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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1996
REGISTRATION NO. 33-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FOUNDATION HEALTH CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 6324 68-0014772
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or
organization)
</TABLE>
3400 DATA DRIVE, RANCHO CORDOVA, CALIFORNIA 95670 (916) 631-5000
(Address, including ZIP Code, and telephone number,including
area code, of registrant's principal executive offices)
ALLEN J. MARABITO, ESQ.
FOUNDATION HEALTH CORPORATION
3400 DATA DRIVE, RANCHO CORDOVA, CALIFORNIA 95670 (916) 631-5000
(Name and address, including zip code, of agent for service)
------------------------
COPIES TO:
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LINDA C. WILLIAMS, ESQ. FREDERICK T. MUTO, ESQ.
THERESA G. MORAN, ESQ. CHRISTOPHER S. BERTICS, ESQ.
Pillsbury Madison & Sutro LLP Cooley Godward Castro Huddleson & Tatum
235 Montgomery Street 4365 Executive Drive, 11th Floor
San Francisco, California San Diego, California 92121-2128
94104
(415) 983-1000 (619) 550-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
UPON CONSUMMATION OF THE REORGANIZATION DESCRIBED HEREIN.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING AGGREGATE REGISTRATION
REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, par value Not Not
$0.01 per share......... 1,145,348 shares Applicable(1) Applicable(1) $100.00(1)
Series A Participating
Preferred Stock Purchase
Rights.................. (2) (2) (2) (2)
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(1) Pursuant to Rule 457(f), the registration fee was computed using the
negative book value of the stock to be acquired by the Registrant in the
Reorganization, which was $(23,206,000) as of September 30, 1995. Therefore,
the minimum registration fee of $100 is applicable.
(2) Such number of Rights as are associated with the shares of common stock
registered hereby from time to time pursuant to the terms of the
Registrant's Stockholder Rights Plan. Initially, the Rights are attached to
and trade with the shares of common stock. Pursuant to Rule 457, no
additional registration fee is required for the Rights.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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FOUNDATION HEALTH CORPORATION
CROSS-REFERENCE SHEET PURSUANT TO REGULATION S-K, ITEM 501(B),
SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF
FORM S-4.
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<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-4 REGISTRATION STATEMENT LOCATION OR HEADING IN PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........ Facing Page; Outside Front Cover Page
2. Inside Front and Outside Back Cover Page of
Prospectus.................................... Inside Front Cover Pages; Available Information;
Incorporation of Certain Documents by Reference; Table
of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information................. Summary; Risk Factors
4. Terms of the Transaction....................... Summary; The Meeting; The Reorganization; Comparison of
Rights; Dissenters' Rights
5. Pro Forma Financial Information................ Not Applicable
6. Material Contacts with the Company Being
Acquired...................................... The Reorganization -- Background of and Reasons for the
Reorganization
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to Be
Underwriters.................................. Not Applicable
8. Interests of Named Experts and Counsel......... Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants.... Incorporation of Certain Documents by Reference;
Summary; Risk Factors
11. Incorporation of Certain Information by
Reference..................................... Incorporation of Certain Documents by Reference
12. Information with Respect to S-2 or S-3
Registrants................................... Not Applicable
13. Incorporation of Certain Information by
Reference..................................... Not Applicable
14. Information with Respect to Registrants Other
than S-3 or S-2 Registrants................... Not Applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies...... Not Applicable
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16. Information with Respect to S-2 or S-3
Companies..................................... Not Applicable
17. Information with Respect to Companies Other
than S-3 or S-2 Companies..................... Summary; The Reorganization; Risk Factors; Business and
Financial Information Regarding MHN; MHN Consolidated
Financial Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited............ Outside Front Cover Page; Incorporation of Certain
Documents by Reference; Summary; The Meeting; Interests
of Certain Persons in the Reorganization; Business and
Financial Information Regarding MHN; Dissenters' Rights
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or in
an Exchange Offer............................. Not Applicable
</TABLE>
<PAGE>
MANAGED HEALTH NETWORK, INC.
PROXY STATEMENT
------------------------
FOUNDATION HEALTH CORPORATION
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to the stockholders of
Managed Health Network, Inc., a Delaware corporation ("MHN"), in connection with
the solicitation of proxies by the Board of Directors of MHN for use at a
special meeting (the "Meeting") of MHN stockholders to be held on ,
1996, including any adjournment or postponement of the Meeting. At the Meeting
or any adjournment or postponement thereof, the stockholders of MHN will be
asked to consider and vote on a proposal to approve the transactions
(collectively, the "Reorganization") contemplated in and approve and adopt the
Agreement and Plan of Reorganization (the "Reorganization Agreement") dated as
of January 9, 1996 by and between MHN and Foundation Health Corporation, a
Delaware corporation ("FHC"). See "The Reorganization."
Pursuant to the Reorganization Agreement, a newly-formed, wholly-owned
Delaware subsidiary of FHC (the "Acquisition Corporation") will be merged with
and into MHN (the "Merger"), with MHN being the surviving corporation. Subject
to provisions for payment of cash for fractional shares and for payments to
dissenting stockholders, upon the consummation of the Merger each share of
common stock of MHN, $.005 par value per share (the "MHN Common Stock"), and
each share of Series A, Series B, Series C, Series D and Series E preferred
stock of MHN, $100.00 par value per share (collectively, the "MHN Preferred
Stock"), issued and outstanding immediately prior to the effectiveness of the
Merger will be converted into shares of common stock of FHC, $.01 par value per
share (the "FHC Common Stock"). The number of shares of FHC Common Stock
deliverable pursuant to the Merger to the holders of MHN Common Stock and MHN
Preferred Stock (collectively, the "MHN Stockholders") will be determined based
on a price per share of the FHC Common Stock that depends upon the relationship
between the average closing price of the FHC Common Stock on the New York Stock
Exchange ("NYSE") Composite Transactions Tape for the 10 trading days ending two
trading days prior to the Closing Date and $42.475 per share (the "Signing
Price"). Holders of Options to acquire MHN Common Stock ("MHN Options") will be
entitled to exercise their options following the Merger for FHC Common Stock. A
portion of the shares deliverable pursuant to the Merger will be placed in
escrow as security for the obligations of the MHN Stockholders to indemnify FHC
for certain liabilities under the Reorganization Agreement. See "The
Reorganization -- General Effects of the Reorganization" and "-- The
Reorganization Agreement -- Indemnification and Escrow" for details concerning
the conversion of MHN Common Stock and MHN Preferred Stock, the exercise of MHN
Options and the escrow.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to the MHN Stockholders on or about , 1996.
This Proxy Statement/Prospectus serves as a prospectus of FHC under the
Securities Act of 1933, as amended, for the issuance of shares of FHC Common
Stock which shall be issued to or in the name of the MHN Stockholders in
connection with the Reorganization.
On , 1996, the closing price on the NYSE Composite Transactions
Tape of FHC Common Stock was $ . See "Summary -- Market Price and Dividend
Data."
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT/ PROSPECTUS.
THE PROPOSED REORGANIZATION IS A COMPLEX TRANSACTION. THE MHN STOCKHOLDERS
ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT/
PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO
UNDER "RISK FACTORS" AND "THE REORGANIZATION."
------------------------
THE SECURITIES TO BE ISSUED IN THE REORGANIZATION 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 PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Proxy Statement/Prospectus is , 1996.
<PAGE>
NO PERSON IS AUTHORIZED BY FHC OR MHN TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS,
IN CONNECTION WITH THE SOLICITATION AND THE OFFERING MADE BY THIS PROXY
STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY OR AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES IN ANY
JURISDICTION IN WHICH SUCH SOLICITATION OR OFFERING MAY NOT LAWFULLY BE MADE.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION
OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF FHC OR MHN SINCE THE DATE
HEREOF.
AVAILABLE INFORMATION
FHC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). In accordance with the Exchange
Act, FHC files proxy statements, reports and other information with the
Securities and Exchange Commission (the "SEC"). This filed material can be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices in Chicago (Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60621-2511) and in New York (Seven World Trade
Center, 13th Floor, New York, NY 10048) and copies of such material can be
obtained by mail from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. FHC Common Stock is listed on
the NYSE. Reports, proxy and information statements and other information
concerning FHC can also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York.
FHC has filed with the SEC a Registration Statement on Form S-4 (together
with any amendments thereto, the "Registration Statement") under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to FHC Common Stock
to be issued in connection with the Reorganization. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto, certain portions of which have
been omitted as permitted by the rules and regulations of the SEC. Copies of the
Registration Statement are available from the SEC, upon payment of prescribed
rates. For further information, reference is made to the Registration Statement
and the exhibits filed therewith. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated by reference in this Proxy
Statement/Prospectus relating to the contents of any contract or other document
referred to herein or therein 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.
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS RELATING TO FHC
HAS BEEN SUPPLIED BY FHC, AND ALL INFORMATION RELATING TO MHN HAS BEEN SUPPLIED
BY MHN.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following FHC documents are incorporated by reference in this Proxy
Statement/Prospectus: (i) Annual Report on Form 10-K for the year ended June 30,
1995; (ii) Quarterly Report on Form 10-Q for the quarter ended September 30,
1995; (iii) Proxy Statement of FHC dated October 4, 1995; (iv) the description
of the FHC Common Stock set forth in the Registration Statement on Form 8-A
dated May 21, 1990; and (v) the description of FHC's Rights to purchase Series A
Participating Preferred Stock, $1.00 par value per share (the "FHC Rights"), set
forth in the Registration Statement on Form 8-A dated September 27, 1991.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. A COPY OF SUCH DOCUMENTS
(EXCLUDING EXHIBITS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE INTO THE INFORMATION INCORPORATED HEREIN) WILL BE PROVIDED BY FIRST
CLASS MAIL WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM A PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON ORAL OR WRITTEN REQUEST OF
ANY SUCH PERSON. REQUESTS REGARDING FHC DOCUMENTS SHOULD BE DIRECTED TO
FOUNDATION HEALTH CORPORATION, INVESTOR RELATIONS, 3400 DATA DRIVE, RANCHO
CORDOVA, CALIFORNIA 95670 (TELEPHONE 916/631-5000). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE AT LEAST FIVE BUSINESS
DAYS PRIOR TO THE MEETING.
All reports and definitive proxy or information statements filed by FHC
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent
to the date of this Proxy Statement/ Prospectus and prior to the date of closing
of the Reorganization shall be deemed to be incorporated by reference into this
Proxy Statement/Prospectus from the dates of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated in
this Proxy Statement/Prospectus shall be deemed to be modified or superseded for
purposes of this Proxy Statement/ 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 modifies or supersedes such statement.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
---------
<S> <C>
SUMMARY................................................................................................... 1
RISK FACTORS.............................................................................................. 12
THE MEETING............................................................................................... 18
THE REORGANIZATION........................................................................................ 19
General Effects of the Reorganization................................................................... 19
Background of and Reasons for the Reorganization........................................................ 22
Certain Federal Income Tax Consequences................................................................. 23
Accounting Treatment.................................................................................... 26
Effect on Exchange Act Requirements..................................................................... 26
Operations Following The Reorganization................................................................. 26
The Reorganization Agreement............................................................................ 27
Closing............................................................................................... 27
Effective Time........................................................................................ 27
Issuance and Exchange of Certificates; Distributions of Escrow Shares................................. 27
MHN Option Procedures................................................................................. 28
Fractional Shares..................................................................................... 28
Stock Exchange Listing................................................................................ 28
Expenses.............................................................................................. 28
Representations and Warranties........................................................................ 28
Certain Covenants..................................................................................... 29
No Solicitation of Transactions....................................................................... 29
Additional Agreements................................................................................. 30
Affiliate Agreements.................................................................................. 30
Indemnification and Escrow............................................................................ 30
Conditions to Consummation of the Reorganization...................................................... 31
Termination........................................................................................... 32
Amendment and Waiver.................................................................................. 33
Interests of Certain Persons in the Reorganization...................................................... 33
BUSINESS AND FINANCIAL INFORMATION REGARDING MHN.......................................................... 34
Selected Consolidated Financial Data of MHN............................................................. 34
Business................................................................................................ 35
Management of MHN....................................................................................... 37
Ownership of MHN Common Stock and MHN Preferred Stock................................................... 39
Management's Discussion and Analysis of Financial Condition and Results of Operations of MHN............ 44
Results of Operations................................................................................. 44
Liquidity and Capital Resources....................................................................... 46
COMPARISON OF RIGHTS...................................................................................... 48
DISSENTERS' RIGHTS........................................................................................ 51
EXPERTS................................................................................................... 55
LEGAL MATTERS............................................................................................. 55
INDEX TO MHN FINANCIAL STATEMENTS......................................................................... F-1
ANNEX 1 -- Agreement and Plan of Reorganization
ANNEX 2 -- Delaware General Corporation Law Section 262
ANNEX 3 -- California General Corporation Law Chapter 13
</TABLE>
i
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN OF THE INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT/PROSPECTUS AND THE ANNEXES HERETO WHICH CONTAIN FURTHER
INFORMATION, SOME OF WHICH IS NOT SUMMARIZED BELOW. MHN STOCKHOLDERS ARE URGED
TO REVIEW THE ENTIRE PROXY STATEMENT/PROSPECTUS CAREFULLY, INCLUDING THE ANNEXES
INCLUDED HEREIN, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS" AND
"THE REORGANIZATION."
THE COMPANIES
FHC. Foundation Health Corporation, a Delaware corporation ("FHC"), is an
integrated managed care organization which administers the delivery of managed
health care services to more than 2.1 million eligible individuals. Through its
subsidiaries, FHC offers group, Medicaid, individual and Medicare health
maintenance organization ("HMO") and preferred provider organization ("PPO")
plans; government sponsored managed care plans; and managed care products
related to workers' compensation insurance and administration, behavioral
health, dental, vision and pharmaceutical products and services. FHC's executive
offices are located at 3400 Data Drive, Rancho Cordova, California 95670, and
its telephone number is (916) 631-5000.
MHN. MHN provides managed behavioral health and employee assistance
programs for employers, union organizations and insurance carriers. MHN's
executive offices are located at 5100 West Goldleaf Circle, Suite 300, Los
Angeles, California 90056, and its telephone number is (213) 299-0999. See
"Business and Financial Information Regarding MHN."
THE MEETING
A special meeting of the MHN Stockholders (the "Meeting") will be held on
, 1996 at . Only holders of record of MHN Common Stock
and MHN Preferred Stock at the close of business on , 1996 (the
"Record Date") will be entitled to notice of and to vote at the Meeting. At the
Meeting MHN Stockholders entitled to vote will consider and vote upon the
Reorganization Agreement and the transactions contemplated thereby, including
the merger of Acquisition Corporation with and into MHN, with MHN thereby
becoming a wholly-owned subsidiary of FHC (the "Merger"). A copy of the
Reorganization Agreement is attached to this Proxy Statement/ Prospectus as
Annex 1 and is incorporated herein by reference. See "The Meeting" and "The
Reorganization."
VOTE REQUIRED; SHARE OWNERSHIP
Approval of the Reorganization requires the affirmative vote of the holders
of at least a majority in interest of the MHN Common Stock, a majority in
interest of the MHN Common Stock and MHN Preferred Stock (on an as-converted
basis), voting together as a whole, and 66 2/3% of the MHN Preferred Stock (on
an as-converted basis), voting together as a whole. As of the Record Date there
were shares of MHN Common Stock and shares of MHN Preferred Stock
(which are convertible to shares of MHN Common Stock) outstanding. An
additional condition to the consummation of the Reorganization is the
affirmative vote of the holders of at least a majority in interest of the shares
of MHN Common Stock who are not otherwise holders of MHN Preferred Stock. FHC
may not invoke its condition to the Closing that no more than 6.5% of the
outstanding shares of MHN Preferred Stock and MHN Common Stock be subject to the
exercise of statutory dissenters' rights, if the holders of 90% in interest of
the outstanding MHN Common Stock and 92% in interest of the MHN Common Stock and
MHN Preferred Stock (on an as-converted basis), taken as a whole, approve the
Reorganization (the "Special Vote").
EFFECTS OF THE REORGANIZATION
GENERAL EFFECTS OF THE REORGANIZATION. Upon consummation of the Merger, MHN
will become a wholly-owned subsidiary of FHC, the separate corporate existence
of Acquisition Corporation will cease, and MHN Stockholders at the Effective
Time (defined below) (other than MHN Stockholders
1
<PAGE>
exercising statutory dissenters' rights) will receive shares of FHC Common
Stock. A portion of the shares of FHC Common Stock deliverable to the MHN
Stockholders equal in value to $1,500,000, on a pro rata basis from the MHN
Stockholders, will be placed in escrow for a period of one year as security for
the obligations of the MHN Stockholders to indemnify FHC for certain
liabilities. See "The Reorganization -- The Reorganization Agreement -- Issuance
and Exchange of Certificates; Distributions of Escrow Shares" and "--
Indemnification and Escrow."
After the Merger, FHC will hold 100% of the MHN capital stock then
outstanding and the MHN Stockholders will be stockholders of FHC. See
"Comparison of Rights."
BACKGROUND OF AND REASONS FOR THE REORGANIZATION. The Board of Directors of
MHN has unanimously approved the Reorganization Agreement and believes that the
transactions contemplated thereby are fair and in the best interests of the MHN
Stockholders. For background information and a discussion of the reasons for the
Reorganization, see "The Reorganization -- Background of and Reasons for the
Reorganization."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. For federal income tax purposes,
no gain is expected to be recognized by MHN Stockholders as a result of the
Reorganization, to the extent that such stockholders receive solely FHC Common
Stock in the Reorganization and provided certain other conditions are met. ALL
MHN STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE REORGANIZATION. See "Risk Factors --
Federal Income Tax Consequences" and "The Reorganization -- Certain Federal
Income Tax Consequences."
ACCOUNTING TREATMENT. For accounting purposes, the Merger is expected to be
treated as a "pooling of interests." Following the Closing, FHC intends to
expense the costs related to the Merger and certain anticipated costs associated
with combining MHN with its existing businesses, which costs are estimated to
total approximately $4.2 million. FHC intends to expense these costs in the
quarter in which the transaction is consummated, which is anticipated to be the
quarter ending March 31, 1996 of the fiscal year ending June 30, 1996. See "The
Reorganization -- Accounting Treatment."
OPERATIONS FOLLOWING THE REORGANIZATION
Following the Reorganization, upon approval by the California Department of
Corporations (the "DOC") (which approval FHC anticipates may take up to 180
days) FHC intends to merge its wholly owned managed behavioral health
subsidiary, Foundation Health PsychCare Services, Inc., a California corporation
("FHPS") with and into MHN's California Knox-Keene licensed behavioral health
subsidiary, with that subsidiary as the surviving corporation. The
non-California business of FHPS will be operated out of another MHN subsidiary.
FHPS management will be primarily responsible for ongoing operations of the
combined companies which will be operated under their respective names pending
approval of the DOC of the merger of FHPS and MHN's behavioral health
subsidiary. FHC may also consolidate other similar operations of both MHN and
FHPS after the Reorganization.
TERMS OF THE REORGANIZATION AGREEMENT
CLOSING AND EFFECTIVE TIME. The Closing will take place after the
conditions to Closing are met, including the effectiveness of the registration
statement on Form S-4 of which this Proxy Statement/ Prospectus is a part,
provided that the Reorganization Agreement may be terminated if the Closing has
not occurred on or before March 31, 1996 (or April 30, 1996, if the Special Vote
is not obtained). The Merger will become effective upon the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware (the
"Effective Time"). The Certificate of Merger will be filed as soon as
practicable after the Closing. See "The Reorganization -- The Reorganization
Agreement -- Closing" and "-- Effective Time."
MERGER CONSIDERATION. Pursuant to the Merger, the MHN Stockholders will
receive shares of FHC Common Stock (the "Closing Shares"). A portion of the
Closing Shares equal in value to $1,500,000 (the "Escrow Shares") will be placed
in escrow for a period of one year as security for the
2
<PAGE>
obligations of the MHN Stockholders to indemnify FHC for certain liabilities
under the Reorganization Agreement. The number of shares of FHC Common Stock
issuable at the Effective Time to holders of MHN Common Stock and MHN Preferred
Stock and into which MHN Options shall be exercisable shall be determined as
follows:
(i) First, the "Aggregate Potential Shares" shall be determined as an
amount equal to (A) $45,000,000, less Excess Transactional Costs (as defined
below), divided by (B) the Assumed Closing Price. "Excess Transactional
Costs" shall mean all amounts paid or payable by MHN for legal, accounting
and financial services as a proximate result of the transactions
contemplated by the Agreement in excess of $900,000, all as identified by
FHC and MHN no later than two days prior to the Closing Date. The "Assumed
Closing Price" shall be calculated as follows:
(A) In the event that the average of the per share closing prices of
FHC Common Stock during the ten trading days ending on the second trading
day prior to Closing as reported on the New York Stock Exchange ("NYSE")
Composite Transaction Tape (the "Closing Price") is no less than 92.5% of
$42.475, which is the average of the per share closing prices of FHC
Common Stock during the ten trading days ending on the trading day prior
to the date of execution of this Agreement by MHN and FHC as reported on
the NYSE Composite Transactions Tape (the "Signing Price"), and no more
than 107.5% of the Signing Price, then the Assumed Closing Price shall be
the Closing Price.
(B) In the event that the Closing Price is greater than 107.5% but no
more than 115% of the Signing Price, then the Assumed Closing Price shall
be 107.5% of the Signing Price.
(C) In the event that the Closing Price is less than 92.5% of the
Signing Price but no less than 85% of the Signing Price, then the Assumed
Closing Price shall be 92.5% of the Signing Price.
(D) In the event that the Closing Price is less than 85% of the
Signing Price, then MHN may in its sole discretion terminate this
Agreement by giving notice of termination to FHC no later than one day
prior to Closing; provided, however, that FHC may cause the Closing to
occur notwithstanding any such notice if it notifies MHN no later than
the day prior to Closing of its intent to cause the issuance of that
number of shares of FHC Common based on an Assumed Closing Price equal to
(1) 92.5% of the Signing Price divided by 85% of the Signing Price, times
(2) the Closing Price.
(E) In the event that the Closing Price is more than 115% of the
Signing Price, then FHC may in its sole discretion terminate this
Agreement.
(ii) Each share and fractional share of MHN Preferred Stock issued and
outstanding immediately prior to the Effective Time shall be converted,
without any action on the part of the holders thereof, into that number of
shares of FHC Common Stock equal to the Preference Amount (as defined below)
divided by the Closing Price. The "Preference Amount" for each share of MHN
Preferred Stock is as determined in accordance with Section 2 of MHN's Fifth
Amended and Restated Certificate of Incorporation as of the Effective Time.
The aggregate number of shares of FHC Common Stock issuable to the holders
of MHN Preferred Stock shall be referred to herein as the "Preferred
Holders' Shares."
(iii) Each share and fractional share of MHN Common Stock issued and
outstanding immediately prior to the Effective Time shall be converted,
without any action on the part of the holders thereof, into that number of
shares of FHC Common Stock (the "MHN Common Stock Conversion Amount") equal
to (i) the Aggregate Potential Shares less the Preferred Holders' Shares,
divided by (ii) an amount equal to the aggregate number of shares of MHN
Common Stock and that number of shares of MHN Common Stock underlying all
fully vested (taking into account any accelerated vesting as a result of the
Merger), outstanding and unexercised options to purchase MHN Common Stock
("MHN Options") outstanding as of the Effective Time. The aggregate number
of shares of FHC Common Stock issuable to the holders of MHN Common Stock
shall be referred to as the "Common Holders' Shares."
3
<PAGE>
The number of shares of FHC Common Stock that the MHN Stockholders will
receive in exchange for the MHN Preferred Stock and MHN Common Stock will vary
based in part upon the price of FHC Common Stock at the Effective Time and in
part by the allocation of price fluctuation risk of FHC Common Stock between the
signing of the Agreement and the Effective Time that has been negotiated between
FHC and MHN. The dollar value of FHC Common Stock that MHN Stockholders will
receive will range between the amounts set forth in the following chart. The
following example assumes that (i) Closing will occur on March 31, 1996; (ii)
the Preference Amount for each share of MHN Preferred Stock will include
Accruing Dividends on such stock through such date; (iii) MHN's transaction
costs do not exceed $900,000; (iv) the total outstanding shares of MHN Preferred
Stock are 217,973.15 (18,328,638 shares of MHN Common Stock on an as-converted
basis); (v) the total outstanding shares of MHN Common Stock are 7,427,844; and
(vi) shares of MHN Common Stock into which outstanding MHN Options are
exercisable are 2,790,000. The number of shares of FHC Common Stock and
therefore the values set forth below, include both the FHC Common Stock
distributable immediately after the Closing and the FHC Common Stock which will
be included in the Escrow (see "The Reorganization -- The Reorganization
Agreement -- Escrow Shares"). "Value" for purposes of the following chart is
calculated based on the FHC Closing Price used in calculating the number of
shares of FHC Common Stock to be issued to the applicable MHN Stockholder. There
can be no assurance that the market value of the FHC Common Stock issued to the
MHN Stockholders will not decrease following the Closing.
VALUE IN FHC COMMON STOCK TO BE RECEIVED
FOR EACH SHARE OF MHN PREFERRED STOCK AND MHN COMMON STOCK
<TABLE>
<CAPTION>
85% 92.5% 100% 107.5% 115%
OF FHC OF FHC OF FHC OF FHC OF FHC
SIGNING PRICE= SIGNING PRICE= SIGNING PRICE= SIGNING PRICE= SIGNING PRICE=
$36.10 $39.29 $42.48 $45.66 $48.85
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
MHN Preferred Stock
Series A (1).................. $ 164.20 $ 184.38 $ 184.38 $ 184.38 $ 218.40
Series B...................... $ 158.32 $ 158.32 $ 158.32 $ 158.32 $ 158.32
Series C...................... $ 138.25 $ 138.25 $ 138.25 $ 138.25 $ 138.25
Series D...................... $ 134.02 $ 134.02 $ 134.02 $ 134.02 $ 134.02
Series E (2).................. $ 125.86 $ 125.86 $ 125.86 $ 125.86 $ 125.86
MHN Common Stock.............. $ 0.99 $ 1.30 $ 1.30 $ 1.30 $ 1.54
</TABLE>
- ------------------------
(1) Reflects the conversion of the Series A to MHN Common Stock at FHC Closing
Prices greater than 85% of FHC Signing Price.
(2) Excludes the share price of $500,000 of Series E issued in June 1995 in
connection with the Health Management Center, Inc. and affiliated companies
(collectively "HMC") acquisition by MHN. The holders of Series E issued in
connection with the HMC acquisition would receive a value of $106.64 per
Series E share, reflecting dividends accruing from June 1995 rather than
January 1993 for the rest of the Series E.
Shares of MHN Preferred Stock and MHN Common Stock held by persons
exercising statutory dissenters' rights shall be treated as described in
"Dissenters' Rights."
TREATMENT OF OPTIONS. At the Effective Time, MHN Options shall be treated
as the right to receive, in exchange for the payment of the exercise price set
forth in such MHN Option, that number of shares of FHC Common Stock per share of
fully vested MHN Common Stock underlying such MHN Option equal to the MHN Common
Stock Conversion Amount. Notwithstanding the foregoing, FHC agrees to consider
requests received by FHC at least 10 days prior to the Closing from any holder
of MHN Options to receive in full settlement of such holder's MHN Options that
number of shares of FHC Common Stock equal to: (a) the number of shares of FHC
Common Stock otherwise allocable to such MHN Options, less (b) an amount equal
to (i) the aggregate exercise price of such MHN Option,
4
<PAGE>
divided by (ii) the Assumed Closing Price (the "Option Spread Amount");
provided, however, that as a condition of such settlement of the MHN Options,
the holder of the MHN Option tenders to FHC the cash to satisfy any required tax
withholding amounts. See "The Reorganization -- General Effects of the
Reorganization."
ISSUANCE AND EXCHANGE OF CERTIFICATES; DISTRIBUTIONS OF ESCROW
SHARES. Promptly after the Effective Time, FHC shall issue the Closing Shares
(excluding the Escrow Shares) to the MHN Stockholders. A portion of the Closing
Shares will be placed in escrow for distribution to the MHN Stockholders upon
the conditions specified in the Reorganization Agreement and an Escrow Agreement
to be executed prior to the Closing. See "The Reorganization -- The
Reorganization Agreement--Issuance and Exchange of Certificates; Distributions
of Escrow Shares" and "-- Indemnification and Escrow."
CONDITIONS. The respective obligations of MHN and FHC to effect the
Reorganization are subject to various conditions described herein, including but
not limited to: (i) the absence of any restraining order or injunction that
would prevent the consummation of the Merger or any litigation seeking the same,
(ii) the performance by the other party of its obligations under the
Reorganization Agreement and the accuracy of the other party's representations
and warranties contained therein, (iii) the obtaining by MHN of consents of
third parties to agreements with these companies required as a result of the
Reorganization, (iv) the obtaining of certain regulatory approvals, including
the approval of the California Department of Corporations and the expiration of
applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended ("HSR Act"), (v) the effectiveness of the Registration
Statement, (vi) the approval of the Reorganization Agreement by the MHN
Stockholders, (vii) the absence of statutory dissenters' rights perfected by
holders of more than 6.5% of the shares of MHN Common Stock and MHN Preferred
Stock (on an as-converted basis) taken as a whole and more than 10% of the MHN
Common Stock, (viii) the resignation of MHN's officers and directors, and (ix)
the receipt by FHC and MHN of opinions from counsel to FHC and counsel to MHN as
to certain legal matters. See "The Reorganization -- The Reorganization
Agreement -- Conditions to Consummation of the Reorganization." On January 24,
1996 and January , 1996, respectively, each of FHC and MHN filed an
application with the California Department of Corporations requesting permission
for FHC to acquire control of MHN. On February , 1996, FHC and MHN made the
necessary filings under the HSR Act.
TERMINATION. The Reorganization Agreement is subject to termination at the
option of either FHC, on the one hand, or MHN, on the other hand, if the
Reorganization is not consummated by March 31, 1996 (or April 30, 1996, if the
Special Vote is not obtained) and prior to that time upon the occurrence of
certain events. See "The Reorganization -- The Reorganization Agreement --
Termination."
INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION
MHNs Board of Directors has adopted a Key Management Retention Program
("Retention Program") under which certain key management employees of MHN, upon
providing a release, will be paid a retention bonus in the event such manager
remains in the employ of MHN through the Closing Date. The total amount of
bonuses under the Retention Program will be limited to $320,000. See "The
Reorganization -- Interests of Certain Persons in the Reorganization."
MHN has a severance program which provides that members of senior management
of MHN who are terminated without cause will receive six-months' salary as a
severance payment, subject to receipt of a release. See "The Reorganization --
Interests of Certain Persons in the Reorganization."
Certain payments which would otherwise be payable in the future by MHN to
the sellers of HMC, a business acquired by MHN, would become due and payable in
full as a result of the Reorganization if certain other events occur. See "The
Reorganization--Interests of Certain Persons in the Reorganization."
5
<PAGE>
The existing directors of MHN will resign effective at the Effective Time.
Thereafter, following the Reorganization, the MHN Board of Directors will
consist of Jeffrey L. Elder, Kirk A. Benson and Gary S. Velasquez, FHC
designees, to serve until their successors are duly elected and assume office.
See "The Reorganization -- Interests of Certain Persons in the Reorganization."
COMPARISON OF RIGHTS
The rights of the MHN Stockholders are currently governed by applicable
Delaware law and California law, MHN's Fifth Amended and Restated Certificate of
Incorporation (the "MHN Certificate") and Bylaws (the "MHN Bylaws"). Former
holders of MHN Common Stock and MHN Preferred Stock after the Merger will become
stockholders of FHC, a Delaware corporation, and their rights as FHC
stockholders from and after the Reorganization will be governed by applicable
Delaware law, and FHC's Restated Certificate of Incorporation (the "FHC
Certificate") and Bylaws (the "FHC Bylaws"). In addition, after the
Reorganization, shares of FHC Common Stock held by former MHN Stockholders will
be subject to the FHC Stockholder Rights Plan. Certain material differences
exist between the rights of the MHN Stockholders and the rights of FHC
stockholders under the FHC Certificate and the FHC Bylaws. See "Comparison of
Rights."
DISSENTERS' RIGHTS
Holders of MHN Common Stock and MHN Preferred Stock who exercise dissenters'
rights with respect to the Merger in accordance with the procedures prescribed
in the Delaware General Corporation Law ("DGCL"), and to the extent applicable,
the California General Corporation Law (the "CGCL"), will be entitled to receive
cash for their stock if such stockholders (i) do not vote in favor of the
Merger, (ii) file demands for appraisal and (iii) otherwise act to perfect their
rights as dissenting stockholders under the DGCL or the CGCL. A copy of the
sections of the DGCL and the CGCL relating to dissenters' rights is attached to
this Proxy Statement/Prospectus as Annex 2 and Annex 3, respectively. The
obligation of FHC to effect the Merger is subject to the condition, among
others, that the MHN Stockholders shall not have duly exercised dissenters'
rights with respect to more than 6.5% of the outstanding MHN Common Stock and
MHN Preferred Stock (on an as-converted basis), taken as a whole, and more than
10% of the MHN Common Stock; provided, however, that this condition shall not
apply if at the Meeting, the Reorganization Agreement and the Certificate of
Merger shall have been approved and adopted by the affirmative vote of (A) at
least 90% of the holders in interest of MHN Common Stock and (B) 92% of the
holders in interest of the MHN Common Stock and MHN Preferred Stock (on an
as-converted basis), taken as a whole, in each case outstanding as of the date
of the Meeting. See "The Reorganization -- The Reorganization Agreement --
Conditions to Consummation of the Merger" and "Dissenters' Rights."
RISK FACTORS
The MHN Stockholders should carefully review the matters set forth under
"Risk Factors."
MARKET PRICE AND DIVIDEND DATA
FHC Common Stock is listed on the NYSE under the symbol "FH." The MHN Common
Stock and the MHN Preferred Stock are not traded on any securities market or
exchange.
6
<PAGE>
The following table sets forth, for the periods indicated based on FHC's
June 30 fiscal year the high and low sales prices of the FHC Common Stock on the
NYSE Composite Transactions Tape:
<TABLE>
<CAPTION>
PER SHARE OF
FHC COMMON STOCK
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year Ending June 30, 1994:
July 1 - September 30............................................................ $ 35 $ 181/8
October 1 - December 31.......................................................... 32 213/4
January 1 - March 31............................................................. 411/2 293/4
April 1 - June 30................................................................ 46 331/4
Fiscal Year Ending June 30, 1995:
July 1 - September 30............................................................ 395/8 311/4
October 1 - December 31.......................................................... 371/2 293/4
January 1 - March 31............................................................. 347/8 263/8
April 1 - June 30................................................................ 323/4 267/8
Fiscal Year Ending June 30, 1996:
July 1 - September 30............................................................ 391/8 265/8
October 1 - December 31.......................................................... 457/8 361/2
January 1 - ........................................................
</TABLE>
The closing price for FHC Common Stock on the NYSE Composite Transactions
Tape on January 8, 1996, the last full day of trading prior to the public
announcement of the Reorganization Agreement, was $42.750, and on January 24,
1996 was $42.125.
FHC has never paid cash dividends on the FHC Common Stock. FHC presently
intends to retain earnings for the development of its businesses and does not
anticipate paying cash dividends on the FHC Common Stock in the foreseeable
future. FHC's $300 Million Revolving Credit Agreement with Citicorp, U.S.A.,
Inc., as administrative agent and an Indenture relating to FHC's 7 3/4% Senior
Notes limit the ability of FHC to pay cash dividends.
MHN has never paid cash dividends on the MHN Common Stock or the MHN
Preferred Stock. MHN is bound by restrictive covenants under its bank loans,
disallowing the payment of dividends without the bank's consent. Also, MHN's
Certificate of Incorporation contains a number of provisions prohibiting,
limiting or conditioning the payment of cash dividends on the MHN Common Stock
without payment of dividends on the MHN Preferred Stock. In addition, MHN's
Certificate of Incorporation contains a provision on the accruing dividend
rights of the MHN Preferred Stock, which entitle the holders of such stock to
receive dividends equal to a return on par value of 8% per annum under certain
circumstances, primarily related to liquidation and reorganization of MHN. This
accruing dividend feature will become effective in the Reorganization for all
shares of MHN Preferred Stock which have not been converted into MHN Common
Stock prior to the Effective Time.
A material part of MHN's revenues and net income is derived from its
California managed behavioral health HMO subsidiary. Regulatory requirements on
this subsidiary relative to tangible net equity and liquidity may limit the
ability of this subsidiary to pay cash dividends to MHN, which in turn may
impact the ability of MHN to pay dividends to its stockholders.
MHN's policy has been to retain earnings for the development of its
business. This policy is subject to change by MHN's Board of Directors.
Therefore, after the Reorganization, when the Board of Directors of MHN will be
controlled by FHC designees, the dividend policy of MHN may change to provide
for the payment of cash dividends by MHN to FHC.
MHN is a privately held company; there is no public trading market for its
stock. As of December 31, 1995, there were 24 record holders of MHN Preferred
Stock and 73 record holders of MHN Common Stock, including those stockholders
who hold both classes of securities.
7
<PAGE>
With the exceptions described below, all shares of MHN Common Stock were
issued more than three years prior to the date hereof. During the past three
years, MHN has issued (a) shares of MHN Common Stock to warrant holders who
exercised their warrants in 1995, which warrants were issued to such holders in
1989 and, in one case, 1992; (b) options to acquire shares of MHN Common Stock
at an exercise price of $.50 per share; (c) shares of MHN Common Stock to
optionholders who exercised their options or who received shares in termination
of their option rights and/or employment with MHN; and (d) shares of MHN
Preferred Stock and MHN Common Stock to certain directors and executive officers
of MHN at the time of their affiliation with MHN.
SUMMARY CONSOLIDATED FINANCIAL DATA
The following information sets forth summary financial data with respect to
FHC and MHN. This information should be read in conjunction with the separate
consolidated financial statements and accompanying notes of FHC incorporated by
reference herein, and with the separate consolidated financial statements and
accompanying notes of MHN, included elsewhere herein. Interim financial
information for FHC and MHN reflect all adjustments which are, in the opinion of
each company's management, necessary to present fairly the consolidated
financial information of such company.
8
<PAGE>
FHC SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1994 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
(1)
Revenues:
Commercial premiums......... $ 759,052 $ 900,660 $1,102,392 $1,358,616 $1,664,509 $390,789 $459,575
Government cotracts......... 584,997 670,271 746,827 542,726 187,493 49,978 81,019
Specialty services
revenue.................... 31,099 50,627 89,135 380,726 509,807 130,258 157,424
Patient service revenue,
net........................ 16,377 40,612 43,483 41,358 41,323 9,249 11,675
Investment and other
income..................... 17,465 21,449 24,874 39,511 56,792 16,101 12,672
---------- ---------- ---------- ---------- ---------- ---------- ----------
1,408,990 1,683,619 2,006,711 2,362,937 2,459,924 594,375 722,365
---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Commercial health care
services................... 617,527 711,735 862,602 1,067,027 1,290,367 309,644 367,398
Government contracts health
care services.............. 149,659 171,983 188,139 152,185 67,508 12,253 27,041
Government contracts
subcontractor costs........ 388,822 419,817 432,903 252,743 66,551 27,206 18,216
Specialty services costs.... 30,683 47,950 79,366 355,208 438,124 114,381 138,452
Patient service costs....... 17,130 40,973 38,156 37,599 33,561 8,649 9,080
Selling, general and
administrative............. 135,179 175,135 230,506 291,130 307,802 72,090 85,029
Amortization and
depreciation............... 15,162 18,390 21,388 28,463 41,102 7,907 13,441
Interest expense............ 11,031 6,035 4,239 12,709 11,555 2,907 4,044
Acquisition and
restructuring costs (2).... -- -- 12,413 -- 124,822 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
1,365,193 1,592,018 1,869,712 2,197,064 2,381,392 555,037 662,701
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
minority interest............ 43,797 91,601 136,999 165,873 78,532 39,338 59,664
Provision for income taxes.... 12,877 34,737 57,026 64,834 26,821 13,917 20,259
Minority Interest............. -- 4,042 6,636 7,398 2,262 1,770 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.................... 30,920 52,822 73,337 93,641 49,449 23,651 39,405
Preferred stock dividends..... 1,721 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income available to common
stockholders................. $ 29,199 $ 52,822 $ 73,337 $ 93,641 $ 49,449 $ 23,651 $ 39,405
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings per share............ $ 0.78 $ 1.32 $ 1.53 $ 1.92 $ 0.90 $ 0.48 $ 0.69
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Weighted average common and
common stock equivalent
shares outstanding........... 37,564,198 40,022,322 47,870,576 48,688,221 54,780,162 49,709,634 57,427,162
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1995
---------- ---------- ---------- ---------- ---------- --------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments.......... $ 170,290 $ 291,919 $ 485,370 $ 765,572 $ 795,278 $ 825,375
Total assets.................. 441,405 632,037 916,247 1,498,508 1,964,207 2,077,532
Notes payable and capital
leases....................... 59,592 51,688 142,048 170,108 180,054 244,480
Stockholders' equity.......... 113,127 263,427 342,398 422,443 756,899 783,708
</TABLE>
- ------------------------------
(1) FHC's consolidated financial statements have been restated to reflect the
results of acquisitions accounted for in accordance with the pooling of
interests method of accounting.
(2) Acquisition and restructuring costs include $12.4 million which relate to
the acquisitions of Century MediCorp, Inc. and Occupational Health Services,
Inc. for integration and restructuring of the combined entities and $124.8
million in connection with the acquisition of CareFlorida Health Systems,
Inc., Thomas-Davis Medical Centers and Intergroup HealthCare Corporation for
integration, restructuring and pooling costs.
9
<PAGE>
MHN SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Contract revenue............................... $ 18,018 $ 12,704 $ 21,011 $ 23,555 $ 21,549 $ 16,035 $ 13,781
Employee assistance program.................... 8,147 8,505 8,384 8,843 10,048 7,449 8,582
Administrative services........................ 4,161 4,673 4,698 7,248 8,380 6,144 8,276
--------- --------- --------- --------- --------- --------- ---------
30,326 25,882 34,093 39,646 39,977 29,628 30,639
Other revenue.................................. 1 25 59 95 56 35 30
--------- --------- --------- --------- --------- --------- ---------
Total revenue................................ 30,327 25,907 34,152 39,741 40,033 29,663 30,669
--------- --------- --------- --------- --------- --------- ---------
Expenses:
Health care services........................... $ 10,885 $ 9,223 $ 18,185 $ 16,329 $ 16,072 $ 12,297 $ 10,338
Payroll and related items...................... 11,504 12,345 13,346 14,319 14,959 11,306 13,374
Marketing, general and administrative.......... 6,040 7,160 5,802 6,721 7,011 5,181 5,448
Depreciation and amortization.................. 793 825 848 1,052 1,131 853 980
Unusual items (1).............................. -- 4,955 -- -- -- -- 112
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses..................... 29,222 34,508 38,181 38,421 39,173 29,637 30,252
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations................ 1,105 (8,601) (4,029) 1,320 860 26 417
Other income (expense):
Interest expense............................. (118) (112) (231) (226) (224) (164) (289)
Interest income.............................. 97 36 50 67 96 59 158
Other expense................................ -- (51) (26) (25) (1) (1) --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes.............. 1,084 (8,728) (4,236) 1,136 731 (80) 286
Benefit (provision) for income taxes........... (438) (3) (6) (29) 384 (10) (31)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item........ 646 (8,731) (4,242) 1,107 1,115 (90) 255
Extraordinary item:
Utilization of net operating loss
carryforward.................................. 365 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before cumulative dividends
on mandatorily redeemable convertible
preferred stock............................... $ 1,011 $ (8,731) $ (4,242) $ 1,107 $ 1,115 $ (90) $ 255
Accrual of undeclared dividends on mandatorily
redeemable convertible preferred stock............ (811) (927) (1,212) (1,693) (1,708) (1,271) (1,288)
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) available to common
stockholders (2).................................. $ 200 $ (9,658) $ (5,454) $ (586) $ (593) $ (1,361) $ (1,033)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER
1990 1991 1992 1993 1994 30, 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and invested cash........................... $ 1,255 $ 2,799 $ 521 $ 3,884 $ 6,227 $ 4,707
Total assets..................................... 11,833 9,406 7,991 11,954 14,215 19,352
Long term debt and capital lease obligations
excluding current portion....................... 957 1,669 1,590 1,515 1,204 4,602
Mandatorily redeemable convertible preferred
stock........................................... 11,907 17,602 19,058 26,851 28,609 30,397
Stockholders' deficit............................ (6,559) (16,217) (21,662) (22,696) (22,199) (23,206)
</TABLE>
- ------------------------------
(1) Unusual items recorded in 1991 include MHN's write-off of goodwill customer
list. Unusual items recorded in 1995 relate to merger expenses MHN has
incurred.
(2) As MHN is a nonpublic company and reported net earnings (loss) available to
common stockholders are negative, an earnings per share calculation has been
omitted.
10
<PAGE>
FHC AND MHN COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of FHC and
MHN and combined per share data on an unaudited pro forma basis, based on the
assumption that the Merger occurred at the beginning of the earliest period
presented and was accounted for as a pooling of interests. Historical net
earnings per common share of MHN have not been presented as MHN is a nonpublic
company and reported net earnings available to holders of MHN Common Stock are
negative. The pro forma comparative per share data gives effect to the Merger
assuming the Closing Price is equal to the Signing Price of $42.475 per share of
FHC Common Stock and based upon the conversion values disclosed in the "Terms of
Reorganization" above.
The pro forma comparative per share data does not purport to represent what
FHC's financial position or results of operations would actually have been had
the Merger occurred at the beginning of the earliest period presented or to
project FHC's financial position or results of operations for any future date or
period. The information presented in the table should be read in conjunction
with the separate consolidated financial statements and accompanying notes of
FHC, incorporated by reference herein, and the separate consolidated financial
statements and accompanying notes of MHN included elsewhere in this Proxy
Statement/Prospectus.
HISTORICAL EARNINGS PER SHARE DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- SEPTEMBER 30,
1993 1994 1995 1995
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
FHC.......................................................... $ 1.53 $ 1.92 $ .90 $ .69
</TABLE>
FHC AND MHN
PRO FORMA COMBINED EARNINGS PER SHARE DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- SEPTEMBER 30,
1993 1994 1995 1995
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Pro forma combined per FHC share............................ $ 1.42 $ 1.91 $ 0.91 $ 0.68
Pro forma equivalent per MHN share:
MHN Common................................................ $ 0.04 $ 0.06 $ 0.03 $ 0.02
MHN Preferred Series A.................................... $ 6.16 $ 8.29 $ 3.94 $ 2.96
B..................................... $ 5.29 $ 7.12 $ 3.39 $ 2.54
C..................................... $ 4.62 $ 6.21 $ 2.96 $ 2.22
D..................................... $ 4.47 $ 6.02 $ 2.87 $ 2.15
E..................................... $ 4.20 $ 5.65 $ 2.69 $ 2.02
</TABLE>
BOOK VALUE PER COMMON SHARE
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1994 1995 1995
------------- --------- -------------
<S> <C> <C> <C>
FHC -- historical............................................. $ 13.25 $ 13.75
MHN -- historical............................................. $ (3.01) $ (3.13)
Pro forma combined per FHC share.............................. $ 13.31 $ 13.89
Pro forma equivalent per MHN share:
MHN Common.................................................. $ 0.41 $ 0.43
MHN Preferred Series A...................................... $ 57.77 $ 60.29
B....................................... $ 49.61 $ 51.77
C....................................... $ 43.32 $ 45.21
D....................................... $ 41.99 $ 43.83
E....................................... $ 39.44 $ 41.16
</TABLE>
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION REGARDING FHC, MHN AND THE
REORGANIZATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY THE MHN STOCKHOLDERS. WHEN USED IN
THIS PROXY STATEMENT/PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN, THE WORDS "ESTIMATE," "PROJECT," "ANTICIPATE," "EXPECT" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW,
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
EFFECTS AND CONDITIONS OF THE REORGANIZATION
If the Reorganization is consummated, there can be no assurance that the
combined companies will realize the anticipated benefits of the Reorganization,
in which MHN will become a wholly owned subsidiary of FHC. Because MHN
Stockholders will own a significantly smaller percentage of FHC than they owned
of MHN, their investment will depend primarily upon the success of FHC's
operations in areas other than the businesses of MHN. The acquisition of MHN by
FHC has several potential operating and business risks, including the retention
of MHN's clients, provider network and personnel. There can be no assurance that
FHC will be successful in integrating FHC's and MHN's operations and personnel
or that enhanced marketing capabilities, systems integration, cross-selling
opportunities or geographic expansion will be realized.
HEALTH CARE REFORM
Numerous health care reform proposals have been introduced at both the
federal and state levels during the past several years. The legislative
proposals have attempted to provide greater access to insurance and control
health care costs through a variety of means, including proposed reductions in
spending under the Medicare and Medicaid programs. In addition to federal
initiatives, states in which FHC conducts and expects to conduct business have
enacted various health care reform measures, and numerous additional proposals
have been and may be introduced, that could significantly affect FHC's business.
Certain states are considering forms of various single-payer systems,
restructuring of Medicaid programs, (for example, the state of Florida reduced
Medicaid reimbursement rates by 18% in July 1995 which significantly affected
FHC's Florida Medicaid HMO revenues), "any willing provider" legislation that
could require managed care companies to contract with any medical provider who
agrees to the terms of the company's standard provider contract and payment
schedule and "patient protection" acts which enhance patient choice of providers
and limit the use of traditional managed care techniques. FHC is unable to
predict whether any of such federal or state health care initiatives or proposed
legislation will be enacted and implemented; no assurance can be given that
implementation of any such proposed legislation will not have a material adverse
effect on FHC's business. FHC anticipates federal and state legislators will
continue to review and assess alternative health care systems and payment
methodologies.
GOVERNMENT REGULATION AND AUDITS
The operations of FHC are subject to extensive state and federal regulation.
Such regulation is subject to change, and the impact of potential changes on
FHC's business cannot be determined. There can be no assurance that FHC will be
able to obtain any necessary governmental approvals to continue to implement its
business strategy of developing or acquiring complementary products and services
or achieving geographic expansion. FHC is in the process of seeking
accreditation by the National Committee on Quality Assurance ("NCQA") of its
Florida HMO operations, which accreditation is a condition of doing business as
an HMO in that state. Failure to obtain accreditation within specified time
frames could result in suspension of enrollment levels or revocation of
licensure which could have a material adverse effect on FHC's future operating
results. Other states and employer groups are increasingly requiring NCQA
accreditation as a condition to using managed care companies for their health
care benefits. FHC's HMO and insurance subsidiaries must maintain minimum levels
of tangible net equity or capital and surplus which may affect their ability to
expand their operations or to provide funds to FHC necessary for FHC to realize
its business strategies.
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Federal and state agencies possess significant powers to review and control
FHC's operations and finances. Where FHC provides services under a government
contract, governmental agencies often possess expansive powers to audit and
control the relationship. FHC is subject to and currently is undergoing
extensive governmental audits and investigations with respect to its commercial
and government contracts, including by the federal Health Care Financing
Administration ("HCFA") with respect to its Medicare contracts and by the
California Department of Corporations and Department of Health Services with
respect to certain aspects of the California HMO Medicaid contracts. The results
of such audits or investigations, which may continue past the termination of
such contracts, may result in reimbursement to the governmental agencies of
amounts previously paid by such governmental agencies to FHC, imposition of
penalties, limitations on marketing under, or cessation of participation in,
these programs. FHC is also subject to federal and state legislation prohibiting
activities and arrangements that provide economic inducements for the referral
of business or other activities that may be deemed to constitute "fraud or
abuse" under governmental programs. Such legislation can impose significant
penalties or cause FHC to lose government business if violations of such
legislation were to occur. FHC is also subject to regular and special medical
and financial audits and investigations by the various federal and state
regulatory agencies which oversee its programs and services with respect to the
operations of its HMO and insurance subsidiaries.
COMMERCIAL ENROLLMENT AND PREMIUM GROWTH
Several recent trends are affecting FHC's commercial premium growth. Some
employer groups are decreasing benefits and choosing lower-cost medical HMO
coverage plans, which result in lower premiums to FHC's medical HMOs; other
large employer groups have consolidated and reduced the number and scope of
health care programs offered to employees, have adopted alternative benefit
plans, including self-funded plans or have combined with other employer groups
to consolidate purchasing power and negotiating leverage. Many employer groups
have been successful in limiting premium increases or in obtaining premium
decreases which has affected FHC's profitability as health care costs have not
been reduced at the same rate as the premium reductions. In part because of the
economic pressure from employer groups, FHC has actively marketed commercial
products to individuals, which has been a growing part of its commercial
business. However, sale of individual products typically results in higher
administrative costs, including commissions and underwriting costs, and medical
losses from these policies may be higher than from groups because of the greater
possibility of adverse selection. Because of increased cost pressures on FHC,
FHC believes that its commercial medical loss ratio may be adversely affected if
health care cost containment measures cannot fully mitigate the effects of the
lower premiums. FHC has experienced intense competition for enrollees, which has
also tended to increase pricing pressures and marketing costs. There can be no
assurance that the current levels of enrollment or profitability can be
maintained. FHC believes that the above factors will continue to affect its
operations and that the future rate of premium growth may be lower than the
rates achieved in recent years.
PREDICTABILITY OF AND CONTROL OVER HEALTH CARE COSTS
FHC's ability to establish appropriate premium rates and sustain favorable
operating margins is dependent upon its ability to predict and control health
care expenditures, to manage effectively utilization of health care services and
to negotiate favorable provider contracts with health care providers, including
physicians, medical groups and IPAs, and dentists, hospitals and ancillary
providers such as pharmaceutical suppliers, laboratories and non-physician
specialists. The payment and other terms of agreements with FHC's health care
providers generally have provisions which allow the payment terms to be
negotiated annually, and there can be no assurance that provider agreements
negotiated in the future will not result in substantially higher health care
costs or smaller networks of available providers for FHC's enrollees. FHC is
continuing to increase the number of capitation arrangements it has with
physicians, hospitals and ancillary providers, thereby assigning the risk and
responsibility for the enrollees' medical care to those providers. FHC relies on
the capitated providers to have the financial strength and management
capabilities to effectively manage the enrollees' medical care. There can be no
assurance, however, that such capitated providers will be successful in
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<PAGE>
managing such care, in which event FHC is ultimately responsible for the cost of
such care. In addition, inflation, advances in medical technologies, major
epidemics, military actions, natural disasters and numerous other external
factors, including the aging of the population and other demographic
characteristics relating to the delivery of health care services can adversely
affect the ability of managed care companies, including FHC, to predict and
control health care costs.
DEPENDENCE UPON HEALTH CARE PROVIDERS
FHC's profitability and the success of its long-range business plans will
depend upon its ability to attract and retain qualified health care providers.
In particular, FHC is dependent upon maintaining a network of qualified primary
care physicians for the provision of general medical care, who are primarily
responsible for hospital and specialty referrals and preventive care. Many
providers are consolidating into organized groups or larger bargaining units and
asserting greater bargaining power or are offering managed care programs
directly to employer groups and others. In addition, there is increasing
competition from other HMOs, health care plans and hospitals to retain the
services of providers. The failure to retain key medical groups, IPAs and
hospitals could adversely affect the ability of FHC to retain enrollees, which
could adversely affect FHC's operating results and future profitability. There
can be no assurance that FHC will successfully maintain a cost effective, stable
provider network.
AFFILIATED MEDICAL GROUPS AND INDEPENDENT PRACTICE ASSOCIATIONS
During the past several years FHC has contracted with affiliated medical
groups, which provide health care services to FHC's enrollees at FHC-managed and
owned health care centers, and affiliated independent practice associations
("IPAs"), which contract with physicians to provide medical services to FHC's
enrollees. FHC provides facilities and support functions to the health care
centers and is reimbursed in the form of a management fee by the affiliated
professional corporations. The health care centers and affiliated medical groups
have required and will continue to require significant capital expenditures and
operating costs. These expenditures and costs are being funded through lines of
credit with FHC. Although FHC believes that the medical groups will be able to
meet their obligations under the credit facilities, there can be no assurance as
to the timing or amount of repayment of these obligations. If the medical groups
were unable to pay all or a significant part of these obligations, such
inability could have a material adverse effect on FHC's operating results and
future profitability.
Certain FHC-affiliated IPAs were recently sold to an independent physician
practice management company, which FHC believes has sufficient resources to fund
the IPAs' outstanding liabilities at the time of the sale; however, there can be
no assurance that such liabilities will be paid in full. Failure to pay such
liabilities could have an adverse effect on FHC's operating results and future
profitability.
In California and certain of the other states in which FHC conducts, or
intends to conduct business, general business corporations are not permitted to
practice medicine, exercise control over physicians who practice medicine or
engage in certain practices such as fee-splitting with physicians. FHC has
structured its relationships with medical groups and IPAs pursuant to agreements
which delegate specified management, administrative and support functions to FHC
and certain of its wholly owned subsidiaries. These agreements also reserve to
the physicians exclusive authority to make all decisions regarding delivery of
medical care. FHC neither represents to the public that it offers medical
services nor purports to control the practice of medicine. FHC believes that the
organization of its provider networks and the contractual framework existing
between FHC and medical groups and IPAs comply with the laws of states in which
it operates or intends to operate that confine the practice of medicine to
licensed physicians. There can be no assurance, however, that regulatory
authorities will not assert that FHC is engaged in the corporate practice of
medicine. Any violation could result in fines and regulators could seek to
restructure the contractual relationships. Any such restructuring could have an
adverse effect on FHC.
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WORKERS' COMPENSATION INSURANCE
California Compensation Insurance Company ("CalComp") is FHC's workers'
compensation insurance company with business primarily in California.
Significant state legislation has been enacted in California affecting, among
other things, workers' compensation minimum rates and the ability to introduce
managed care concepts in workers' compensation. Effective January 1, 1995, the
minimum rate law in California was abolished. The effects of open rating have
adversely affected CalComp's profitability in California. The profitability of
CalComp may also be affected by a variety of factors outside FHC's control,
including competition, severity and frequency of workers' compensation claims,
interest rates, new state regulations, court decisions and the judicial climate.
While actuarially determined, the amounts established by CalComp for loss
reserves are estimates of future costs based on various assumptions, which
reserves could prove to be inadequate in light of subsequent experience. If the
reserves are inadequate, CalComp's and FHC's profitability would be adversely
affected.
CalComp, through its subsidiary, Business Insurance Company ("BICO"), is
expanding its workers' compensation business in other states and is subject to
the regulations of various states. There can be no assurance that BICO will be
successful in operating in states outside California.
MEDICAID AND MEDICARE PROGRAMS
FHC is reimbursed on a fixed monthly contract rate per enrollee for the
provision of services to its Medicaid eligible beneficiaries. In general, state
regulators have broad discretion in the determination of Medicaid HMO contract
rates, and there are ongoing budgetary pressures to reduce future payments to
HMOs. Such pressure may increase if health care costs continue to rise or if
national or state health care reforms change the benefits or payments permitted
under the Medicaid program. FHC is unable to assess the impact, if any, such
changes would have on its operations; however, any significant change in
Medicaid or its reimbursement rates could materially affect FHC's operations.
Failure of the federal government to reach consensus on a national budget could
affect payments to FHC under its Medicaid and Medicare contracts; if the result
of lack of a budget were to reduce, delay or cease payments under these
programs, there could be a material adverse effect on FHC's operations.
Funds received under Medicaid and Medicare are subject to audit with respect
to the proper application of various payment formulas, and therefore,
retroactive adjustments of revenue from these programs may occur. These programs
are also subject to many statutory and regulatory changes, and payment rates may
be reduced. There can be no assurance that payments under such programs will
remain at levels comparable to present levels or sufficient to cover costs for
FHC's Medicaid HMO enrollees or the operating and fixed costs of FHC's hospitals
allocable to Medicaid patients. Certain states in which FHC operates are
considering restructuring the delivery of medical care to Medicaid beneficiaries
and the federal Medicaid reimbursement rates have been decreased in certain of
the areas in which FHC has Medicaid programs (for example, the state of Florida
reduced Medicaid reimbursement rates by 18% in July 1995 which significantly
affected FHC's Florida Medicaid HMO revenues); there can be no assurance that
FHC will be able to retain this business, or if retained, whether the programs
will provide FHC with an adequate level of profitability.
In October 1995, FHC was awarded four Medicaid contracts to establish a
managed care program to cover up to approximately 1.8 million eligible
beneficiaries in four California counties. Certain of these contracts are being
protested by unsuccessful bidders. Implementation of the contracts is scheduled
to commence in the second half of 1996 subject to the State of California's
receipt of a waiver from HCFA. The annual contracts run through March 2002.
California has never offered a program of this magnitude, so there may be
significant changes in how the program is ultimately implemented or how the
state will interpret or impose the requirements of the programs. There can be no
assurance that, if the protested contracts are retained, FHC will be successful
in managing the implementation and delivery of Medicaid services under these
contracts, that FHC will experience sufficient enrollment from eligible
beneficiaries to meet its anticipated enrollment targets, or whether such
contracts will provide FHC with an adequate level of profitability.
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MERGERS, ACQUISITIONS AND EXPANSION
Mergers and acquisitions have played an important role in the implementation
of FHC's business strategy and are expected to continue to be important to FHC's
growth and development. FHC's product offerings and HMO, PPO and specialty
services enrollment have been expanded through these acquisitions. As a result,
FHC is subject to the uncertainties and risks associated with any business that
has grown rapidly and has expanded into new product and geographic areas. These
mergers and acquisitions have placed substantial demands on FHC's management and
financial resources. The integration of the acquired companies' operations
continues to be slower, more complex and more costly than originally
anticipated, especially in systems and functional areas such as claims
processing, data management and finance. There can be no assurance that the
combined companies will realize the full cost savings or revenue enhancements
FHC expects to realize as a result of the recent acquisitions and the
consolidation of certain of the operations of the acquired companies or that
such savings or enhancements will be realized at the points in time currently
anticipated. Furthermore, there can be no assurance that any cost savings which
are realized will not be offset by increases in other expenses or operating
losses. FHC will encounter similar uncertainties and risks with respect to any
future acquisitions it may make.
FHC continues to expand its HMO and specialty services operations in
additional states, either through internally generated development or through
acquisitions, thereby subjecting FHC to different methods of operations and
management and the effect of varying state regulations. FHC has start-up HMO and
specialty services operations in a number of states and the United Kingdom.
These operations have required and will continue to require significant costs
related to creating the infrastructure for operations, satisfying net equity or
capital and surplus requirements, hiring and training personnel, obtaining
necessary regulatory approvals and operating until sufficient enrollment is
obtained to offset the start-up costs. There can be no assurance that FHC will
be successful in managing HMOs at multiple locations or in obtaining sufficient
enrollment to be profitable. FHC's United Kingdom operations are experiencing
greater losses during the start-up phase of operations and are facing larger
regulatory capital requirements than originally anticipated; there can be no
assurance that the critical mass needed for these operations to become
profitable within a reasonable time period will be realized. Failure of the
United Kingdom operations would have an adverse effect on FHC's operating
results.
FHC is engaged in an ongoing evaluation of potential acquisitions. No
assurance can be given as to FHC's ability to compete successfully at favorable
prices for available acquisition candidates or to complete future acquisitions,
or as to the financial effect on FHC of any acquired business. Future
acquisitions by FHC may involve significant cash expenditures and may result in
increased indebtedness and interest and amortization expense or decreased
operating income, which could have an adverse impact on FHC's future operating
results.
COMPETITION
The managed health care industry is highly competitive and has experienced
significant changes in recent years. There has been a marked trend toward
consolidation in the health care industry, and managed health care companies are
larger both in size and in the number of products that they offer. Large
employer groups continue to demand a variety of health care options, such as
HMOs, point of service plans and PPO products, either insured by third parties
or self-funded. Physician and other provider groups are consolidating and also
compete with FHC's operations. Some of FHC's competitors have substantially
greater financial resources and broader geographic coverage than FHC. The health
care industry has been subject to vigorous price competition with volatility in
the industry caused by regulatory changes and competitive market pricing
pressures. These factors are likely to continue and may become more severe in
the future. Such competition could adversely impact FHC's future results by
reducing margins or enrollment levels, or both.
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GOVERNMENT CONTRACTS
FHC, through Foundation Health Federal Services, Inc. ("FHFS"), its
government contracts subsidiary, administers large, multi-year managed care
government contracts. FHFS subcontracts to affiliated and unrelated third
parties part of the administration and health care risk of these contracts.
Government contracts revenue is subject to semi-annual bid price adjustments,
annual price increases or decreases, change orders, risk sharing provisions and
various other price adjustments under the contracts. The contracts are also
subject to ongoing and retroactive allocations between FHFS and its
subcontractors which can have a positive or negative effect on the total
contract price. Although FHC believes that FHFS has adequately processed claims
and there are no significant outstanding liabilities under these contracts,
there can be no assurance that the government will not make determinations
adverse to FHC with respect to these matters.
During fiscal year 1995, FHFS was awarded two large, multi-year government
contracts to provide health care services to over 800,000 CHAMPUS-eligible
beneficiaries in Washington, Oregon, Oklahoma and most of Arkansas, Louisiana
and Texas. On August 31, 1995, FHFS was notified of award by the Department of
Defense of the multi-year TRICARE managed care contract to provide services to
approximately 720,000 CHAMPUS-eligible beneficiaries in California and Hawaii.
Delivery of health care services is scheduled to commence April 1, 1996. The
TRICARE contract in California and Hawaii is being protested by unsuccessful
bidders. Failure of FHC to maintain this contract could have a material adverse
effect on FHC's future operating results. There can be no assurance that FHC
will be successful in managing the implementation and delivery of services under
several large, multi-year government managed care contracts or whether any of
such contracts will be profitable. These contracts also contain risk sharing
provisions whereby FHC's equity is at risk for managing costs within agreed upon
parameters; failure to appropriately manage these contracts and the health care
costs associated thereby could have a material adverse effect on FHC's operating
results and financial position.
FHC intends to compete for managed care contracts as they are announced by
federal and state agencies. FHC expects intense competition for such contracts
and there can be no assurance that it will be the successful bidder for any such
contracts or if successful, whether such contracts will provide an adequate
level of profitability. The design and implementation of managed care government
contracts may be affected by any health care reforms and reductions in
government spending considered by government agencies and legislative bodies,
and FHC is unable at the present time to predict the effect of any such reforms
or reductions on the profitability of any contracts awarded.
MARKET VOLATILITY
The stock market and the market for securities of health care companies has
from time to time experienced extreme price and volume fluctuations which may be
unrelated to the operating performance of particular companies. From time to
time analysts and others have issued reports and articles which have had a
negative impact on stock prices. In addition, various factors and events, such
as announcements by FHC or its competitors concerning operating results, loss of
a major employer group contract or provider contract, governmental approvals,
regulations or audits, acquisitions, new product introductions, competitive
pricing pressures and rising costs of health care may also contribute to the
price volatility of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The ability of the Board of Directors of FHC to issue shares of preferred
stock without stockholder approval and a stockholder rights plan adopted by FHC
may, alone or in combination, have certain anti-takeover effects. FHC also is
subject to provisions of the Delaware General Corporation Law ("DGCL") which may
make certain business combinations more difficult.
EXPOSURE TO EVOLVING THEORIES OF RECOVERY
FHC, like HMOs and health insurers generally, excludes certain health care
services from coverage under its HMO, PPO and indemnity plans. In the ordinary
course of its business, FHC is subject to
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the claims of its enrollees arising out of decisions to restrict treatment or
reimbursement for certain services. Several recent proceedings filed against
managed care companies have successfully challenged HMOs' decisions to deny
coverage of treatment sought by enrollees. Compensatory damages (including
damages for emotional distress) and punitive damages, which are not covered by
insurance, have been awarded. The punitive damages have been awarded on the
premise that the defendant HMOs have, in bad faith, denied coverage of the
treatments sought. Although each lawsuit must succeed or fail on its own merits,
FHC anticipates that claims alleging bad faith may become more common in
enrollees' actions against managed care companies. The loss of even one such
coverage claim, if it results in a punitive damage award, could have a
significant adverse effect on FHC. In addition, HMO enrollees are challenging
certain features of HMOs' financial arrangements with their contracting
providers, in particular, that these arrangements contain certain financial
incentives to control unnecessary referrals to specialists and unnecessary
hospitalizations. The enrollees contend that these financial arrangements, and
the capitation system for reimbursing providers as well, provide participating
providers with improper incentives to furnish less than adequate medical care to
enrollees. State legislatures are also considering managed care reimbursement
methodologies and their effect on access to, and quality of, medical care. The
financial and operational impact which such evolving theories of recovery and
legislation, if enacted, will have on the managed care industry generally, and
FHC in particular, is at present unknown. In addition, the risk of potential
liability under punitive damages theories may increase significantly the
difficulty of obtaining reasonable settlements of such coverage claims.
RIGHTS OF MHN STOCKHOLDERS FOLLOWING THE REORGANIZATION
Following the Reorganization, holders of MHN Common Stock and MHN Preferred
Stock will become holders of FHC Common Stock. Certain differences exist between
the rights of the MHN Stockholders under the MHN Certificate and the MHN Bylaws,
and the rights of FHC stockholders under the FHC Certificate and the FHC Bylaws.
Among other things, the FHC Certificate and the MHN Certificate contain
different provisions regarding voting in the election of directors, the
procedure for calling special meetings of their respective Boards, the procedure
for qualifying, nominating and removing directors, the right of stockholders to
inspect certain corporate records, and the vote required to amend each
respective charter. The FHC Certificate and the FHC Bylaws also contain
provisions which may make it more difficult for stockholders to nominate
director candidates. These provisions include requirements that stockholders
must give 120 days' prior notice of nominations to the FHC Board and that
one-third of the FHC Board must be composed of persons who are independent of
FHC. The affirmative vote of a larger percentage of stockholders may be required
to amend some of the provisions of the FHC Certificate than to amend the MHN
Certificate. In addition, FHC has a Stockholder Rights Plan and MHN does not.
See "Comparison of Rights."
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is intended to qualify for federal income tax purposes as
a tax-free reorganization under the Internal Revenue Code of 1986, as amended
(the "Code"). See "The Reorganization -- Certain Federal Income Tax Consequences
- -- Tax Free Reorganization Treatment." If for any reason the Reorganization does
not qualify as a reorganization, then among other effects, the MHN Stockholders
may recognize gain or loss in such transaction. See "The Reorganization --
Certain Federal Income Tax Consequences -- Failure of Reorganization Treatment."
ACCORDINGLY, ALL MHN STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING ALL TAX RAMIFICATIONS OF THE REORGANIZATION.
THE MEETING
This Proxy Statement/Prospectus is being provided to the MHN Stockholders in
connection with the Meeting. The Board of Directors of MHN is soliciting proxies
for use at its Meeting.
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The Meeting is scheduled to be held on , 1996, at
. At the Meeting, the holders of MHN Common Stock and MHN
Preferred Stock will be asked to vote on the Reorganization Agreement and the
transactions contemplated thereby, including the Merger. See "The
Reorganization."
THE BOARD OF DIRECTORS OF MHN HAS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AS BEING FAIR AND IN THE
BEST INTERESTS OF MHN AND THE MHN STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT
THE MHN STOCKHOLDERS VOTE FOR APPROVAL OF THE REORGANIZATION AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.
RECORD DATE AND VOTING RIGHTS. Only holders of record of MHN Common Stock
and MHN Preferred Stock at the close of business on , 1996 (the
"Record Date"), will be entitled to notice of and to vote at the Meeting. At the
close of business on such date, there were shares of MHN Common Stock
and shares of MHN Preferred Stock outstanding. Each share of MHN
Common Stock will entitle the holder thereof to one vote at the Meeting. Each
share of MHN Preferred Stock will have that number of votes as is specified by
the MHN Certificate.
STOCKHOLDER VOTE REQUIRED. The approval of the Merger requires the
affirmative vote of the holders of at least a majority in interest of the MHN
Common Stock, a majority in interest of the MHN Common Stock and MHN Preferred
Stock (on an as-converted basis), voting together as a whole, and 66 2/3% of the
MHN Preferred Stock (voting together on an as-converted basis). Abstentions will
have the same effect as negative votes. Holders of at least a majority of the
outstanding shares of MHN Common Stock and MHN Preferred Stock (on an
as-converted basis), must be represented at the Meeting, either in person or by
proxy, for a quorum to be present. An additional condition to the consummation
of the Reorganization is the affirmative vote of the holders of at least a
majority in interest of the shares of MHN Common Stock who are not otherwise
holders of MHN Preferred Stock. FHC may not invoke its condition precedent to
the Closing that no more than 6.5% of the outstanding shares of MHN Preferred
Stock and MHN Common Stock be subject to the exercise of statutory dissenters'
rights, if the holders of 90% in interest of the outstanding MHN Common Stock
and 92% in interest of the MHN Common Stock and MHN Preferred Stock (on an
as-converted basis), taken as a whole, approve the Reorganization (the "Special
Vote").
PROXIES. Each properly completed proxy returned in time for voting at the
Meeting will be voted in accordance with the instructions indicated on the
proxy, or, if no instructions are provided, will be voted FOR approval of the
Reorganization Agreement and the transactions contemplated thereby, including
the Merger. It is not expected that any matters other than that referred to in
this Proxy Statement/Prospectus will be brought before the Meeting. If, however,
other matters are properly presented, the persons named as proxies in the form
of proxy will vote in accordance with their judgment with respect to such
matters. The grant of a proxy will also confer discretionary authority on the
persons named in the proxy to vote on matters incident to the conduct of the
Meeting.
A stockholder may revoke a proxy at any time before it is voted by filing
with the Corporate Secretary of MHN an instrument revoking the proxy, or by
returning a duly executed proxy bearing a later date, or by attending the
applicable Meeting and voting in person. Any filing should be made to the
attention of Franklin Tom, Secretary of Managed Health Network, Inc., 5100 West
Goldleaf Circle, Suite 300, Los Angeles, California 90056. Attendance at the
Meeting will not by itself constitute revocation of a proxy.
THE REORGANIZATION
GENERAL EFFECTS OF THE REORGANIZATION
Upon consummation of the Merger, MHN will become a wholly owned subsidiary
of FHC, the separate corporate existence of Acquisition Corporation will cease,
and MHN Stockholders at the time the Certificate of Merger is filed with the
applicable governmental authorities (the "Effective Time") will receive shares
of FHC Common Stock, as described below. A portion of the Closing Shares (the
"Escrow Shares") will be placed in escrow for a period of one year as security
for the obligations of the
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MHN Stockholders to indemnify FHC for certain liabilities under the
Reorganization Agreement. Escrow Shares not applied for such purpose will be
distributed to the MHN Stockholders at the end of the escrow period. See "-- The
Reorganization Agreement -- Issuance and Exchange of Certificates; Distributions
of Escrow Shares" and "-- Indemnification and Escrow."
The number of shares of FHC Common Stock issuable at the Effective Time to
holders of MHN Common Stock and MHN Preferred Stock and into which MHN Options
shall be exercisable (the "Closing Shares") shall be determined as follows:
(i) First, the Aggregate Potential Shares shall be determined as an
amount equal to (A) $45,000,000, less Excess Transactional Costs (as defined
below), divided by (B) the Assumed Closing Price. "Excess Transactional
Costs" shall mean all amounts paid or payable by MHN for legal, accounting
and financial services as a proximate result of the transactions
contemplated by the Agreement in excess of $900,000, all as identified by
FHC and MHN no later than two days prior to the Closing Date. The "Assumed
Closing Price" shall be calculated as follows:
(A) In the event that the average of the per share closing prices of
FHC Common Stock during the ten trading days ending on the second trading
day prior to Closing as reported on the New York Stock Exchange ("NYSE")
Composite Transaction Tape (the "Closing Price") is no less than 92.5% of
$42.475, which is the average of the per share closing prices of FHC
Common Stock during the ten trading days ending on the trading day prior
to the date of execution of this Agreement by MHN and FHC as reported on
the NYSE Composite Transactions Tape (the "Signing Price"), and no more
than 107.5% of the Signing Price, then the Assumed Closing Price shall be
the Closing Price.
(B) In the event that the Closing Price is greater than 107.5% but no
more than 115% of the Signing Price, then the Assumed Closing Price shall
be 107.5% of the Signing Price.
(C) In the event that the Closing Price is less than 92.5% of the
Signing Price but no less than 85% of the Signing Price, then the Assumed
Closing Price shall be 92.5% of the Signing Price.
(D) In the event that the Closing Price is less than 85% of the
Signing Price, then MHN may in its sole discretion terminate this
Agreement by giving notice of termination to FHC no later than one day
prior to Closing; provided, however, that FHC may cause the Closing to
occur notwithstanding any such notice if it notifies MHN no later than
the day prior to Closing of its intent to cause the issuance of that
number of shares of FHC Common Stock based on an Assumed Closing Price
equal to (1) 92.5% of the Signing Price divided by 85% of the Signing
Price, times (2) the Closing Price.
(E) In the event that the Closing Price is more than 115% of the
Signing Price, then FHC may in its sole discretion terminate this
Agreement.
(ii) Each share and fractional share of MHN Preferred Stock issued and
outstanding immediately prior to the Effective Time shall be converted,
without any action on the part of the holders thereof, into that number of
shares of FHC Common Stock equal to the Preference Amount divided by the
Closing Price. The "Preference Amount" for each share of MHN Preferred Stock
is as determined in accordance with Section 2 of MHN's Fifth Amended and
Restated Certificate of Incorporation as of the Effective Time. The
aggregate number of shares of FHC Common Stock issuable to the holders of
MHN Preferred Stock shall be referred to herein as the "Preferred Holders'
Shares."
(iii) Each share and fractional share of MHN Common Stock issued and
outstanding immediately prior to the Effective Time shall be converted,
without any action on the part of the holders thereof, into that number of
shares of FHC Common Stock (the "MHN Common Stock Conversion Amount") equal
to (i) the Aggregate Potential Shares less the Preferred Holders' Shares,
divided by (ii) an amount equal to the aggregate number of shares of MHN
Common Stock and that number of shares of MHN Common Stock underlying all
fully vested (taking into account
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<PAGE>
any accelerated vesting as a result of the Merger), outstanding and
unexercised options to purchase MHN Common Stock ("MHN Options") outstanding
as of the Effective Time. The aggregate number of shares of FHC Common Stock
issuable to the holders of MHN Common shall be referred to as the Common
Holders' Shares.
The number of shares of FHC Common Stock that the MHN Stockholders will
receive in exchange for the MHN Preferred Stock and MHN Common Stock will vary
based in part upon the price of FHC Common Stock at the Effective Time and in
part by the allocation of price fluctuation risk of FHC Common Stock that has
been negotiated between FHC and MHN. The dollar value of FHC Common Stock
between the signing of the Agreement and the Effective Time that MHN
Stockholders will receive will range between the amounts set forth in the
following chart. The following example assumes that (i) Closing will occur on
March 31, 1996, (ii) the Preference Amount for each share of MHN Preferred Stock
will include Accruing Dividends on such stock through such date, (iii) MHN's
transaction costs do not exceed $900,000; (iv) the total outstanding shares of
MHN Preferred Stock are 217,973.15 (18,328,638 shares of MHN Common Stock on an
as-converted basis); (v) the total outstanding shares of MHN Common Stock are
7,427,844; and (vi) shares of MHN Common Stock into which outstanding MHN
Options are exercisable are 2,790,000. The number of shares of FHC Common Stock
and therefore the values set forth below, include both the FHC Common Stock
distributable immediately after the Closing and the FHC Common Stock which will
be included in the Escrow (see "-- The Reorganization Agreement -- Escrow
Shares"). "Value" for purposes of the following chart is calculated based on the
FHC Closing Price used in calculating the number of shares of FHC Common Stock
to be issued to the applicable MHN Stockholder. There can be no assurance that
the market value of the FHC Common Stock issued to the MHN Stockholders will not
decrease following the Closing.
VALUE IN FHC COMMON STOCK TO BE RECEIVED
FOR EACH SHARE OF MHN PREFERRED STOCK AND MHN COMMON STOCK
<TABLE>
<CAPTION>
85% OF FHC 92.5% OF FHC 100% OF FHC 107.5% OF FHC 115% OF FHC
SIGNING PRICE= SIGNING PRICE= SIGNING PRICE= SIGNING PRICE= SIGNING PRICE=
$36.10 $39.29 $42.48 $45.66 $48.85
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
MHN Preferred Stock
Series A (1)............... $ 164.20 $ 184.38 $ 184.38 $ 184.38 $ 218.40
Series B................... $ 158.32 $ 158.32 $ 158.32 $ 158.32 $ 158.32
Series C................... $ 138.25 $ 138.25 $ 138.25 $ 138.25 $ 138.25
Series D................... $ 134.02 $ 134.02 $ 134.02 $ 134.02 $ 134.02
Series E (2)............... $ 125.86 $ 125.86 $ 125.86 $ 125.86 $ 125.86
MHN Common Stock........... $ 0.99 $ 1.30 $ 1.30 $ 1.30 $ 1.54
</TABLE>
- ------------------------
(1) Reflects the conversion of the Series A to MHN Common Stock at FHC Closing
Prices greater than 85% of FHC Signing Price.
(2) Excludes the share price of $500,000 of Series E issued in June 1995 in
connection with the HMC acquisition by MHN. The holders of Series E issued
in connection with the HMC acquisition would receive a value of $106.64 per
Series E share, reflecting dividends accruing from June 1995 rather than
January 1993 for the rest of the Series E.
Shares of MHN Preferred Stock and MHN Common Stock held by persons
exercising statutory dissenters' rights shall be treated as described in
"Dissenters' Rights."
All outstanding and unexercised MHN Options will fully vest as a result of
the Reorganization. At the Effective Time, each fully vested, outstanding and
unexercised MHN Option shall be treated as the right to receive, in exchange for
the payment of the exercise price set forth in such MHN Option, that number of
shares of FHC Common Stock per share of fully vested MHN Common Stock underlying
such MHN Option equal to the MHN Common Stock Conversion Amount. Notwithstanding
the foregoing, FHC agrees to consider requests received by FHC at least 10 days
prior to the Closing from
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any holder of MHN Options to receive in full settlement of such holder's MHN
Options that number of shares of FHC Common Stock equal to: (a) the number of
shares of FHC Common Stock otherwise allocable to such MHN Options, less (b) an
amount equal to (i) the aggregate exercise price of such MHN Option, divided by
(ii) the Assumed Closing Price (the "Option Spread Amount"); provided, however,
that as a condition of such settlement of the MHN Options, the holder of the MHN
Option tenders to FHC the cash to satisfy any required tax withholding amounts.
The Escrow Shares will be equal in number to $1,500,000 divided by the
Closing Price or Assumed Closing Price. See "-- The Reorganization Agreement --
Issuance of Certificates; Distributions of Escrow Shares." The Escrow Shares
will be held as security for the obligations of the MHN Stockholders to
indemnify FHC for certain liabilities. See "-- The Reorganization Agreement --
Indemnification and Escrow."
After the Reorganization, FHC will hold 100% of the MHN capital stock then
outstanding. Following the Closing, the MHN Stockholders, and upon exercise or
settlement of the MHN Options, the holders of MHN Options, will be stockholders
of FHC. See "Comparison of Rights." Upon the delivery of the Closing Shares
(including the Escrow Shares), the MHN Stockholders will hold up to 1,059,497
shares of FHC Common Stock (assuming a Closing Price equal to the Signing Price
of $42.475), which will represent approximately 1.8% of the FHC Common Stock
outstanding as of December 31, 1995.
BACKGROUND OF AND REASONS FOR THE REORGANIZATION
In October 1992, FHC acquired Occupational Health Services, Inc., a managed
behavioral health HMO located in Northern California. Renamed Foundation Health
PsychCare Services, Inc. ("FHPS"), this acquired company provides managed
behavioral health care services to FHC's customers, markets employee assistance
programs throughout the United States and provides the managed behavioral health
care component for some of FHC's governmental contracts.
After the FHPS acquisition FHC was interested in further expanding its
managed behavioral health business. Therefore, in May 1993, representatives of
FHC contacted representatives of MHN (which included Gary S. Velasquez, who was
then the Vice President and Chief Financial Officer of MHN and is now Chief
Executive Officer of FHPS). While the parties had preliminary discussions
regarding a possible transaction, these discussions ultimately ceased. In
February 1994, Mr. Velasquez joined FHPS as its President.
In 1994, MHN's Board of Directors retained the investment banking firm of
Covington Associates of Boston, Massachusetts, to assist the Board in evaluating
and developing strategic alternatives for increasing the stockholder value of
MHN. This included acquisition strategies by MHN, and initially resulted in
MHN's acquisition of HMC, which was consummated in June 1995. In late 1994, the
scope of strategic alternatives to be addressed by Covington Associates was
expanded to include the possible sale, merger or other strategic alliance of MHN
with another company of significant size.
In early 1995, FHC expressed a renewed interest in MHN, and after some
preliminary discussions, in April 1995 the parties executed a confidentiality
agreement to permit the exchange of financial information.
During 1995, MHN had exploratory discussions and preliminary expressions of
interest from a number of companies regarding a possible acquisition of MHN. In
one case, this resulted in the signing, in May 1995, of a nonbinding letter of
intent between MHN and another private company.
Discussions between FHC and MHN took place at various intervals throughout
early and mid-1995, and ultimately, in August 1995, FHC made a written offer to
acquire MHN for $45 million in cash, subject to a number of conditions. MHN's
Board of Directors accepted FHC's offer, subject to certain additional
conditions, and terminated its negotiations with the other private company for a
number of reasons, including the Board's determination that the alternative
private transaction would not receive required approval from the MHN
Stockholders due, in part, to the fact that no immediate liquidity would be
provided to the MHN Stockholders.
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On November 18, 1995, the Board of Directors of FHC approved the acquisition
of MHN, subject to the consideration being changed to FHC Common Stock in a
pooling of interests transaction. MHN agreed to this change after negotiating
certain concessions.
On December 27, 1995, MHN's Board of Directors unanimously approved the
Reorganization as being fair and in the best interests of MHN and its
stockholders. On January 9, 1996, the parties executed the Reorganization
Agreement.
MHN believes that the Reorganization may result in a number of benefits to
MHN and its stockholders, including the following:
- Liquidity for the MHN Stockholders, who would hold shares in a publicly
traded corporation rather than a private company;
- Reasonable merger consideration which would provide the holders of MHN
Preferred Stock with at least a return in publicly-traded stock for their
investment and accruing dividends and the holders of MHN Common Stock with
a fair value for their shares; and
- Access for MHN to greater corporate and financial resources.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
FHC and MHN each intend for the Merger to qualify as a reorganization within
the meaning of section 368(a) of the Internal Revenue Code of 1986, as amended
(the Code). In order for reorganization treatment to apply certain requirements
must be met, including:
MHN, as the surviving corporation of the Merger, must acquire
substantially all of the assets of each of the corporations participating
in the Merger (while case law may support a lesser percentage, the
substantially all test will generally be met if 90 percent of the net assets
and 70 percent of the gross assets of a corporation are acquired);
FHC must obtain control of MHN, as defined in section 368(c) of the Code,
solely for FHC Common Stock issued in connection with the Merger (control
in this context is generally defined to mean ownership of 80 percent of all
of the voting stock of a corporation and 80 percent of the total number of
shares of all other classes of stock of such corporation); and
the individual stockholders of MHN must maintain continuity of
proprietary interest through continued ownership of FHC Common Stock.
While case law may support a lesser percentage, the continuity of interest test
will generally be met as long as the individual MHN Stockholders do not have a
plan or intention to sell, exchange or otherwise dispose of a number of shares
of FHC Common Stock received in the Merger that would reduce the number of
shares of FHC Common Stock owned by such stockholders after the Merger to a
number of shares having a value as of the date of the Merger of less than 50
percent of the value of all of the formerly outstanding shares of MHN held by
such stockholders as of that date. Ordinarily, shares surrendered by dissenting
stockholders or exchanged for cash in lieu of fractional shares are treated as
shares outstanding on the date of the Merger, and shares held by MHN
Stockholders and otherwise sold, redeemed or disposed of prior or subsequent to
the Merger are similarly considered.
It is a condition to the consummation of the Merger that each of MHN and FHC
obtain an opinion of its counsel that, based upon the assumptions and
understandings contained in such opinion, the Merger will constitute a tax-free
reorganization within the meaning of section 368(a) of the Code. Certain of the
assumptions and understandings included in such opinions will relate to the
existence of continuity of interest, FHC's acquisition of control of MHN solely
for FHC Common Stock, and MHN's acquisition of substantially all of the assets
of each of MHN and Acquisition Corporation. If such assumptions and
understandings are not met with respect to the Merger, then the validity of the
conclusions reached in such opinions, as well as herein, could be adversely
affected.
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<PAGE>
Based upon the conclusion that the Merger will qualify as a reorganization
under section 368(a) of the Code, such opinions of counsel will provide that,
for United States federal income tax purposes:
(a) No gain or loss will be recognized by the MHN Stockholders who
receive solely FHC Common Stock in the Merger.
(b) If a stockholder receives, in addition to FHC Common Stock, cash or
other property in the Merger, then subject to paragraph (c), such
stockholder will recognize gain (but not loss) with respect to the Merger in
an amount equal to the lesser of (i) the difference between the fair market
value of the FHC Common Stock and any other property (including cash)
received by such stockholder in the Merger (reduced by any amount treated as
a dividend, as discussed in paragraph (c) below) and such stockholder's
basis in the MHN stock, and (ii) the amount of cash and the fair market
value of property received in the transaction other than FHC Common Stock.
MHN Stockholders who purchased their stock at different times and prices
should consult with their tax advisors, as there may be several alternative
methods available for determining gain with respect to such stock.
(c) If the receipt of cash or other property described in paragraph (b)
has the effect of a dividend under section 301 of the Code, then
notwithstanding paragraph (b), such stockholder will be treated as receiving
a dividend in an amount equal to the lesser of (i) the difference between
the amount of cash and the fair market value of the FHC Common Stock and any
other property received in the Merger and the stockholder's basis in the MHN
stock, (ii) the amount of cash and the fair market value of any assets
(other than FHC Common Stock) received by such stockholder in the Merger and
(iii) such stockholder's ratable share of the earnings and profits of the
relevant corporation. The remainder, if any, will be treated as gain from
the exchange of property to the extent provided for in paragraph (b), above.
(d) If an MHN Stockholder receives solely FHC Common Stock in the
Merger, that stockholder's aggregate basis in the FHC Common Stock received
(including Escrow Shares) will be the same as the aggregate basis in the MHN
stock surrendered in exchange therefor.
(e) If an MHN Stockholder receives other property in the Merger in
addition to FHC Common Stock, such stockholder's aggregate basis in the FHC
Common Stock received will be the same as the aggregate basis in the stock
surrendered in exchange therefor, reduced by the amount of cash and the fair
market value of any property (other than FHC Common Stock) received by such
stockholder, and increased by any amounts treated as a dividend and any gain
recognized on the Merger.
(f) An MHN Stockholder's holding period for the FHC Common Stock
received in the Merger will include the period during which the shares of
MHN stock surrendered were held, provided that the surrendered stock is a
capital asset at the Effective Time.
(g) An MHN Stockholder receiving cash in the Merger in lieu of a
fractional share of FHC Common Stock will be treated as if such stockholder
actually received such fractional share which was subsequently redeemed by
FHC, resulting in the cash such stockholder receives in lieu of such
fractional share being treated as having been received as full payment in
exchange for stock redeemed as provided in section 302(a) of the Code.
(h) No gain or loss will be recognized by MHN, Acquisition Corporation
or FHC as a result of the Merger.
No gain or loss will be recognized by a holder of an unexercised MHN Option
stock solely as a result of the conversion of such option into an option to
acquire FHC Common Stock, provided that such option (i) was issued in connection
with the performance of services and (ii) did not and will not have a readily
ascertainable fair market value (within the meaning of Income Tax Regulations
section 1.83-7(b)) when issued or at the Effective Time. In addition, to the
extent any such unexercised MHN Option is an "incentive stock option"
immediately prior to the Merger, such option will remain an "incentive stock
option" after its conversion into an option to acquire FHC Common Stock.
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<PAGE>
In light of federal income tax consequences that may apply, any holder of an
MHN Option who is considering making a request to FHC in accordance with the
terms of the Reorganization Agreement to receive the Option Spread Amount in
settlement of such holder's MHN Options (see "-- General Effects of the
Reorganization") is strongly urged to consult with his or her tax adviser prior
to making any such request.
DISSENTERS. An MHN Stockholder who perfects dissenters' rights and receives
payment for such stockholder's stock generally will be treated as if such stock
was redeemed. In general, if the MHN stock is held as a capital asset at the
Effective Time, a dissenting stockholder will recognize capital gain or loss
measured by the difference between the amount of cash received and the basis in
such stock. However, if such dissenting stockholder owns, directly or
constructively through application of section 318 of the Code, any MHN Preferred
Stock or MHN Common Stock as to which dissenters' rights are not exercised and
perfected and which are exchanged for FHC Common Stock in the Merger, or
otherwise holds FHC Common Stock, such stockholder may be treated as having
received a dividend in the amount of the cash paid to the stockholder in
exchange for the shares as to which dissenters' rights are perfected. Under
section 318 of the Code, an individual is deemed to own stock that is actually
owned (or deemed to be owned) by certain members of such individual's family
(spouse, children, grandchildren and parents, with certain exceptions) and other
related parties, including, for example, certain entities in which the
individual has a direct or indirect interest (such as partnerships, estates,
trusts and corporations), as well as stock that such individual (or a related
person) has the right to acquire upon exercise of an option or conversion right
held by such individual (or related person). Each stockholder who intends to
dissent from the Merger (see "Dissenters' Rights") should consult such
stockholder's own tax advisor with respect to the application of the stock
redemption and constructive ownership rules to the stockholder's particular
circumstances.
ESCROW SHARES. Because the former stockholders of MHN will be entitled to
receive all taxable dividends with respect to the Escrow Shares (see " -- The
Reorganization Agreement -- Indemnification and Escrow") and to direct the
voting of the Escrow Shares, the Escrow Shares should be treated as having been
issued at the time of the Merger. The former stockholders of MHN should thus be
regarded as the recipients of any such distributions, but no further federal
income tax consequences should result from their receipt of Escrow Shares upon
termination of the one year Escrow. The number of shares of Escrow Shares to be
used to satisfy any claim against the escrow will be determined by valuing the
shares at the higher of the Closing Price or Assumed Closing Price or the
trading price of FHC Common Stock at the time such indemnification occurs. If
the number of shares is based on the trading price of FHC Common Stock at the
time such indemnification occurs, the former stockholders of MHN will recognize
gain or loss to the extent that Escrow Shares are used to satisfy such claim.
The amount of such gain or loss will be measured by the difference between such
stockholder's basis in the Escrow Shares used to satisfy the claim and the fair
market value of those Escrow Shares.
BACKUP WITHHOLDING. All stockholders who (i) intend to dissent from the
Merger, (ii) receive cash or other property in the Merger in a situation where
such distribution may be considered essentially equivalent to a dividend, or
(iii) receive cash in lieu of fractional shares of FHC Common Stock where the
gross amount of the cash paid is $20 or more should consult their own tax
advisors with regard to the 31 percent federal backup withholding tax which may
become applicable to such amounts for stockholders failing to furnish their
federal taxpayer identification numbers as requested by MHN to otherwise
establish an exemption from such backup withholding.
FAILURE OF REORGANIZATION TREATMENT. If the Merger does not qualify as a
reorganization under section 368(a) of the Code, whether by virtue of failure to
meet the continuity of interest test or otherwise, then for federal income tax
purposes the Merger would be treated as a taxable sale of the stock of MHN by
the MHN Stockholders, and:
(a) Each MHN Stockholder would generally recognize gain or loss in the
Merger in an amount equal to the difference between such stockholder's
adjusted basis in his or her MHN stock
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<PAGE>
and the amount of money and the fair market value of other property
(including FHC Common Stock and Escrow Shares) received by such MHN
Stockholder in the Merger. Such gain or loss would generally be capital gain
if the surrendered stock were held as a capital asset at the time of the
Merger, and would be long-term if at such time the holding period for such
stock exceeded one year;
(b) Each MHN Stockholder would have a basis in the FHC Common Stock
received in the Merger (including the Escrow Shares) equal to the fair
market value of such stock at the time of the Merger; and
(c) Each MHN Stockholder's holding period for the FHC Common Stock
received in the Merger (including Escrow Shares) would not include any
period of time prior to the Merger.
However, no gain or loss will be recognized by MHN, Acquisition Corporation
or FHC as a result of the Merger, even if the Merger fails to qualify for
reorganization treatment.
THE FOREGOING IS NOT INTENDED TO BE A COMPREHENSIVE DISCUSSION OF ALL
POSSIBLE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. FURTHERMORE, THIS PROXY
STATEMENT/PROSPECTUS DOES NOT PROVIDE INFORMATION ABOUT THE TAX CONSEQUENCES OF
THE MERGER UNDER THE TAX LAWS OF ANY STATE OR OF ANY LOCAL OR FOREIGN
JURISDICTION. MHN STOCKHOLDERS AND HOLDERS OF MHN OPTIONS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO ALL TAX CONSEQUENCES OF THE MERGER.
ACCOUNTING TREATMENT
The Merger is expected to qualify as a "pooling of interests" for accounting
and financial reporting purposes. The obligations of FHC to consummate the
Merger are subject to FHC's ability to account for the Merger as a pooling of
interests. See "-- The Reorganization Agreement -- Conditions to Consummation of
the Merger." Following the Closing, FHC intends to expense the costs related to
the Merger and certain anticipated costs associated with combining MHN with its
existing businesses, which costs are estimated to total approximately $4.2
million. FHC intends to expense these costs in the quarter in which the
transaction is consummated, which is anticipated to be the third quarter ending
March 31, 1996 of the fiscal year ending June 30, 1996.
EFFECT ON EXCHANGE ACT REQUIREMENTS
The Reorganization will have no impact on FHC's requirements under the
Exchange Act. FHC Common Stock is currently registered under the Exchange Act.
Following the Reorganization, FHC, so long as it is subject to Section 13(a) or
15(d) of the Exchange Act, will have an obligation to file annual, quarterly and
other periodic reports with the SEC, which will include consolidated financial
and other information regarding FHC and its subsidiaries. Directors, officers
and 10% stockholders of FHC will continue to be subject to the short-swing
profit recovery provisions of Section 16(b) of the Exchange Act. All other
applicable provisions of the federal and state securities laws will continue to
be in effect with respect to transactions in FHC equity securities. FHC Common
Stock will continue to be listed on the NYSE.
OPERATIONS FOLLOWING THE REORGANIZATION
Following the Reorganization, upon approval by the DOC (which approval FHC
anticipates may take up to 180 days), FHC intends to merge FHPS with and into
MHN's California Knox-Keene licensed behavioral health subsidiary, with that
subsidiary as the surviving corporation. The non-California business of FHPS
will be operated out of another MHN subsidiary. FHPS management will be
primarily responsible for ongoing operations of the combined companies which
will be operated under their respective names pending approval of the DOC of the
merger of FHPS and MHN's licensed behavioral health subsidiary. FHC may also
consolidate other similar operations of both MHN and FHPS after the
Reorganization. There can be no assurance that FHC will be successful in
integrating FHPS's and MHN's operations and personnel or that enhanced marketing
capabilities, systems integration or cross-selling opportunities will be
realized after the Reorganization.
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<PAGE>
BOARD OF DIRECTORS. Following the Reorganization, the MHN Board of
Directors will consist of Jeffrey L. Elder, Kirk A. Benson and Gary S.
Velasquez, FHC designees, to serve until their successors are duly elected and
assume office.
THE REORGANIZATION AGREEMENT
The terms and conditions of the Reorganization are set forth in the
Reorganization Agreement attached to this Proxy Statement/Prospectus as Annex 1
and incorporated herein by reference. The following summarizes the material
terms thereof, and the MHN Stockholders are urged to review the text of the
Reorganization Agreement.
CLOSING
The closing of the Reorganization Agreement (the "Closing") shall occur not
more than two (2) business days following the satisfaction of all conditions
precedent to the Merger, unless waived by the party whose satisfaction is
required. See "-- Conditions to Consummation of the Reorganization." If the
Closing has not occurred on or before March 31, 1996 (or April 30, 1996 if the
Special Vote is not obtained), either FHC or MHN may terminate the
Reorganization Agreement pursuant to the terms described in "-- Termination."
EFFECTIVE TIME
The Merger will become effective upon the filing of Certificate of Merger
with the Secretary of State of the State of Delaware. The Certificate of Merger
will be filed on the date on which the Closing is held (the "Closing Date"). See
"-- Closing."
ISSUANCE AND EXCHANGE OF CERTIFICATES; DISTRIBUTIONS OF ESCROW SHARES
Within five business days after the Effective Time, FHC shall mail, or cause
to be mailed by its transfer agent, Chemical Trust Company of California, or
such other person reasonably acceptable to MHN (the "Exchange Agent"), to each
holder of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of MHN Common Stock or MHN
Preferred Stock (the "Certificates") whose shares are being converted into
shares of FHC Common Stock (or in the case of fractional shares, cash; see "--
Fractional Shares") (the "Merger Consideration"), instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration. As a condition to receipt of Merger Consideration, each MHN
Stockholder must sign instructions appointing a representative (the "MHN
Stockholders' Representative") authorizing him to take all actions on behalf of
the MHN Stockholders for purposes of the Escrow Agreement. Upon surrender of a
Certificate for cancellation to FHC and the instruction referred to in the prior
sentence, the holder of such Certificate shall be entitled to receive in
exchange therefor (i) a certificate representing that number of whole shares of
FHC Common Stock to which such holder of MHN Preferred Stock or MHN Common Stock
shall have become entitled pursuant to the Reorganization Agreement, and (ii) if
applicable, a check representing the amount of cash in lieu of fractional shares
of FHC Common Stock to which such holder shall have become entitled (see "--
Fractional Shares"), and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of MHN Preferred Stock or MHN
Common Stock which is not registered in the transfer records of MHN, the Merger
Consideration may be delivered to a transferee if the Certificate representing
the right to receive Merger Consideration is presented to FHC and accompanied by
all documents required to evidence and effect such transfer and to evidence that
any applicable stock transfer taxes have been paid. FHC shall follow the same
procedure with respect to lost, stolen or mutilated MHN Certificates as are
followed with respect to lost, stolen or mutilated FHC stock certificates, which
is the requirement of an affidavit and indemnity bond. Unless and until any such
Certificates shall be so surrendered, or such procedures respecting lost, stolen
or mutilated Certificates are followed, the holders of such Certificates shall
not be entitled to receive any Merger Consideration.
The Escrow Shares will be deposited for a one year period with an escrow
agent to be appointed in connection with provisions of the Reorganization
Agreement relating to indemnification (the "Escrow Agent"). Pursuant to the
Escrow Agreement, all distributions on the Escrow Shares, other than
27
<PAGE>
taxable dividends, will be held by the Escrow Agent in escrow. Taxable dividends
on the Escrow Shares will be paid directly to the MHN Stockholders and will not
become part of the escrow. The Escrow Agreement will terminate one year
following the Closing. Upon any such termination, all remaining Escrow Shares
held by the Escrow Agent will be delivered to the MHN Stockholders, subject only
to the establishment by the Escrow Agent of a reserve of Escrow Shares necessary
to compensate FHC for any outstanding claims for indemnification which have not
yet been resolved and any estimated MHN Stockholders' Representative expenses.
The right of the MHN Stockholders to receive the Escrow Shares is subject to the
right of FHC to receive Escrow Shares as compensation for certain indemnified
liabilities. See "-- Indemnification and Escrow."
MHN OPTION PROCEDURES
Within five business days after the Effective Time, FHC shall mail, or cause
to be mailed by the Exchange Agent, to each holder of record of an agreement
which immediately prior to the Effective Time represented an outstanding MHN
Option (collectively, the "MHN Option Agreements") notification of the number of
shares of FHC Common with respect to which such MHN Option is exercisable as a
result of the Merger. Upon surrender of an MHN Option Agreement in accordance
with its terms for cancellation to FHC (an affidavit of lost MHN Option
Agreement shall be sufficient if the MHN Option has been set forth in schedules
provided to FHC by MHN), and payment of the exercise price specified in such MHN
Option Agreement, the holder of such MHN Option Agreement shall be entitled to
receive in exchange therefor (i) a certificate representing that number of whole
shares of FHC Common Stock to which such holder of MHN Options shall have become
entitled pursuant to the Reorganization Agreement, and (ii) if applicable, a
check representing the amount of cash in lieu of fractional shares of FHC Common
Stock. See "-- Fractional Shares."
FRACTIONAL SHARES
Pursuant to the Reorganization Agreement, no certificates for fractional
interests in shares of FHC Common Stock will be issued to the MHN Stockholders
or holders of MHN Options. In lieu of certificates representing such fractional
interests, each MHN Stockholder or holder of an MHN Option whose shares of MHN
Common Stock or MHN Preferred Stock are not convertible or exercisable into a
whole number of shares of FHC Common Stock shall be entitled to receive, upon
surrender of such holder's certificates formerly representing MHN Common Stock
or MHN Preferred Stock or exercise of MHN Option, shares of FHC Common Stock as
provided above and, after aggregating all fractional shares of FHC Common Stock
to be received by such holder, an amount of cash (without interest) determined
by multiplying such fractional interest by the Closing Price (in the case of MHN
Preferred Stock) or Assumed Closing Price (in the case of MHN Common Stock or
MHN Options). See "The Reorganization -- General Effects of the Reorganization."
STOCK EXCHANGE LISTING
The shares of FHC Common Stock to be issued in connection with the
Reorganization will be listed on the NYSE.
EXPENSES
The Reorganization Agreement provides that FHC and MHN shall each pay its
own fees and expenses incurred incident to the preparation and carrying out of
the transactions contemplated by the Reorganization Agreement, including legal,
accounting and financial services. The fees imposed by the Escrow Agent and the
Exchange Agent will be paid by FHC. To the extent that Transaction Costs exceed
$900,000 and the excess is not treated as a deduction to the purchase price (see
"-- General Effects of the Reorganization"), any such excess may be paid as a
deduction from the escrow. See "-- Indemnification and Escrow."
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains customary representations and
warranties relating to, among other things, (i) each of FHC's, Acquisition
Corporation's and MHN's organization, qualification and similar corporate
matters; (ii) the capital structure of FHC, Acquisition Corporation, and
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<PAGE>
MHN; (iii) equity ownership interests of MHN (including MHN Options); (iv) the
due authorization and valid issuance of the shares of FHC Common Stock to be
delivered to the MHN Stockholders; (v) authorization, execution, delivery,
performance and enforceability of the Reorganization Agreement and related
matters; (vi) third-party consents required in connection with the
Reorganization; (vii) the absence of consents, approvals or authorizations or
filings with any governmental entity in connection with the Reorganization
Agreement, subject to certain exceptions; (viii) the accuracy and completeness
of documents filed by FHC with the SEC; (ix) the fair presentation of MHN's
financial statements and the accuracy and completeness of MHN's regulatory
financial statements; (x) the accuracy of information supplied by each of FHC
and MHN in connection with the Registration Statement and this Proxy
Statement/Prospectus; (xi) the existence of good title to MHN's assets and
properties, free and clear of liens; (xii) the characteristics of the
receivables of MHN; (xiii) the due filing of tax returns and the payment of
taxes by MHN; (xiv) compliance with law; (xv) the status of pending litigation
and the absence of threatened litigation; (xvi) MHN's standard provider or
customer contracts and certain other material contracts, and the performance by
MHN under the foregoing; (xvii) business and customers of MHN; (xviii)
proprietary rights and insurance policies of MHN; (xix) employees of MHN and
certain employee compensation, employee benefit and labor matters; (xx) the
absence of broker's or finders' fee obligations to be borne by the other party,
except as disclosed; (xxi) the insurance maintained by and activities of MHN's
providers and the status of MHN's relationships with such providers; and (xxii)
the absence of certain material changes or events relating to MHN.
CERTAIN COVENANTS
Pursuant to the Reorganization Agreement, MHN has agreed to carry on its
business in the usual, regular and ordinary course in substantially the same
manner as conducted prior to the execution of the Reorganization Agreement and
to use all commercially reasonable efforts to preserve intact its present
business organization, to use its best efforts to keep available the services of
its present officers and key employees and preserve it relationships with
present and potential customers, providers and others having business dealings
with it to the end that the goodwill and ongoing business of MHN will be
unimpaired as of the Effective Time.
In addition, MHN has agreed that it will not, except as expressly
contemplated by the Reorganization Agreement or to the extent FHC otherwise
gives its prior written consent, among other things: (i) adopt or amend any plan
or agreement with its employees (except that MHN has adopted a special retention
bonus for certain of its employees and may make certain discretionary 401(k)
plan payments (see "-- Interests of Certain Persons in the Reorganization));
(ii) declare or pay any dividends or make other distributions on its shares of
capital stock or repurchase any shares of its capital stock; (iii) issue any
securities of MHN; except MHN Common Stock issued for MHN Options; (iv) amend
the articles and bylaws of MHN; (v) acquire any material assets, except in the
ordinary course of business, or any business, corporation, partnership,
association or other business organization or division; (vi) lease or dispose of
any material assets except in the ordinary course of business and in any event
not in excess of $25,000 in the aggregate; or (vii) incur any indebtedness for
borrowed money or guarantee any indebtedness or issue or sell any obligations of
MHN or guarantee any debt securities of others. MHN has agreed to allow a
representative of FHC or FHPS to meet regularly with management of MHN to
discuss pending decisions relating to MHN's business and to conduct MHN's
business in accordance with an interim operating and integration plan prepared
by FHPS.
NO SOLICITATION OF TRANSACTIONS
The Reorganization Agreement provides that MHN will not, directly or
indirectly through any officer, director or agent: solicit, initiate or
encourage any discussions or negotiations with or participate in any
negotiations with or provide any information to, or otherwise cooperate with,
any corporation, partnership, person or other entity or group (other than FHC)
concerning any merger, sale of substantially all of the assets of MHN, sale of
shares of capital stock or any division of MHN or control thereof (each, an
"acquisition transaction"). FHC shall be promptly notified in writing of an
acquisition transaction, including a summary of the material terms.
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<PAGE>
ADDITIONAL AGREEMENTS
The Reorganization Agreement contains additional covenants of FHC and MHN to
(i) abstain from any communications with the public or their respective
stockholders without the prior approval of the other party; (ii) to update any
disclosures made in the Reorganization Agreement with any material relevant
facts arising prior to the Closing; and (iii) to act in good faith in an attempt
to satisfy all conditions precedent prior to the Closing, including all
regulatory approvals and (iv) to take certain actions with respect to filing of
the Form S-4 registration statement of which this Proxy Statement/ Prospectus is
part. MHN has also agreed to afford FHC and its representatives reasonable
access to its books, contracts, records and properties.
FHC and MHN have agreed that employee plans and benefit arrangements in
effect at the date of the Reorganization Agreement shall, to the extent
practicable, remain in effect from and after the Effective Time, unless
otherwise determined by FHC after the Effective Time. To the extent such plans
and benefit arrangements are not continued by FHC, the Reorganization Agreement
sets forth the current intent of FHC and MHN that employee plans and benefit
arrangements which are comparable in the aggregate to current plans and
arrangements will be provided to the MHN employees. In the Reorganization
Agreement, FHC acknowledged MHN's current policy to pay MHN employees (other
than senior managers) one-half of their accrued and unused sick leave at the end
of each year. FHC agreed that it would assume and continue without modification
MHN's Retention Program for aggregate payments of no more than $320,000 and its
six month severance program for senior managers described to FHC, provided that
any payment made under either program shall be subject to the receipt of an
appropriate release by the employee receiving a payment. See "-- Interests of
Certain Persons in the Reorganization."
AFFILIATE AGREEMENTS
The Reorganization Agreement contains as an exhibit a form of Affiliate
Agreement to be signed by certain persons who may be deemed affiliates of MHN
within the meaning of Rule 145 under the Securities Act. The form of Affiliate
Agreement provides that each such affiliate may not sell his or her MHN Common
Stock or MHN Preferred Stock or any FHC Common Stock received by such person as
a result of the Merger until publication of financial statements covering at
least 30 days of post-Merger combined operations of FHC and MHN. The Affiliate
Agreement also provides that each affiliate will comply with all the
requirements of Rule 145 under the Securities Act.
INDEMNIFICATION AND ESCROW
The Reorganization Agreement provides for indemnification of FHC (and, after
the Closing, MHN) and their respective affiliates, directors, officers,
stockholders, successors and assigns against certain liabilities and losses
which an indemnified person may suffer or incur after the Closing by reason of
(i) the inaccuracy or breach of the representations, warranties and covenants of
MHN contained in the Reorganization Agreement relating to title of the MHN
Common Stock and the MHN Preferred Stock, the capitalization of MHN (including
MHN Options), brokers or finders fees and any Transactional Costs in excess of
$900,000 not deducted from the Purchase Price. The indemnification referred to
above is limited to the $1,500,000 in Escrow Shares deposited into escrow at the
Closing. FHC will be entitled to make claims against the escrow for the
"indemnifiable damages" described above until the one-year anniversary of the
Closing Date. See "-- Issuance and Exchange of Certificates; Distributions of
Escrow Shares." The Escrow Agreement provides that the MHN Stockholders'
Representative shall be permitted to represent the MHN Stockholders with respect
to matters relating to the Escrow Shares. The MHN stockholders' Representative
shall be reimbursed for up to an aggregate of $100,000 from the Escrow Shares in
expenses he incurs in representing the MHN Stockholders under the Escrow
Agreement or in opposing any FHC claim for indemnification under the Escrow
Agreement.
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<PAGE>
CONDITIONS TO CONSUMMATION OF THE REORGANIZATION
The obligations of FHC and MHN to effect the Merger are subject to various
conditions, unless waived, which include, in addition to other customary closing
conditions, the following:
(i) MHN (in the case of FHC) and FHC (in the case of MHN) shall have
performed in all material respects all obligations required to be performed
by each under the Reorganization Agreement;
(ii) all necessary governmental approvals for the Reorganization
(including that of the California Department of Corporations and Arizona
Department of Insurance) shall have been obtained, and applicable federal or
state securities laws and requirements of the NYSE shall have been
satisfied;
(iii) all consents or approvals required from third parties relating to
contracts, permits, leases and other instruments, material to the respective
businesses of FHC and MHN shall have been obtained;
(iv) the Registration Statement shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceeding
seeking a stop order, and none of the information supplied by FHC or MHN for
inclusion in the Registration Statement, at its date of effectiveness, shall
have contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading;
(v) there shall not be any injunction or restraining order in effect
preventing the consummation of the Merger nor shall any litigation seeking
the same be pending;
(vi) no law shall have been enacted by a governmental entity which would
make the Merger illegal, prohibit ownership and operation by FHC or MHN of a
material portion of the business or assets of MHN, compel FHC or MHN to
dispose of a material portion of the business or assets of MHN, or render
the parties unable to consummate the Merger;
(vii) the MHN Stockholders shall have duly approved the Reorganization
Agreement and the transactions contemplated thereby; and the affirmative
vote of the holders of at least a majority in interest of shares of MHN
Common Stock who are not otherwise holders of MHN Preferred Stock shall have
been obtained; and
(viii) each of FHC and MHN shall have received an opinion to the effect
that the Merger shall be treated for federal income tax purposes as a
tax-free reorganization within the meaning of section 368(a)(1)(A) of the
Code by virtue of the provisions of section 368(a)(2)(E) of the Code.
The obligation of FHC to consummate the Merger are subject to the following
additional conditions:
(i) the representations and warranties of MHN in the Reorganization
Agreement shall be true and correct in all material respects;
(ii) since the date of the Reorganization Agreement there shall have
been no changes in the condition, business, prospects, employees,
operations, obligations or liabilities of MHN which, in the aggregate, have
had or may be reasonably expected to have a materially adverse effect on the
financial condition, business, or operations of MHN;
(iii) FHC shall have received an opinion dated the Closing Date of Cooley
Godward Castro Huddleson & Tatum, outside counsel to MHN, in form and
substance reasonably satisfactory to FHC and its counsel;
(iv) FHC shall have no reasonable basis for believing that any customers
of MHN or any of its subsidiaries that individually accounts for at least 5%
or that in the aggregate account for at least 10% of MHN's estimated 1995
consolidated total revenues will not continue to contract with MHN after the
Closing;
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<PAGE>
(v) MHN shall sign the Certificate of Merger and MHN and the MHN
Stockholders' Representative shall sign the Escrow Agreement;
(vi) the Merger shall satisfy all the requirements for treatment as a
pooling transaction under generally accepted accounting principles;
(vii) the number of holders of MHN Common or MHN Preferred that exercise
their statutory dissenters' rights at Closing shall not exceed 6.5% the MHN
Common Stock and MHN Preferred Stock (on an as-converted basis), taken as a
whole, outstanding as of the date of the Meeting; provided, however, that
this condition shall not apply in the event that at the Meeting, the
Reorganization and the Merger shall have been approved by the affirmative
vote (the "Special Vote") of (a) at least 90% of the holders in interest of
MHN Common Stock; and (b) 92% of the holders in interest of the MHN Common
Stock and MHN Preferred Stock (on an as-converted basis), taken as a whole,
in each case outstanding as of the date of the Meeting; and
(viii) each individual who serves as a member of the Board of Directors or
as an officer of MHN shall have resigned effective as of Closing.
The obligations of MHN to consummate the Merger are also subject to the
following additional conditions:
(i) the representations and warranties of FHC in the Reorganization
Agreement shall be true and correct in all material respects;
(ii) MHN shall have received an opinion dated the Closing Date of
Pillsbury Madison & Sutro LLP, outside counsel to FHC, in form and substance
reasonably satisfactory to MHN and its counsel; and
(iii) FHC shall have executed the Escrow Agreement and the Exchange Agent
Agreement.
TERMINATION
The Reorganization Agreement may be terminated at any time prior to the
Closing (i) by mutual written consent of the parties; (ii) by either FHC, on the
one hand, or MHN, on the other hand, if there has been a material breach of any
representation, warranty, covenant or agreement in the Reorganization Agreement
on the part of the other which has not been promptly cured after written notice;
(iii) by FHC or MHN if the Merger shall not have been consummated on or before
March 31, 1996 (unless any such failure to consummate the Merger by such date is
due to the failure to obtain the Special Vote, but in no event later than April
30, 1996); (iv) by FHC or MHN if (A) there shall be a final nonappealable order
of a federal or state court in effect preventing consummation of the Merger or
(B) there shall be any action taken, or any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Merger by any
governmental authority which would make consummation of the Merger illegal; (v)
by FHC if there shall be any action taken, or any statute, rule, regulation or
order enacted or issued or deemed applicable to the Merger by any governmental
authority, which would (A) prohibit FHC's or MHN's ownership or operation of all
or a material portion of the business or assets of FHC or MHN, or compel FHC or
MHN to dispose of or hold separate all or a material portion of the business or
assets of MHN or FHC as a result of the Merger, or (B) render FHC or MHN unable
to consummate the Merger; (vi) by FHC if any condition to its obligation to
complete the Merger has not been waived by FHC or satisfied; (vii) by MHN if any
condition to its obligation to complete the Merger has not been waived by MHN or
satisfied and (viii) by MHN if the Closing Price is less than 85% of the Signing
Price, by giving notice of termination to FHC no later than one day prior to
Closing; provided, however, FHC may cause the Closing to occur notwithstanding
such notice if it notifies MHN no later than the day prior to Closing of its
intent to cause the issuance of that number of shares of FHC Common based on an
Assumed Closing Price equal to (a) 92.5% of the Signing Price divided by 85% of
the Signing Price times (b) the Closing Price; and (viii) by FHC in the event
that the Closing Price is more than 115% of the Signing Price.
In the event of termination of the Reorganization Agreement by FHC or MHN,
the Reorganization Agreement will become void, and there will be no liability or
obligation on the part of any party to
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the Reorganization Agreement or any of their officers or directors other than
under certain specified provisions of the Reorganization Agreement dealing with
confidentiality, the payment of expenses and other than liabilities or damages
incurred or suffered by a party as a result of the willful breach by the other
party of any of its representations or warranties, or the breach by a party of
any of its covenants or agreements set forth in the Reorganization Agreement;
provided, however, that (i) in the event of the termination of the
Reorganization Agreement other than by mutual consent or under circumstances
involving actual fraud on the part of MHN, its representatives or the MHN
Stockholders or by reason of MHN failing to satisfy certain conditions preceding
to Closing, FHC shall pay to MHN a termination fee of $500,000 (provided
further, that if within twelve months after such termination MHN consummates a
transaction or a series of related transactions with any party other than FHC
and its affiliates which involves a sale, lease or other transfer, by merger or
otherwise, of all or substantially all the assets or stock of MHN, then MHN
shall immediately repay the termination fee to FHC); and (ii) in the event of
termination of the Agreement by MHN by virtue of the fact that the Closing Price
is less than 85% of the Signing Price, where FHC does not proceed with the
transaction as described above, MHN shall pay to FHC a termination fee of
$500,000 within five business days after such termination.
AMENDMENT AND WAIVER
The Reorganization Agreement may be amended at any time by an instrument in
writing signed by the parties thereto. At any time prior to the Closing, FHC or
MHN, by appropriate corporate action, to the extent legally allowed, may extend
the time for performance of the obligations of the other parties to the
Reorganization Agreement, waive inaccuracies in representations and warranties
and waive compliance with any agreements or conditions for their respective
benefit contained in the Reorganization Agreement.
INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION
MHN's Board of Directors has adopted a Key Management Retention Program
("Retention Program") under which certain key management employees of MHN, upon
providing a release, will be paid a retention bonus in the event such manager
remains in the employ of MHN through the Closing Date. The total amount of
bonuses under the Retention Program will be limited to $320,000.
MHN has a severance program which provides that members of senior management
of MHN who are terminated without cause will receive six-months' salary as a
severance payment, subject to receipt of a release.
In connection with the acquisition by MHN of HMC, MHN agreed that under the
circumstances described below, certain payments which would otherwise be payable
in the future by MHN to Janis S. DiMonaco, a director and executive officer of
MHN, and the other former HMC stockholder would become due and payable in full
at an earlier time. This acceleration of payment occurs if, among other things,
both of the following events occur within twelve months of each other: (a) an
acquisition by a person or group of more than 50% of the voting control or of
the total value of MHN and (b) Ronald W. Moreland resigns or is terminated as an
employee of MHN or its successor entity. Such acceleration will affect the
following obligations: (1) up to $1,000,000 of contingent payments which would
otherwise be payable in installments through June 1997 upon the successful
retention of business volume and upon the completion of integration of HMC's
operations into MHN; and (2) $1,650,000 principal amount of a promissory note
from MHN which would otherwise be payable in installments through May 2000,
which note represents a portion of the acquisition price paid by MHN for HMC.
The existing directors of MHN will resign effective at the Effective Time.
Thereafter, following the Reorganization, the MHN Board of Directors will
consist of Jeffrey L. Elder, Kirk A. Benson and Gary S. Velasquez, FHC
designees, to serve until their successors are duly elected and assume office.
David Buhler shall be Senior Vice President-Finance of MHN following the
Effective Time.
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BUSINESS AND FINANCIAL INFORMATION REGARDING MHN
SELECTED CONSOLIDATED FINANCIAL DATA OF MHN
The selected financial data set forth below with respect to MHN are derived
from the consolidated financial statements of MHN. The consolidated financial
statements of MHN as of December 31, 1993 and 1994 and for each of the years in
the three year period ended December 31, 1994 have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, whose report thereon
appears elsewhere in this Proxy Statement/Prospectus. KPMG Peat Marwick LLP's
report refers to a change in accounting of income taxes in 1993. The selected
financial data as of and for the nine months ended September 30, 1994 and 1995
are derived from MHN's consolidated unaudited financial statements and include
all adjustments (consisting only of normal adjustments) considered necessary by
MHN for a fair presentation of the results of such periods. The results of
operations for the nine months ended September 30, 1995 may not be indicative of
results of operations to be expected for the entire fiscal year. The data
presented below should be read in conjunction with and are qualified in their
entirety by the consolidated financial statements of MHN, related notes and
other financial information included herein.
MHN SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Contract revenue.................................. $ 18,018 $ 12,704 $ 21,011 $ 23,555 $ 21,549 $ 16,035 $ 13,781
Employee assistance program....................... 8,147 8,505 8,384 8,843 10,048 7,449 8,582
Administrative services........................... 4,161 4,673 4,698 7,248 8,380 6,144 8,276
--------- --------- --------- --------- --------- --------- ---------
30,326 25,882 34,093 39,646 39,977 29,628 30,639
Other revenue..................................... 1 25 59 95 56 35 30
--------- --------- --------- --------- --------- --------- ---------
Total revenue................................... 30,327 25,907 34,152 39,741 40,033 29,663 30,669
--------- --------- --------- --------- --------- --------- ---------
Expenses:
Health care services.............................. $ 10,885 $ 9,223 $ 18,185 $ 16,329 $ 16,072 $ 12,297 $ 10,338
Payroll and related items......................... 11,504 12,345 13,346 14,319 14,959 11,306 13,374
Marketing, general and administrative............. 6,040 7,160 5,802 6,721 7,011 5,181 5,448
Depreciation and amortization..................... 793 825 848 1,052 1,131 853 980
Unusual items (1)................................. -- 4,955 -- -- -- -- 112
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses........................ 29,222 34,508 38,181 38,421 39,173 29,637 30,252
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations................... 1,105 (8,601) (4,029) 1,320 860 26 417
Other income (expense):
Interest expense................................ (118) (112) (231) (226) (224) (164) (289)
Interest income................................. 97 36 50 67 96 59 158
Other expense................................... -- (51) (26) (25) (1) (1) --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes................. 1,084 (8,728) (4,236) 1,136 731 (80) 286
Benefit (provision) for income taxes.............. (438) (3) (6) (29) 384 (10) (31)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item........... 646 (8,731) (4,242) 1,107 1,115 (90) 255
Extraordinary item:
Utilization of net operating loss carryforward... 365 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before cumulative dividends on
mandatorily redeemable convertible preferred
stock............................................ $ 1,011 $ (8,731) $ (4,242) $ 1,107 $ 1,115 $ (90) $ 255
Accrual of undeclared dividends on mandatorily
redeemable convertible preferred stock............... (811) (927) (1,212) (1,693) (1,708) (1,271) (1,288)
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) available to common stockholders
(2).................................................. $ 200 $ (9,658) $ (5,454) $ (586) $ (593) $ (1,361) $ (1,033)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER
1990 1991 1992 1993 1994 30, 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and invested cash............................... $ 1,255 $ 2,799 $ 521 $ 3,884 $ 6,227 $ 4,707
Total assets......................................... 11,833 9,406 7,991 11,954 14,215 19,352
Long term debt and capital lease obligations
excluding current portion........................... 957 1,669 1,590 1,515 1,204 4,602
Mandatorily redeemable convertible preferred stock... 11,907 17,602 19,058 26,851 28,609 30,397
Stockholders' deficit................................ (6,559) (16,217) (21,662) (22,696) (22,199) (23,206)
</TABLE>
- ------------------------------
(1) Unusual items recorded in 1991 include MHN's write-off of goodwill customer
list. Unusual items recorded in 1995 relate to merger expenses MHN has
incurred.
(2) As MHN is a nonpublic company and reported net earnings (loss) available to
common stockholders are negative, an earnings per share calculation has been
omitted.
34
<PAGE>
BUSINESS
MHN was formed during 1987 and 1988 by the acquisition of three predecessor
entities: California Wellness Plan, Human Resources Group, Inc. ("HRG") and
Brownlee Dolan Stein Associates, Inc. ("BDS"). California Wellness Plan was one
of the first managed behavioral health HMOs licensed under the California
Knox-Keene Health Care Service Plan Act ("Knox-Keene Act") as a specialized HMO
in the mental health and chemical dependency service segment. HRG and BDS were
both New York-based providers of employee assistance program ("EAP") services.
MHN continues to provide a variety of managed behavioral health programs, on
both an at-risk and an administration basis, as well as EAP programs, for
employment groups, members of union organizations and insurance carriers.
In June 1995, MHN acquired the HMC companies. HMC is primarily in the
business of providing managed behavioral health services on an administration
basis to members of union organizations. It also offers, through its affiliated
companies, a California worker's compensation program in managed behavioral
health and a preferred provider organization of medical/surgical providers and
facilities in Massachusetts, Connecticut and Rhode Island.
PROGRAMS AND SERVICES
The primary business of MHN is providing managed care programs in behavioral
health. These programs typically cover both mental health and chemical
dependency issues, and provide both outpatient and inpatient services. The
management of care occurs through a telephonic intake and referral process,
assessment through initial assessment sessions with a specialized clinician or
through brief telephonic assessment with an MHN staff clinician; case management
through utilization management protocols administered by MHN staff clinicians
and by MHN's proprietary Clinical Information Management System ("CIMS")
software system; and claims adjudication through CIMS and MHN staff review.
MHN's managed behavioral health services are provided on an at-risk basis or
on an administration basis. At-risk programs are those in which MHN, rather than
the client, is financially responsible for payment of healthcare providers and
facilities rendering services to covered enrollees. Such at-risk services are
provided either through its subsidiary's behavioral health license under the
Knox-Keene Act in California or through its arrangement with Standard Security
Life Insurance Company of New York ("Standard Security") described below under
"-- Arrangement with Standard Security." Administration-based managed behavioral
health services are those in which MHN provides the service components (intake,
assessment, referral, case management and claims adjudication and payment), but
is not financially responsible for the payment of healthcare providers and
facilities rendering services to covered enrollees.
EAP services provide employees and their dependents with a limited number of
sessions of counseling and referral relating to a wide variety of problems that
affect employees and their job performance, such as stress or conflict related
to workplace and family issues, drug and alcohol dependency, and strains related
to financial problems, child care, elder care and legal problems. The EAP
services are rendered either by staff clinicians employed by MHN or by network
clinicians.
PROVIDER NETWORK
With the exception of a limited number of staff offices in which
MHN-employed clinicians provide managed behavioral health and EAP services,
treatment and counseling services are provided through referral to independent
clinicians, multi-specialty groups, hospitals and other alternate care
facilities. Whenever practical, such referrals are made to MHN's network of
approximately 13,000 providers and 500 facilities, located throughout the nation
but particularly concentrated in California and other key urban areas. These
providers and facilities have been accepted by MHN following application and a
credentialing process.
35
<PAGE>
INFORMATION SYSTEMS
MHN has attempted to utilize technology to improve service to members and
providers, improve efficiency and effectiveness in the case management and
claims adjudication processes, and gather data for outcomes measurement and
utilization reporting. Toward those ends, MHN has developed its own proprietary
system, CIMS. CIMS is a computer-based system which is capable of electronically
scanning information from forms provided by MHN and completed by members and
providers. Clinical information from these forms is compared to a series of
clinical algorithms embedded in the system to assist in case management and
claims adjudication. Both clinical and member satisfaction and health status
information is utilized in outcomes measurement and client reporting. MHN has
commenced to utilize some of these outcomes measurements in provider profiling,
which will assist in the identification of the most efficient and effective
providers in MHN's network and the corresponding ability to channel referrals
accordingly.
ARRANGEMENT WITH STANDARD SECURITY
In late 1994, MHN concluded a contractual arrangement with Standard Security
which provided MHN with an insured (at-risk) managed behavioral health product.
Standard Security is a New York domestic insurance company qualified in all 50
states. Together with MHN, Standard Security developed a group policy providing
managed behavioral health, administered by a subsidiary of MHN. MHN was also
provided with the authority to sell the policy. The policy was filed for
approval with the insurance departments of all 50 states. To date, the policy
has been approved, exempt or deemed approved in approximately 40 states, with
applications pending in the other states.
Standard Security has also negotiated a reinsurance arrangement with John
Alden Life Insurance Company ("Alden") under which Standard Security has ceded
82% of the risk of the policies to Alden. In turn, Alden has ceded 90% of the
assumed risk (after certain intermediary fees) to a reinsurance subsidiary of
MHN.
GOVERNMENT REGULATION
As a result of its licensure under the Knox-Keene Act, MHN's subsidiary,
Managed Health Network, is regulated under that Act by the California Department
of Corporations. The Knox-Keene Act, together with the regulations promulgated
thereunder, provide for broad oversight of licensee's in such areas as health
care services, marketing and advertising, administration, client and provider
contract terms, quality assurance procedures, and financial soundness. Among
other things, the Knox-Keene Act requires that licensees apply for and receive
clearance from the Department of Corporations for all material modifications of
the licensee's operations and ownership, including a change of control of the
licensee as will be the case in this Reorganization.
MHN's reinsurance subsidiary is organized under the Arizona insurance laws,
as administered by the Arizona Department of Insurance. As with the Knox-Keene
Act, insurance regulation provides broad oversight of licensees, and requires,
among other things, that a change of control of a licensee (as will occur with
respect to this Reorganization) may take place only after the approval of the
Department of Insurance following application therefor.
MHN is also subject to a number of other laws in California and other states
for utilization review, third party administration, preferred provider
organization, and similar regulatory statutes. Moreover, many states have
enacted laws affecting managed care processes, mandating mental health and
chemical dependency benefits, and preserving the confidentiality of patient
information. All of such laws have had a significant impact on MHN and other
managed behavioral health companies.
CUSTOMERS
Most of MHN's business is contracted directly from employer groups and union
organizations. However, a portion of MHN's revenues is derived from its
contracts with HMOs, insurance companies and similar organizations, under which
MHN provides managed behavioral health benefits as part of
36
<PAGE>
the other organization's package of medical benefits. While MHN's clients
include a number of government entities and agencies, MHN provides services to
the government's employees rather than to eligible beneficiaries of
government-sponsored entitlement programs.
OFFICES AND EMPLOYEES
MHN's headquarters, and the headquarters of its Western regional operations,
are located in Los Angeles, California. The headquarters of its Eastern regional
operations and its Southern regional operations are located in New York City and
Irving, Texas, respectively. MHN also maintains a number of other offices
throughout the United States, some of which are administrative offices and
others of which include clinical staff who provide counseling and assessment
services. All of its facilities are leased.
As of December 31, 1995, MHN employed approximately 370 persons in all of
its offices. Approximately 190 of these employees are located in the Los Angeles
headquarters office, which includes the Western regional operations.
MANAGEMENT OF MHN
BOARD OF DIRECTORS OF MHN
The following table sets forth certain information as of December 31, 1995
with respect to each of MHN's directors:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH MHN PRINCIPAL OCCUPATION
- --------------------------------- --- ----------------------------- -----------------------------------------
<S> <C> <C> <C>
John E. Armer 72 Director President, Wellness Integrated Network,
Inc.
M. Kathleen Behrens, Ph.D. 43 Director Partner, Robertson, Stephens & Company
Robert C. Bellas, Jr. 53 Director General Partner, Morgenthaler Venture
Partners
Alethea Caldwell 54 Director, President and Chief
Operating Officer
James E. Clark 66 Director Business consultant and private investor
Janis S. DiMonaco, Ph.D. 44 Director and Senior Vice
President
Scott S. Halsted 35 Director Vice President, Morgan Stanley Ventures
William T. Hjorth 58 Director Private investor
J. Matthew Mackowski 41 Director Partner, Mackowski & Shepler
Darcy Moore 39 Director General Partner, Frontenac & Company
Ronald W. Moreland 55 Director, Chairman and Chief
Executive Officer
Marcia J. Radosevich, Ph.D. 43 Director Chief Executive Officer, Health Payment
Review, Inc.
</TABLE>
None of the persons named above will continue to serve as a director of MHN
after the Reorganization.
EXECUTIVE OFFICERS
The only current executive officer of MHN who will serve as an executive
officer of MHN or FHPS after the Reorganization is David C. Buhler, who will be
Senior Vice President-Finance of MHN following the Closing.
37
<PAGE>
Mr. Buhler has served as Vice President and Chief Financial Officer of MHN
since March 1994. From June 1991 to February 1994, he was Vice President-Finance
of MHN, and from September 1990 to May 1991, he was the Director of Financial
Planning at MHN.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by MHN to Mr. Buhler in
the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
SECURITIES
CASH UNDERLYING
NAME AND PRINCIPAL POSITION YEAR COMPENSATION (1) BONUS OPTIONS
- ------------------------------------- --------- ---------------- --------- -----------
<S> <C> <C> <C> <C>
David C. Buhler, Vice President 1995 $ 126,000 $ 10,000 15,000
and Chief Financial Officer 1994 105,000 -- --
1993 102,000 -- --
</TABLE>
- ------------------------
(1) Includes compensation paid into MHN's 401(k) Plan at the election and for
the benefit of executive officer.
STOCK OPTIONS
The following table sets forth information concerning the grant of stock
options under MHN's stock option plan to Mr. Buhler during the fiscal year ended
December 31, 1995:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS
-------------------------- VALUE OF ASSUMED RATES
NUMBER OF PERCENTAGE OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION OF OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM
OPTIONS EMPLOYEES IN BASE PRICE ----------------------
NAME GRANTED (1) FISCAL YEAR ($/SH) EXPIRATION DATE 5% (2) 10% (2)
----------- ------------- --------------- ----------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
David C. Buhler...................... 15,000 5.08 0.50 June 21, 2000 2,100 5,775
</TABLE>
- ------------------------
(1) All options vest at the rate of 20% per year from the date of grant until
all options have become vested at the end of five years from the date of
grant. Such MHN Options will vest in full as a result of the Merger.
(2) The potential realizable value is calculated based on the term of the option
at its time of grant. It is calculated by assuming that the stock price on
the date of grant appreciates at the indicated annual rate compounded
annually for the entire term of the option and the option is exercised and
sold on the last day of its term for the appreciated stock price. No gain to
the optionee is possible unless the stock price increases over the option
term, which will benefit all stockholders.
The following table sets forth information with respect to the exercise of
stock options by Mr. Buhler during the fiscal year ended December 31, 1995 and
the number and value of securities underlying unexercised options held by Mr.
Buhler at December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE YEAR-END VESTED/ FISCAL YEAR-END ($)(2)
NAME EXERCISE REALIZED ($) UNVESTED (1) VESTED/UNVESTED (1)
------------- ------------- --------------------- -----------------------
<S> <C> <C> <C> <C>
David C. Buhler........................... -- -- 73,000/42,000 0
</TABLE>
- ------------------------
(1) Under MHN's Amended and Restated 1991 Stock Option Plan, all unvested stock
options shall vest immediately prior to, but contingent upon, the
consummation of an acquisition or sale as defined in such plan.
(2) Fair market value of MHN's Common Stock at December 31, 1995, minus the
exercise price of the options, multiplied by the number of shares underlying
the options.
38
<PAGE>
OWNERSHIP OF MHN COMMON STOCK AND MHN PREFERRED STOCK
MHN SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of MHN Common and Preferred Stock as of December 31, 1995 by each
person known by MHN to own beneficially more than 5% of the outstanding shares
of MHN Common or MHN Preferred Stock (on an as-converted basis).
<TABLE>
<CAPTION>
TOTAL
NUMBER OF PERCENT OF
SHARES CLASS TOTAL
CLASS OF BENEFICIALLY BENEFICIALLY VOTING
NAME OF PERSON OR IDENTITY OF GROUP (1) SECURITIES OWNED (2) OWNED (3) POWER (4)
- -------------------------------------------------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Entities affiliated with Robertson, Stephens & Co. Preferred 5,935,817(5) 32.4% 28.8%
555 California St. Common 1,490,696(6) 20.1%
San Francisco, CA 94104
Morgan Stanley Venture Capital Trust Preferred 2,607,905 14.2% 10.1%
3000 Sand Hill Rd.
Menlo Park, CA 94025
Entities affiliated Preferred 1,931,267(7) 10.5% 8.7%
with HLM Management Common 311,039(8) 4.2%
222 Berkeley St.
Boston, MA 02116
Morganthaler Venture Partners II Preferred 1,914,396 10.4% 8.6%
2730 Sand Hill Rd. Common 311,539 4.2%
Menlo Park, CA 94025
William Blair Venture Partners II Preferred 1,352,564 7.4% 6.2%
222 W. Adams St. Common 240,156 3.2%
33rd Floor
Chicago, IL 60606
Frontenac Venture V, L.P. Preferred 1,388,889 7.6% 5.4%
135 South LaSalle St.,
Suite 3800
Chicago, IL 60603
Hancock Venture Preferred 1,388,889 7.6% 5.4%
Partnership III
One Financial Center
Boston, MA 02111
John E. Armer Common 1,118,550(9) 15.1% 4.3%
3435 Ocean Park Blvd.
Santa Monica, CA 90405
Gregory Armer Common 802,030(10) 10.8% 3.1%
15260 Ventura Blvd. Suite 2100
Sherman Oaks, CA 91403
Ronald W. Moreland Common 742,000(11) 9.2% 2.8%
c/o Managed Health Network, Inc.
5100 W. Goldleaf
Circle, Suite 300
Los Angeles, CA 90056
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
TOTAL
NUMBER OF PERCENT OF
SHARES CLASS TOTAL
CLASS OF BENEFICIALLY BENEFICIALLY VOTING
NAME OF PERSON OR IDENTITY OF GROUP (1) SECURITIES OWNED (2) OWNED (3) POWER (4)
- -------------------------------------------------- ---------- ------------ ------------ ---------
John Tillotson, M.D. Common 630,374(12) 8.3% 2.4%
c/o Managed Health Network, Inc.
5100 W. Goldleaf
Circle, Suite 300
Los Angeles, CA 90056
<S> <C> <C> <C> <C>
Alan Savitz, M.D. Common 510,914(13) 6.7% 2.0%
10350 Wilshire Boulevard
Los Angeles, CA 90024
</TABLE>
- ------------------------
(1) Except as otherwise indicated below, the persons named in the table have
sole voting and investment power with respect to all shares of stock shown
as beneficially owned by them, subject to community property laws, where
applicable. See the following table "MHN Security Ownership of Management"
for information regarding directors of MHN which are related to the
principal stockholders set forth above.
(2) Includes stock options to purchase MHN Common Stock exercisable within 60
days of December 31, 1995. Does not include shares that become exercisable
on an accelerated basis as a result of the Merger pursuant to the terms of
the 1991 Incentive Stock Option Plan.
(3) Computed on the basis of the number of shares of MHN Common Stock or the
number of votes eligible to be cast by shares of MHN Preferred Stock, as the
case may be, outstanding on December 31, 1995, plus (with respect to those
persons holding options to purchase MHN Common Stock exercisable within 60
days of December 31, 1995) the number of shares of MHN Common Stock that are
issuable to such person upon the exercise thereof.
(4) Computed on the basis of 25,765,482 equivalent shares comprised of MHN
Common and MHN Preferred Stock outstanding as of December 31, 1995, plus
with respect to those persons holding options to purchase MHN Common Stock
exercisable within 60 days of December 31, 1995, the shares of MHN Common
Stock that are issuable to such person upon the exercise thereof.
(5) Includes 4,679,834 shares held by RCS III, 528,415 shares held by Bayview
Investors, Ltd., 353,407 shares held by RCS Ltd., 324,760 shares held by
Crossover Fund, L.P., 44,643 shares held by RCS Emerging Growth Fund and
4,758 shares held by RCS Investors.
(6) Includes 1,252,940 shares held by RCS III, 155,395 shares held by Bayview
Investors, Ltd., 44,179 shares held by RCS, Ltd. and 38,182 shares held by
Crossover Fund, L.P.
(7) Includes 1,145,880 shares held by HLM Partners, L.P. and 785,387 shares
held by HLM Partners II, L.P.
(8) Includes 188,283 shares held by HLM Partners, L.P. and 122,756 shares held
by HLM Partners II, L.P.
(9) Includes 134,067 shares of Common Stock held by the Armer Associates
Incorporated ESOT for which Mr. Armer has sole voting and investment power.
Does not include 802,030 shares held by Gregory Armer, the adult son of Mr.
Armer. Also does not include 13,000 shares held by Trudy Sholl Armer, the
wife of John Armer, and 19,410 shares held by the Trudy Sholl Armer Profit
Sharing Plan. John Armer disclaims beneficial ownership of all such shares.
(10) Does not include 984,483 shares of MHN Common Stock held by John Armer, the
father of Gregory Armer, and 134,067 shares of MHN Common Stock held by
Armer Associates Incorporated ESOT. Also does not include shares held by
Trudy Sholl Armer and the Trudy Sholl Profit Sharing Plan described in
footnote (9) above.
40
<PAGE>
(11) Includes options to purchase 662,000 shares of MHN Common Stock held by Mr.
Moreland that are exercisable within sixty (60) days of December 31, 1995.
Does not include options to purchase an additional 40,000 shares of MHN
Common Stock that will become exercisable upon consummation of the Merger.
(12) Includes options to purchase 190,000 shares of MHN Common Stock held by Dr.
Tillotson.
(13) Includes options to purchase 190,000 shares of MHN Common Stock held by Dr.
Savitz.
MHN SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of MHN Common and Preferred Stock as of December 31, 1995 (i) by each
of the directors and executive officers of MHN and (ii) by all of MHN's
directors and executive officers as a group.
<TABLE>
<CAPTION>
TOTAL
NUMBER OF PERCENT OF
SHARES CLASS TOTAL
CLASS OF BENEFICIALLY BENEFICIALLY VOTING
NAME OF PERSON (1) SECURITIES OWNED (2) OWNED (3) POWER (4)
- --------------------------------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
John E. Armer Common 1,118,550(5) 15.1% 4.3%
c/o Wellness Integrated Network,
Inc.
3435 Ocean Park Boulevard
Santa Monica, CA 90405
M. Kathleen Behrens, Ph.D. Preferred 5,935,817(6) 32.4% 28.8%
c/o Robertson, Stephens & Co. Common 1,490,696(6) 20.1%
555 California Street,
San Francisco, CA 94194
Robert C. Bellas, Jr. Preferred 1,914,396(7) 10.4% 8.6%
c/o Morganthaler Venture Common 311,539(7) 4.2%
Partners
2730 Sand Hill Road,
Menlo Park, CA 94025
Alethea Caldwell Preferred 34,722 * *
c/o Managed Health Network, Common 35,000(8) *
Inc.,
5100 W. Goldleaf
Circle, Suite 300
Los Angeles, CA 90056
James E. Clark Preferred 23,077 * *
24412 Park Granada Common 80,000(9) 1.1%
Calabasas, CA 91302
Janis S. DiMonaco, Ph.D. Preferred 347,222(10) 1.9% 1.3%
c/o Health Management
Center, Inc.
32 Hampden,
Springfield, MA 01103
Scott S. Halsted Preferred 2,607,905(11) 14.2% 10.1%
c/o Morgan Stanley
Ventures
3000 Sand Hill Road,
Menlo Park, CA 94025
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
TOTAL
NUMBER OF PERCENT OF
SHARES CLASS TOTAL
CLASS OF BENEFICIALLY BENEFICIALLY VOTING
NAME OF PERSON (1) SECURITIES OWNED (2) OWNED (3) POWER (4)
- --------------------------------- ---------- ------------ ------------ ---------
William T. Hjorth Preferred 69,444 * *
6412 Edinburgh Drive, Common 4,000(12) *
Nashville, TN 37221
<S> <C> <C> <C> <C>
J. Matthew Mackowski Preferred 102,777(13) * *
343 Sansome Street,
San Francisco, CA 94114
Darcy Moore Preferred 1,388,889(14) 7.6% 5.4%
c/o Frontenac & Company
135 S. LaSalle Street,
Chicago, IL 60603
Ronald W. Moreland Common 742,000(15) 9.2% 2.8%
c/o Managed Health
Network, Inc.,
5100 W. Goldleaf
Circle, Suite 300,
Los Angeles, CA 90056
Marcia J. Radosevich, Ph.D. Common 4,000(16) * *
c/o Health Payment Review, Inc.
245 First Street,
Cambridge, MA 02142
David C. Buhler Common 77,000(17) 1.0% *
c/o Managed Health Network, Inc.
5100 W. Goldleaf
Circle, Suite 300,
Los Angeles, CA 90056
Franklin Tom Common 40,000(18) * *
c/o Managed Health Network, Inc.
5100 W. Goldleaf
Circle, Suite 300,
Los Angeles, CA 90056
All current directors and Preferred 12,424,249 67.8% 61.1%
executive officers (14 persons) Common 3,902,785(19) 46.9%
</TABLE>
- ------------------------
* Less than 1%
(1)Except as otherwise indicated below, the persons named in the table have
sole voting and investment power with respect to all shares of stock shown
as beneficially owned by them, subject to community property laws, where
applicable.
(2)See footnote (2) to the preceding table.
(3)See footnote (3) to the preceding table.
(4)See footnote (4) to the preceding table.
(5)See footnote (9) to the preceding table.
(6)Dr. Behrens is a general partner of Robertson, Stephens & Co. which is the
general partner of the entities set forth in footnotes (5) and (6) to the
preceding table. Dr. Behrens has shared voting and
42
<PAGE>
investment power with respect to the shares held by the entities affiliated
with Robertson Stephens & Co., but disclaims beneficial ownership of such
shares, other than such equity participation that she may have in the
entities.
(7) Mr. Bellas is a general partner of Morganthaler Venture Partners, the
general partner of Morganthaler Venture Partners II, a limited partnership
and a principal stockholder of MHN set forth in the preceding table. Mr.
Bellas has shared voting and investment power with respect to the shares
held by Morganthaler Venture Partners II, but disclaims beneficial ownership
of such shares, other than such equity participation that he may have in the
partnership.
(8) Includes options to purchase 35,000 shares of MHN Common Stock held by Ms.
Caldwell that are exercisable within sixty (60) days of December 31, 1995.
Does not include options to purchase an additional 140,000 shares of MHN
Common Stock that will become exercisable upon consummation of the Merger.
(9) Includes options to purchase 80,000 shares of MHN Common Stock held by Mr.
Clark that are exercisable within sixty (60) days of December 31, 1995. Does
not include options to purchase an additional 20,000 shares of MHN Common
Stock that will become exercisable upon consummation of the Merger.
(10) Dr. DiMonaco shares voting and investment power with Vincent D. DiMonaco,
her brother, who is a Senior Vice President of MHN.
(11) Mr. Halsted is a Vice President of Morgan Stanley, the general partner of
Morgan Stanley Ventures, a limited partnership and a principal stockholder
of MHN set forth in the preceding table. Mr. Halsted has shared voting and
investment power with respect to the shares held by Morgan Stanley Ventures,
but disclaims beneficial ownership of such shares, other than such equity
participation that he may have in the partnership.
(12) Includes options to purchase 4,000 shares of MHN Common Stock held by Mr.
Hjorth that are exercisable within sixty (60) days of December 31, 1995.
Does not include options to purchase an additional 6,000 shares of MHN
Common Stock that will become exercisable upon consummation of the Merger.
(13) Does not include Mr. Mackowski's economic interest in Bayview Investors,
Ltd. and RCS III, two partnerships in which M. Kathleen Behrens, Ph.D., a
director of MHN, has shared voting and investment power.
(14) Ms. Moore is a general partner of Frontenac & Company, which is the general
partner of Frontenac Ventures V, a limited partnership and a principal
stockholder of MHN set forth in the preceding table. Ms. Moore has shared
voting and investment power of the shares held by Frontenac Ventures V, but
disclaims beneficial ownership of such shares, other than such equity
participation that she may have in the partnership.
(15) Includes options to purchase 662,000 shares of MHN Common Stock held by Mr.
Moreland that are exercisable within sixty (60) days of December 31, 1995.
Does not include options to purchase an additional 40,000 shares of MHN
Common Stock that will become exercisable upon consummation of the Merger.
(16) Includes options to purchase 4,000 shares of MHN Common Stock held by Dr.
Radosevich that are exercisable within sixty (60) days of December 31, 1995.
Does not include options to purchase an additional 6,000 shares of MHN
Common Stock that will become exercisable upon consummation of the Merger.
43
<PAGE>
(17) Includes options to purchase 77,000 shares of MHN Common Stock held by Mr.
Buhler that are exercisable within sixty (60) days of December 31, 1995.
Does not include options to purchase an additional 38,000 shares of MHN
Common Stock that will become exercisable upon consummation of the Merger.
(18) Includes options to purchase 40,000 shares of MHN Common Stock held by Mr.
Tom that are exercisable within sixty (60) days of December 31, 1995. Does
not include options to purchase an additional 75,000 shares of MHN Common
Stock that will become exercisable upon consummation of the Merger.
(19) Includes options to purchase an aggregate of 902,000 shares of MHN Common
Stock held by shares of MHN Common Stock held by seven (7) executive
officers and directors that are exercisable within sixty (60) days of
December 31, 1995. Excludes options to purchase 325,000 shares of MHN Common
Stock held by seven (7) executive officers and directors that will become
exercisable upon consummation of the Merger.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF MHN
GENERAL
MHN's business is primarily focused on its managed behavioral health
programs for corporations, local government, and labor unions. It writes
behavioral health coverage in California through its Knox-Keene licensed health
plan, administers behavioral managed health programs through its Third Party
Administrator ("TPA") subsidiary, and runs EAP's for contracting employers.
Therefore, MHN's revenues arise primarily from three sources: at-risk contract
revenue, EAP revenue, and administrative services only ("ASO") revenue. Health
care service expenses are primarily related to discounted fee for service
payments to institutions and providers.
MHN completed the acquisition of HMC, a behavioral health firm specializing
in the labor market, in June 1995, for the purchase price of $7.4 million. This
acquisition was accounted for under the purchase method of accounting, and
accordingly, the operations of HMC are included in the MHN consolidated
financial information from the date of acquisition. The purchase was effected by
a payment in cash of $4,250,000, the issuance of 5,000 shares of Series E
preferred stock with $100 par value, a promissory note in the principal amount
of $1,650,000, and contingent payments of up to $1,000,000.
Health care services are provided by hospitals and healthcare providers
primarily under discounted fee for service arrangements. Accrued health care
services include claims payable and a provision for incurred but not reported
("IBNR") claims. Claims payable are those claims which have been received but
not yet paid with respect to services, while IBNR represents MHN's best estimate
of the liability related to such claims which exist as of a certain date but
have not yet been reported. IBNR claims payable, which are expected to be
reported to MHN after the balance sheet date, but which relate to the period
prior to the balance sheet date, are estimated by MHN based on evaluations of
historical information.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1994
Total revenue increased by $1,006,000, or 3.4%, from the period in 1994 to
1995. Contract revenue decreased during the period by $2,254,000, or 14.1%, with
EAP and ASO services increasing $1,133,000, or 15.2%, and $2,132,000, or 34.7%,
respectively. Overall enrollment increased in the period by 19,100 lives, or
2.9%; at-risk lives decreased by 11,400 lives, or 9.4%. Consolidated premium per
member increased modestly by .5% during the period.
Health care service expense decreased by $1,959,000, or 15.9% from the 1994
period, due principally to changes in inpatient contracted rates and improved
medical utilization management related to a significant wholesale account.
At-risk health care service expense decreased 10.1% on a Per
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Member Per Month ("PmPm") basis, with inpatient costs decreasing broadly across
MHN's entire book of business by 16.5%. To a lesser extent, there was also a
reduction in health care service expense due to a migration of at-risk
enrollment moving into EAP and ASO services.
Payroll and related items increased $2,068,000, or 18.3%, from the period in
1994 to 1995. This increase resulted primarily from salaries related to
employees of HMC and increased contractor usage for systems maintenance and
sales and marketing.
Marketing, general and administrative expenses increased $267,000 or 5.2%,
from the period in 1994 to 1995. This increase related primarily to the
operating expenses of HMC and increased MHN marketing efforts. MHN entered into
a seven year lease for new offices in New York City during June 1995.
Depreciation and amortization expense increased $127,000, or 14.9% from the
period in 1994. The increase is primarily attributable to goodwill amortization
charges related to the acquisition of HMC. Additionally, higher depreciation
expense was incurred related to property and equipment acquisitions during 1995,
principally due to MHN's investment in new office space in New York City.
Unusual items recorded increased $112,000 from the period in 1994. This
related to merger expenses for legal, accounting and investment banking relating
to the uncompleted merger with a private company and costs associated with the
Reorganization.
Interest expense increased $125,000, or 76.2%, from the period in 1994 to
1995. This is principally due to increased debt with regard to the HMC
acquisition.
Interest income on cash investments and deposits increased $99,000 from the
period in 1994 to 1995.
Net income before cumulative dividends on mandatorily redeemable convertible
preferred stock was $255,000 for the 1995 period compared to a loss of $90,000
for the same period in 1994. This was principally due to MHN's change in mix of
business from at-risk to ASO and EAP programs and the commensurate reduction in
health care service expense attributable to a reduction in seasonality from the
at-risk business.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenues increased by $292,000, or .7%, from 1993 to 1994. Contract
revenue decreased during the period by $2,006,000, or 8.5%, with EAP and ASO
services increasing $1,205,000, or 13.6%, and $1,132,000, or 15.6%,
respectively. Overall enrollment increased in the period by 61,300, or 7.4%.
Consolidated premium per member declined by 5.9% reflecting the change in
business mix from the at-risk to EAP and ASO services.
Health care service expense decreased by $257,000, or 1.6%, in the 1994
period, due principally to the change in enrollment mix from at-risk to EAP and
ASO services. At-risk health care service expenses increased 13.2% on a PmPm
basis due to high utilization within MHN's wholesale and school district
business.
Payroll and related items increased $640,000, or 4.5%, from 1993 to 1994.
This increase resulted primarily from employee merit increases and increased
staffing costs in marketing and information systems development.
Marketing, general and administrative expenses increased $290,000, or 4.3%,
from 1993 to 1994. This increase resulted from recruitment costs for the
positions discussed in the immediately preceding paragraph and increased service
contracts for information systems.
Depreciation and amortization expense increased $79,000, or 7.5%, from 1993
to 1994. This is attributed to higher depreciation expense on property and
equipment acquisitions during 1994, which related primarily to computer and
telephone equipment.
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In 1994 MHN recorded an income-tax benefit of $384,000 versus income tax
expense of $29,000 in 1993. During 1994, due to continued profitability, MHN
reduced its valuation allowance recorded under FAS 109, thereby recognizing a
portion of its operating loss carryovers as a deferred tax asset.
MHN reported net income before cumulative dividends on mandatorily
redeemable convertible preferred stock of $1,115,000 for 1994 compared to
$1,107,000 on the same basis for 1993.
YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992
In January 1993, MHN raised $6,000,000 through a private placement of MHN
Preferred Stock Series E. Expenses relating to the offering, all charged against
Additional Paid-In Capital, amounted to approximately $488,000.
Total revenues increased by $5,589,000, or 16.3%, in 1993 from $34,152,000
in 1992. Contract revenue increased during the period by $2,544,000, or 12.1%,
with EAP and ASO services increasing $459,000, or 5.5%, and $2,550,000, or
54.3%, respectively. Overall enrollment increased in the period by 28,800 lives,
or 8.1%. Consolidated premium PmPm declined by 6.8%, reflecting the full year
effect in 1993 of a large wholesale account.
Health care service expense decreased by $1,856,000, or 10.2%, from
$18,185,000 in 1992, due principally to substantial improvements in utilization
in 1993 for a key school district account. At-risk health care service expense
decreased 24.6% on a PmPm basis overall and 7.5% excluding the key school
district case.
Payroll and related items increased $973,000, or 7.3%, from 1992 to 1993.
This increase resulted primarily from increased staffing in service operations.
Marketing, general and administrative expenses increased $919,000, or 15.8%,
from 1992 to 1993. This increase was principally related to rent and operating
lease expenses for additional space at MHN's principal offices in Los Angeles
and to a lesser extent increased broker and sales commissions paid during the
year.
Depreciation and amortization expense increased $204,000, or 24.1%, from
$848,000 for 1992 to $1,052,000 for 1993 due to higher depreciation expense on
property and equipment, including the full year effect in 1993 of furniture
acquisitions and leasehold improvements made in the fourth quarter of 1992 at
MHN's principal offices in Los Angeles.
The provision for income taxes increased by $23,000 from 1992 to 1993
primarily related to federal alternative minimum taxes.
MHN reported a net loss before cumulative dividends on mandatorily
redeemable convertible preferred stock of $4,242,000 for 1992 compared to net
income on the same basis of $1,107,000 for 1993.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $1,279,000 for the nine months
ended September 30, 1995. MHN invests excess cash in short-term investments.
The primary uses of cash in operations are health care services, payroll and
rent. The primary sources of cash are premiums and investment income. Since
January 1993, MHN has been able to rely on cash provided by operating activities
for its operating needs. In addition, MHN has relied on borrowings to fund the
acquisition of HMC and fixed assets.
MHN has a $2.5 million receivable based, revolving line of credit with
Imperial Bank, N.A. with the initial term expiring June 3, 1996 and one year
renewal options at MHN's request and subject to Imperial Bank's approval.
Principal amounts outstanding under the Credit Agreement bear interest at the
bank's prime lending rate. Borrowings under the line are secured by
substantially all the assets of MHN and its subsidiaries except for MHN
Reinsurance of Arizona. Interest is payable monthly. As of September 30, 1995
MHN had drawn $750,000 on the line of credit related to the acquisition of
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HMC. MHN subsequently repaid $500,000 of this amount on November 30, 1995. In
addition, MHN maintains a $250,000 standby letter of credit issued under the
revolving line of credit to secure certain obligations under its lease for
offices in New York City. The remaining availability under the line of credit is
currently $2,000,000.
MHN has a $500,000 line of credit for property and equipment acquisition
with Imperial Bank, N.A. This is a thirty-two (32) month non-replacing line that
had to be drawn by November 3, 1995 with the term expiring June 3, 1998. Payment
is made in equal installments over the term with interest on the principal
amounts outstanding under the Credit Agreement bearing interest at the prime
lending rate plus .75%. Borrowings under the line are secured by substantially
all the assets of MHN and its subsidiaries, with the exception of MHN
Reinsurance Company of Arizona. Principal and interest are payable monthly. All
principal and accrued interest are due and payable on June 3, 1998. MHN had
drawn $450,000 on this line as of November 3, 1995.
MHN has a $2.0 million loan with Imperial Bank, N.A. that was taken out by
MHN to help effect the acquisition of HMC in June 1995. This is a five (5) year
loan that expires June 3, 2000. The loan is interest only for one (1) year with
equal principal and monthly accrued interest installments for the remaining four
(4) years. The principal amounts outstanding under the Loan Agreement bear
interest at the prime lending rate plus .75%. The loan is secured by
substantially all the assets of MHN and its subsidiaries, with the exception of
MHN Reinsurance Company of Arizona.
The credit agreements contain customary affirmative covenants which, among
other things, require MHN to comply with all laws and maintain its
accreditation, properties and insurance. The agreement also contains financial
covenants which require MHN to maintain specified financial ratios. MHN was in
compliance with these financial covenants at September 30, 1995.
MHN provided, as part of the HMC consideration, a promissory note in the
amount of $1,650,000. The note is due in five years accruing interest at 7% with
stipulated principal payments of $550,000, $500,000, and $600,000 on May 31,
1998, 1999, and 2000, respectively. The sellers of HMC are entitled to receive
up to an additional $1,000,000 consideration in the form of contingent payments.
The contingent payments, primarily related to retention of business volume and
completion of integration activities, of $375,000, $375,000 and $250,000 are
payable at June 2, 1996, December 2, 1996, and June 2, 1997. See also "The
Reorganization -- Interests of Certain Persons In the Reorganization."
MHN is subject to certain contractual and regulatory restrictions on its
ability to transfer funds from its subsidiaries which MHN believes will not have
a material effect on its operations. Among the requirements imposed on its
Knox-Keene licensee, was the necessity of maintaining cash deposits of $700,000
to secure payment of claims by non-panel providers, as required by the
Knox-Keene Act and regulations thereunder. As of November 1995, the licensee was
released from these deposit requirements based upon a reduction in utilization
of non-panel providers. MHN's Knox-Keene licensee must maintain minimum levels
of tangible net equity and its reinsurance company must maintain minimum paid-in
capital and surplus. The Knox-Keene licensee and the reinsurance company were in
compliance with their capital requirements at September 30, 1995.
Under MHN's Certificate of Incorporation, on or after June 14, 1996, the
holders of two-thirds in interest of all the series of MHN Preferred Stock
acting together, with concurrence of two-thirds in interest of Preferred Series
E, may require that MHN redeem all but not less than all of the outstanding MHN
Preferred Stock, which would require the payment by MHN of the par value of such
Stock and the Accruing Dividends thereon. Based upon the number of outstanding
shares of MHN Preferred Stock as of December 31, 1995, the redemption payment at
June 14, 1996 will be approximately $31,627,000. Under applicable law, MHN's
Board of Directors is subject to certain restrictions limiting the ability of
MHN to make such a redemption payment. These restrictions are anticipated by
MHN's management to render MHN unable to satisfy or comply with the redemption
requirement, given MHN's current cash resources and other assets.
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COMPARISON OF RIGHTS
Both FHC and MHN are incorporated in the State of Delaware. Following the
Effective Time each of FHC and MHN will continue to be governed by the Delaware
General Corporation Law ("DGCL"). However, MHN Stockholders will hold FHC Common
Stock rather than MHN Common Stock or MHN Preferred Stock and therefore the
rights of such stockholders, although still governed by the DGCL following the
Merger, will also be governed by the provisions of the FHC Certificate and the
FHC Bylaws rather than the MHN Certificate and the MHN Bylaws. In addition, MHN
may be deemed to be subject to certain provisions of the California General
Corporation Law ("CGCL") which are applicable to stockholders of certain
corporations incorporated outside of California but which meet certain tests.
The following also sets forth a summary comparison of certain provisions of the
CGCL, as may be deemed to apply to MHN and the material provisions of the FHC
Certificate and FHC Bylaws which are different than the MHN Certificate and MHN
Bylaws. This summary does not comport to be complete and is qualified in its
entirety by reference to the corporate statutes of those states, and the
respective certificates of incorporation and bylaws of each of FHC and MHN.
CUMULATIVE VOTING. In an election of directors under cumulative voting,
each share of stock normally having one vote is entitled to a number of votes
equal to the number of directors to be elected. A stockholder may then cast all
such votes for a single candidate or may allocate them among as a many
candidates as a stockholder may choose. Without cumulative voting, absent any
other special provision, the holders of a majority of the shares present at an
annual meeting or any special meeting held to elect directors would have the
power to elect all the directors to be elected at that meeting, and no person
could be elected without the support of holders of a majority of the shares
voting at such meeting.
Under the DGCL cumulative voting in the election of directors is not
mandatory. However, under the CGCL cumulative voting is a right generally
available to stockholders. The FHC Certificate provides for cumulative voting
whereas the MHN Certificate does not.
Although the MHN Certificate does not provide for cumulative voting it does
set forth special provisions for the election of directors, which enable various
classes of MHN Stockholders to elect their own candidates to the MHN Board. The
MHN Certificate provides for the MHN Board to be elected as follows: The holders
of Series A Preferred Stock shall be entitled to elect one director; the holders
of Series B Preferred Stock shall be entitled to elect one director; the holders
of Series C Preferred Stock shall be entitled to elect one director; the holders
of Series E Preferred Stock shall be entitled to elect one director; the holders
of MHN Common Stock shall be entitled to elect four directors; and the holders
of MHN Common Stock and MHN Preferred Stock (on an as-converted basis), voting
together, shall be entitled to elect four directors.
MHN Stockholders will have the right to cumulative voting after the
Effective Time, as they did prior to the Effective Time under the CGCL, but will
not have the special voting rights described above. Cumulative voting may permit
the election to the Board of Directors of a candidate who does not have the
support of the holders of a majority of the outstanding shares but who does have
the support of a significant number of shares of FHC Common Stock.
SIZE OF BOARD OF DIRECTORS. The DGCL permits the board of directors of a
Delaware corporation to change the authorized number of directors by amendment
to the corporation's bylaws or in the manner provided in the bylaws unless the
number of directors is fixed in the corporation's certificate of incorporation,
in which case a change in the number of directors may be made only by amendment
to the certificate of incorporation.
The FHC Bylaws provide that the number of directors shall be established
from time to time by resolution of the FHC Board. The current number of
directors is fixed at ten. The MHN Bylaws provide that the number of directors
shall be twelve as amended from time to time in accordance with
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the MHN Certificate. The MHN Certificate provides that MHN shall not increase
the number of directors above twelve without the consent of the holders of at
least 66.7% of the outstanding shares of MHN Preferred Stock (voting together on
an as-converted basis).
QUALIFICATION OF DIRECTORS. The FHC Certificate provides that the FHC Board
shall be composed of at least nine directors, and one-third of the authorized
number of directors must be persons who are not officers of FHC, are not related
to any officers of FHC, do not represent concentrated or family holdings of FHC
Common Stock and, in the view of the FHC Board, are free of any relationship
that would interfere with the exercise of independent judgment. The MHN
Certificate and Bylaws do not have any special requirements relating to
qualifications. The MHN Certificate provides that each of the respective classes
of MHN Preferred Stock, voting as a separate class, is entitled to elect one MHN
director, the holders of MHN Common Stock, voting as a separate class, are
entitled to elect three MHN directors, and the holders of MHN Common Stock and
MHN Preferred Stock, voting together as a single class, are entitled to elect
the remaining two directors.
SPECIAL MEETINGS OF THE BOARD OF DIRECTORS. The MHN Bylaws provide that
special meetings of the MHN Board may be called at any time by the President and
that special meetings shall be called by the President or Secretary on the
request of any two directors or any holders of at least 25% of the outstanding
shares of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock on an as-converted basis. Under the
FHC Bylaws, meetings of the FHC Board other than the annual meeting may be
called by notice to the Secretary or the Assistant Secretary, by any three
directors, by the FHC Board or by the President.
REMOVAL OF DIRECTORS. FHC and MHN have different requirements for the
removal of directors. In the case of a Delaware corporation having cumulative
voting, such as FHC, if less than the entire board is to be removed, a director
may not be removed without cause unless the number of shares voted against such
a removal would be sufficient to elect the director under cumulative voting. A
director of a corporation with a classified board of directors, such as MHN, can
be removed only for cause unless the certificate of incorporation otherwise
provides.
Under the CGCL, any director or the entire board of directors may be removed
without cause with the approval of a majority of the outstanding shares entitled
to vote. However, no director may be removed (unless the entire board is
removed) if the votes against removal would be sufficient to elect the director
if voted cumulatively. If by provisions of the articles of incorporation of a
corporation, the holders of shares of a class or series, voting as a class or
series, are entitled to elect one or more directors, any director elected in
this manner may be removed only by applicable vote of the holders of that class
or series.
Under the MHN Bylaws, any directors, or the entire MHN Board, may be removed
from office, with or without cause by the holders of a majority of shares
entitled to vote in an election of directors.
Since the FHC Certificate permits cumulative voting, if less than the entire
board is to be removed, a director of FHC may not be removed without cause
unless the number of shares voted against such a removal would be sufficient to
elect the director under cumulative voting. This provision is similar to the
requirements of the CGCL.
SUPERMAJORITY PROVISIONS. The FHC Certificate provides that the approval of
the holders of at least 80% of the shares of FHC Common Stock then outstanding
is required to amend, alter, change or repeal certain provisions of the FHC
Certificate. These provisions include elimination of cumulative voting rights,
the number of directors and the independent director requirements discussed
above, filling vacancies on the Board, the composition and powers of the board
committees and special voting requirements. The effect of the supermajority
voting provision is to make any of these changes to the FHC Certificate more
difficult. The MHN Certificate and Bylaws do not contain any comparable
provision. Since stockholders of FHC do not have the right to call special
meetings of stockholders or
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to act by written consent, it will be difficult for FHC stockholders (including
former MHN Stockholders after the Effective Time) to amend the FHC Certificate
with respect to the supermajority requirements without the support of the FHC
Board.
The MHN Certificate provides that the approval of the holders of at least
66.67% of the outstanding MHN Preferred Stock, voting together on an
as-converted basis, is required before MHN may undertake certain corporate
actions, including the following: (a) consolidate or merge with or into any
other entity (subject to certain exceptions); (b) sell, lease or dispose all or
substantially all of MHN's assets; (c) purchase or redeem any outstanding MHN
Common Stock (subject to certain exceptions); (d) amend the MHN Certificate or
MHN Bylaws; (e) authorize or create a class of security with rights equal or
senior to any series of MHN Preferred Stock; (f) adversely amend the
designations or rights of any series of MHN Preferred Stock; or (g) increase the
number of directors.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS. The FHC Bylaws and the MHN Bylaws
differ with respect to notice required for directors' nominations. Under the FHC
Bylaws, subject to the rights of holders of any class or series of stock having
a preference over the common stock as to dividends or upon liquidation,
nominations for election to the FHC Board of Directors may be made on behalf of
the Board by the Nominating Committee appointed by the Board, or by any FHC
stockholder entitled to vote for the election of directors at a meeting of
stockholders. The FHC Bylaws provide that a stockholder who is entitled to vote
for the election of directors who wishes to nominate a person for election as a
FHC director at a FHC meeting of stockholders must give written notice to FHC's
Corporate Secretary or Assistant Secretary not less than 120 days prior to the
stockholders' meeting, or, if less than 120 days' notice of the meeting is given
to stockholders, not later than the close of business on the seventh day after
notice of meeting was mailed. The notice must contain the following information
with respect to each nominee who is not an incumbent director: the name, age,
business address and, if known, residence address of each proposed nominee, the
principal occupation or employment of each such nominee, the number of shares of
stock of FHC beneficially owned by each such nominee and by the nominating
stockholder, and any other information concerning the nominee required to be
disclosed in solicitations for proxies for election pursuant to Regulation 14A
under the Exchange Act. If the Chairman of the stockholders' meeting determines
that the nomination was not made in accordance with the foregoing procedure, the
FHC Bylaws provide that the defective nomination will be disregarded.
The foregoing requirements are separate from the rules promulgated by the
Commission under Section 14 of the Exchange Act pertaining to the inclusion of
stockholder proposals in proxy statements. These requirements may make it more
difficult to effect a change in control of FHC and may discourage or deter a
third party from attempting a takeover.
The MHN Bylaws contains no such requirements concerning the submission of
director nominations by stockholders.
AMENDMENT OF BYLAWS. Under the DGCL, the authority to adopt, amend, or
repeal the bylaws of a Delaware corporation is held exclusively by the
stockholders unless such authority is conferred upon the board of directors in
the corporation's certificate of incorporation.
The FHC Certificate and Bylaws provide that any bylaw may be adopted,
amended or repealed by the vote of the holders of a majority of the shares of
common stock then entitled to vote at an election of directors. In addition, the
FHC Certificate and the FHC Bylaws expressly grant to its directors the power to
make, alter, amend or repeal any bylaws, except as described above, without any
action on the part of the stockholders, by the affirmative vote of a majority of
the entire Board of Directors. The MHN Certificate and Bylaws provide that the
MHN Bylaws may be amended by the MHN Stockholders or the Board of Directors, but
also provide that any such amendment must be approved by the holders of at least
66.67% of the outstanding MHN Preferred Stock, voting together on an as-
converted basis.
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LIMITATION OF LIABILITY OF DIRECTORS. Both the FHC Certificate and the MHN
Certificate contain provisions limiting a director's liability to the fullest
extent permitted by Delaware law. Under the DGCL, a corporation may include in
its certificate of incorporation a provision which would, subject to the
limitations described below, eliminate or limit directors' liability for
monetary damages for breaches of their fiduciary duty of care. Under the DGCL,
directors' liability cannot be eliminated or limited (i) for breaches of duty of
loyalty, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for the payment of
unlawful dividends or expenditure of funds for unlawful stock purchases or
redemptions, or (iv) for transactions from which such director derived an
improper personal benefit.
Under the CGCL directors' liability also cannot be limited where they make
unlawful distributions to stockholders in contravention of certain of the CGCL
provisions or distribute assets to stockholders after institution of dissolution
proceedings without providing for liabilities of the corporation.
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK. The FHC Certificate authorizes
100,000,000 of FHC Common Stock and 1,000,000 shares of Preferred Stock while
the MHN Certificate provides for 40,000,000 authorized shares of MHN Common
Stock and 248,493 shares of Preferred Stock.
STOCKHOLDER RIGHTS PLAN. The FHC Board of Directors adopted a Stockholder
Rights Plan on September 27, 1991, which provides for distribution of rights to
holders of outstanding shares of FHC Common Stock. MHN does not have a similar
rights plan. Therefore, after the Effective Time, the shares of FHC Common Stock
held by former MHN Stockholders will be subject to the FHC Rights Plan.
MHN PREFERRED STOCK. As MHN Preferred Stock will be converted to FHC Common
Stock in the Merger, holders of MHN Preferred Stock will no longer enjoy the
special dividend, voting and liquidation preferences and rights set forth in the
MHN Certificate.
DISSENTERS' RIGHTS
Record holders of MHN Common Stock and MHN Preferred Stock are entitled to
appraisal rights under Section 262 of the DGCL ("Section 262"). In addition,
Section 2115 of the CGCL provides that certain California law provisions,
including dissenters' rights, apply to stockholders of a corporation
incorporated outside of California if certain tests are met. Because MHN may be
deemed to satisfy these requirements, the provisions of Chapter 13 of the CGCL,
relating to dissenters' rights, may be deemed to apply to the Reorganization.
The following discussion represents a summary of the material provisions of
Section 262 of the DGCL and Chapter 13 of the CGCL. For additional information,
reference is made to the full text of Section 262 of the DGCL and Chapter 13 of
the CGCL, which are reprinted in entirety as Annex 2 and Annex 3, respectively,
to this Proxy Statement/Prospectus. A person having a beneficial interest in
shares of MHN Common Stock and MHN Preferred Stock held of record in the name of
another person, such as a nominee, must act promptly to cause the record holder
to follow the steps summarized below properly and in a timely manner to perfect
the appraisal rights provided under Section 262 of the DGCL and Chapter 13 of
the CGCL.
DELAWARE LAW. Under Section 262, where a merger is to be submitted for
approval at a meeting of stockholders, as in the case of the Meeting, not less
than 20 days prior to the meeting, a constituent corporation must notify each of
the holders of its stock for which appraisal rights are available that such
appraisal rights are available and include in each such notice a copy of Section
262. THIS PROXY STATEMENT/PROSPECTUS SHALL CONSTITUTE SUCH NOTICE TO THE RECORD
HOLDERS OF MHN COMMON STOCK AND MHN PREFERRED STOCK. ANY SUCH STOCKHOLDER WHO
WISHES TO EXERCISE SUCH APPRAISAL RIGHTS SHOULD REVIEW THE FOLLOWING DISCUSSION
AND ANNEX 2 CAREFULLY, BECAUSE FAILURE TO TIMELY AND PROPERLY COMPLY WITH THE
PROCEDURES SPECIFIED WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS UNDER THE DGCL.
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Under the DGCL, a record holder of shares of MHN Common Stock or MHN
Preferred Stock who makes the demand described below with respect to such
shares, who continuously is the record holder of such shares through the
Effective Time, who otherwise complies with the statutory requirements set forth
in Section 262 and who neither votes in favor of approval of the Reorganization
Agreement and the Merger nor consents thereto in writing will be entitled to
have his or her shares of MHN Common Stock or MHN Preferred Stock appraised by
the Delaware Court of Chancery and to receive payment of the "fair value" of
such shares as described below. Such holders are, in such circumstances,
entitled to appraisal rights because they hold stock of a constituent
corporation to the Merger and may be required by the Reorganization Agreement to
accept Merger Consideration. Since holders of shares of MHN Common Stock wishing
to exercise appraisal rights must not vote in favor of approval of the
Reorganization Agreement and the Merger, such holders should not deliver
unmarked proxies (i.e., proxies without instructions) to MHN as such proxies
will be voted FOR such approval (see "The Meeting -- Proxies").
A holder of shares of MHN Common Stock or MHN Preferred Stock wishing to
exercise his or her appraisal rights must deliver to the Secretary of MHN,
before the vote on the Reorganization Agreement at the Meeting, a written demand
for appraisal of his or her shares of MHN Common Stock or MHN Preferred Stock.
Merely voting or delivering a proxy directing a vote against approval of the
Reorganization Agreement and the Merger will not constitute a demand for
appraisal. A written demand is essential. Such written demand must reasonably
inform MHN of the identity of the holder and that such holder intends thereby to
demand appraisal of the holder's shares. All written demands for appraisal of
MHN Common Stock or MHN Preferred Stock should be sent or delivered to Managed
Health Network, Inc., 5100 West Goldleaf Circle, Suite 300, Los Angeles,
California 90056, Attn: Corporate Secretary. In addition, a holder of shares of
MHN Common Stock or MHN Preferred Stock wishing to exercise his or her appraisal
rights must hold such shares of record on the date the written demand for
appraisal is made and must hold such shares continuously through the Effective
Time. Stockholders who hold their shares of MHN Common Stock or MHN Preferred
Stock in nominee form and who wish to exercise appraisal rights must take all
necessary steps in order that a demand for appraisal is made by the record
holder of such shares and are urged to consult with their nominee to determine
the appropriate procedures for the making of a demand for appraisal by the
record holder.
Within ten days after the Effective Time of the Merger, MHN, as the
surviving corporation in the Merger (the "Surviving Corporation") must send a
notice as to the effectiveness of the Merger to each person who has satisfied
the appropriate provisions of Section 262 and who is entitled to appraisal
rights under Section 262. Within 120 days after the Effective Time, any holder
of record of shares of MHN Common Stock and MHN Preferred Stock who has complied
with the requirements for exercise of appraisal rights will be entitled, upon
written request, to receive from the Surviving Corporation a statement setting
forth (i) the aggregate number of shares of MHN Common Stock and MHN Preferred
Stock not voted in favor of the Reorganization Agreement and with respect to
which demands for appraisal have been received and (ii) the aggregate number of
holders of such shares. Any such statement must be mailed within ten days after
a written request therefor has been received by the Surviving Corporation.
Within 120 days after the Effective Time, but not thereafter, the Surviving
Corporation or any holder of shares of MHN Common Stock or MHN Preferred Stock
who has complied with the foregoing procedures and who is entitled to appraisal
rights under Section 262 may file a petition in the Delaware Court of Chancery
demanding a determination of the "fair value" of such shares. The Surviving
Corporation is not under any obligation to file a petition with respect to the
appraisal of the "fair value" of the shares of MHN Common Stock or MHN Preferred
Stock and neither FHC nor MHN presently intends that the Surviving Corporation
file such a petition. Accordingly, it is the obligation of the stockholders to
initiate all necessary action to perfect their appraisal rights within the time
prescribed in Section 262. A holder of shares of MHN Common Stock or MHN
Preferred
52
<PAGE>
Stock will fail to perfect, or effectively lose, his or her right to appraisal
if no petition for appraisal of shares of MHN Common Stock or MHN Preferred
Stock is filed within 120 days after the Effective Time.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the holders of shares of
MHN Common Stock or MHN Preferred Stock entitled to appraisal rights and will
appraise the "fair value" of the shares of MHN Common Stock and MHN Preferred
Stock, EXCLUSIVE OF ANY ELEMENT OF VALUE ARISING FROM THE ACCOMPLISHMENT OR
EXPECTATION OF THE MERGER. Holders considering seeking appraisal should be aware
that the "fair value" of their shares of MHN Common Stock or MHN Preferred Stock
as determined under Section 262 could be more than, the same as, or less than
the value of the Merger Consideration they would receive if they did not seek
appraisal. The Delaware Supreme Court has stated that "proof of value by any
techniques or methods which are generally considered acceptable in the financial
community and otherwise admissible in court" should be considered in the
appraisal proceedings. In addition, Delaware courts have decided that the
statutory appraisal remedy, depending on factual circumstances, may or may not
be a dissenter's exclusive remedy.
The Delaware Court of Chancery will determine the amount of interest, if
any, to be paid upon the amounts to be received by persons whose shares of MHN
Common Stock and MHN Preferred Stock have been appraised. The costs of the
action may be determined by such court and taxed upon the parties as the court
deems equitable. The Delaware Court of Chancery may also order that all or a
portion of the expenses incurred by any holder of shares of MHN Common Stock or
MHN Preferred Stock in connection with an appraisal, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts
utilized in the appraisal proceeding, be charged pro rata against the value of
all of the shares of MHN Common Stock or MHN Preferred Stock entitled to
appraisal.
If any holder of shares of MHN Common Stock or MHN Preferred Stock who
demands appraisal of his or her shares under Section 262 fails to perfect, or
effectively withdraws or loses, his or her right to appraisal, as provided in
the DGCL, the shares of MHN Common Stock or MHN Preferred Stock of such
stockholder will be deemed to receive Merger Consideration in accordance with
the Reorganization Agreement. A holder may withdraw his or her demand for
appraisal by delivering to the Surviving Corporation a written withdrawal of his
or her demand for appraisal and acceptance of the Merger, except that any such
attempt to withdraw made more than 60 days after the Effective Time will require
the written approval of the Surviving Corporation. Failure to follow the steps
required by Section 262 of the DGCL for perfecting appraisal rights may result
in the loss of such rights.
Any holder of shares of MHN Common Stock or MHN Preferred Stock who has duly
demanded an appraisal in compliance with Section 262 will not, after the
Effective Time, be entitled to vote the shares of MHN Common Stock and MHN
Preferred Stock subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on those shares (except dividends or
other distributions payable to holders of record of shares of MHN Common Stock
and MHN Preferred Stock as of a date prior to the Effective Time).
CALIFORNIA LAW. If the Reorganization Agreement is approved by the required
votes of the MHN Stockholders and is not abandoned or terminated, any holder of
MHN Preferred Stock or MHN Common Stock may, by complying with Sections 1300
through 1312 of the CGCL, be entitled to dissenters' rights as described
therein. The record holders of the shares of MHN Preferred Stock and MHN Common
Stock which dissent from the Merger (the "Dissenting Shares") are referred to
herein as "MHN Dissenting Shareholders."
The following discussion is not a complete statement of the CGCL relating to
dissenters' rights, and is qualified in its entirety by reference to Sections
1300 through 1312 of the CGCL attached to this Proxy Statement/Prospectus as
Annex 3 and incorporated herein by reference. This discussion and Sections 1300
through 1312 of the CGCL should be reviewed carefully by any holder who wishes
to exercise statutory dissenters' rights or wishes to preserve the right to do
so, since failure to comply with the required procedures will result in the loss
of such rights.
53
<PAGE>
Shares of MHN Common Stock must satisfy each of the following requirements
to qualify as Dissenting Shares under the CGCL: (i) the shares must have been
outstanding on the record date for the determination of the holders of MHN
Common Stock entitled to vote on the Merger (and therefore options to purchase
MHN Common Stock exercised after the record date may not constitute Dissenting
Shares); (ii) the shares must not have been voted in favor of the Merger; (iii)
the holder of such shares must make a written demand that MHN repurchase the
shares at fair market value and such demand must be received by MHN within 30
days after notice of approval of the Merger by the outstanding shares is mailed
to the holder; and (iv) the holder of such shares must submit certificates for
endorsement (as described below). A vote by proxy or in person against the
Merger does not in and of itself constitute a demand for appraisal under the
CGCL.
Pursuant to Sections 1300 through 1312 of the CGCL, holders of Dissenting
Shares may require MHN to repurchase their Dissenting Shares at a price equal to
the fair market value of such shares determined as of the day before the first
announcement of the terms of the Merger, excluding any appreciation or
depreciation in consequence of the proposed Merger, but adjusted for any stock
split, reverse stock split or stock dividend which becomes effective thereafter.
Within 10 days following approval of the Merger by MHN Stockholders, MHN is
required to mail to each person who did not vote in favor of the Merger a notice
of the approval of the Merger, a statement of the price determined by MHN to
represent the fair market value of Dissenting Shares (which shall constitute an
offer by MHN to purchase such Dissenting Shares at such stated price), and a
description of the procedures for such holders to exercise their rights as
Dissenting Shareholders.
Within 30 days after the date on which the notice of the approval of the
Merger was mailed, a holder of MHN Common Stock who wishes to be paid the full
cash value of his Dissenting Shares must submit to MHN (i) a written demand for
the purchase of the dissenting shares, as described below, and (ii) certificates
representing any Dissenting Shares which the Dissenting Shareholder demands MHN
purchase, so that such Dissenting Shares may either be stamped or endorsed with
the statement that the shares are Dissenting Shares or exchanged for
certificates of appropriate denomination so stamped or endorsed.
The demand of a Dissenting Shareholder is required by law to contain a
statement concerning the number of Dissenting Shares held of record by such
Dissenting Shareholder which the Dissenting Shareholder demands that MHN
purchase, and a statement of what such Dissenting Shareholder claims to be the
fair market value of the Dissenting Shares as of the day before the announcement
of the proposed Merger. The statement of fair market value in such demand by the
Dissenting Shareholder constitutes an offer by the Dissenting Shareholder to
sell the Dissenting Shares at such price.
If MHN and a Dissenting Shareholder agree upon the price to be paid for the
Dissenting Shares, upon the Dissenting Shareholder's surrender of the
certificates representing the Dissenting Shares, such price is required by law
to be paid to the Dissenting Shareholder within the later of 30 days after such
agreement or 30 days after any statutory or contractual conditions to the
consummation of the Merger are satisfied or waived.
If MHN and a Dissenting Shareholder disagree as to the price for such
Dissenting Shares or disagree as to whether such Dissenting Shares are entitled
to be classified as Dissenting Shares, such holder has the right to bring an
action in California Superior Court to resolve such dispute within six months
after the date on which notice of approval of the Merger is mailed. In such
action, the court will determine whether the shares of MHN Preferred Stock and
MHN Common Stock held by such shareholder are Dissenting Shares, the fair market
value of such shares of MHN Preferred Stock and MHN Common Stock, or both. The
CGCL provides, among other things, that a Dissenting Shareholder may not
withdraw the demand for payment of the fair market value of Dissenting Shares
unless MHN consents to such request for withdrawal.
54
<PAGE>
EXPERTS
The consolidated financial statements and financial statement schedules of
FHC incorporated in this Registration Statement by reference from FHC's Annual
Report on Form 10-K for the year ended June 30, 1995, have been audited by
Deloitte & Touche LLP, independent auditors, to the extent and for the periods
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.
The consolidated financial statements of CareFlorida Health Systems, Inc.
and its subsidiaries at December 31, 1993 and 1992 and for the years then ended
incorporated by reference in this Registration Statement from FHC's Annual
Report on Form 10-K for the year ended June 30, 1995, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Thomas-Davis Medical Centers, P.C.
and subsidiaries as of December 31, 1993 and 1992 and for the years then ended
have been audited by Stevenson, Jones & Holmaas, P.C., independent auditors, as
stated in their report which is incorporated by reference in this Registration
Statement from FHC's Annual Report on Form 10-K for the year ended June 30,
1995, and has been so incorporated in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Intergroup Healthcare Corporation
as of December 31, 1993 and 1992 and for the years then ended have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
incorporated herein by reference from the annual report on Form 10-K of FHC, in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Managed Health Network, Inc. and
subsidiaries as of December 31, 1993 and 1994 and for each of the years in the
three-year period ended December 31, 1994 have been included herein and in the
Registration Statement in reliance on the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP refers to a change in the method of accounting for income
taxes in 1993.
LEGAL MATTERS
The validity of the shares of FHC Common Stock offered hereby and certain
legal matters in connection with the Reorganization will be passed upon for FHC
by Pillsbury Madison & Sutro LLP, San Francisco, California. Cooley Godward
Castro Huddleson & Tatum, San Diego, California is acting as counsel for MHN in
connection with certain legal matters relating to the Reorganization and the
transactions contemplated thereby.
55
<PAGE>
INDEX TO MHN FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................... F-3
Consolidated Balance Sheets................................................................................ F-4
Consolidated Statements of Operations...................................................................... F-5
Consolidated Statements of Stockholders' Deficit........................................................... F-6
Consolidated Statements of Cash Flows...................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets...................................................................... F-19
Condensed Consolidated Statements of Operations............................................................ F-20
Condensed Consolidated Statements of Cash Flows............................................................ F-21
Notes to Condensed Consolidated Financial Statements....................................................... F-22
</TABLE>
F-1
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1994 and 1993
(With Independent Auditors' Report Thereon)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Managed Health Network, Inc.:
We have audited the accompanying consolidated balance sheets of Managed
Health Network, Inc. and subsidiaries as of December 31, 1994 and 1993 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the three-year period ended December 31, 1994.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Managed
Health Network, Inc. and subsidiaries at December 31, 1994 and 1993 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in notes 2 and 11 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," in 1993.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 10, 1995
F-3
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
1994 1993
----------- -----------
Current assets:
Cash and invested cash......................................... $ 6,227,445 $ 3,883,879
Receivables:
Contract revenues, net of allowance for doubtful accounts of
$63,000 and $62,000, respectively........................... 2,443,473 2,596,363
Administrative services...................................... 306,979 391,531
Related parties (note 5)..................................... 29,066 27,613
Other........................................................ 28,596 119,206
Deferred income taxes (note 11)................................ 365,042 --
Prepaid expenses............................................... 654,705 727,817
----------- -----------
Total current assets....................................... 10,055,306 7,746,409
Regulatory deposits (note 14).................................... 750,000 750,000
Restricted cash.................................................. 118,151 46,756
Property and equipment, net (notes 4 and 6)...................... 2,680,245 2,848,543
Deposits......................................................... 453,892 462,726
Deferred income taxes (note 11).................................. 82,958 --
Other assets..................................................... 74,718 100,013
----------- -----------
$14,215,270 $11,954,447
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued health care services (note 3).......................... $ 3,313,240 $ 3,348,754
Accrued payroll and related items.............................. 504,503 466,866
Accrued other liabilities (note 7)............................. 1,103,747 811,560
Income tax payable............................................. 6,143 10,000
Unearned revenue............................................... 661,317 646,923
Current portion of notes payable (note 6)...................... 319,592 345,446
Current portion of capital lease obligations (note 6).......... 446,461 336,605
----------- -----------
Total current liabilities.................................. 6,355,003 5,966,154
Other liabilities (note 7)....................................... 246,326 318,228
Long-term portion of notes payable (note 6)...................... 351,617 507,483
Long-term portion of capital lease obligations (note 6).......... 852,223 1,007,095
----------- -----------
Total liabilities.......................................... 7,805,169 7,798,960
Mandatorily redeemable convertible preferred stock (note 9)...... 28,609,067 26,851,337
Stockholders' deficit (note 10):
Common stock, $.005 par value. Authorized 40,000,000 shares;
issued and outstanding 7,363,847 and 5,271,972 shares,
respectively.................................................. -- --
Additional paid-in capital..................................... -- --
Accumulated deficit............................................ (22,198,966) (22,695,850)
Commitments and contingencies (notes 6, 7, 8, 9, 10, 13, 15, 16)
----------- -----------
$14,215,270 $11,954,447
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue (note 12):
Contract revenue............................................... $ 21,548,980 $ 23,555,183 $ 21,011,174
Employee assistance program.................................... 10,047,671 8,842,932 8,384,162
Administrative services........................................ 8,380,164 7,247,664 4,697,726
-------------- -------------- --------------
Subtotal..................................................... 39,976,815 39,645,779 34,093,062
Other revenue.................................................. 55,805 95,050 59,282
-------------- -------------- --------------
Total revenue................................................ 40,032,620 39,740,829 34,152,344
-------------- -------------- --------------
Expenses:
Health care services (note 3).................................. 16,072,680 16,329,315 18,184,951
Payroll and related items...................................... 14,958,882 14,318,821 13,345,896
Marketing, general and administrative.......................... 7,010,710 6,720,775 5,802,621
Depreciation and amortization.................................. 1,130,821 1,051,498 848,295
-------------- -------------- --------------
Total operating expenses..................................... 39,173,093 38,420,409 38,181,763
-------------- -------------- --------------
Income (loss) from operations................................ 859,527 1,320,420 (4,029,419)
Other income (expense):
Interest income................................................ 95,466 67,126 49,482
Interest expense............................................... (223,536) (226,193) (230,736)
Other expense.................................................. (840) (24,891) (25,237)
-------------- -------------- --------------
Income (loss) before income taxes............................ 730,617 1,136,462 (4,235,910)
Benefit (provision) for income taxes (note 11)................... 384,000 (29,400) (5,600)
-------------- -------------- --------------
Net income (loss)............................................ 1,114,617 1,107,062 (4,241,510)
Undeclared dividends on mandatorily redeemable convertible
preferred stock................................................. (1,707,730) (1,693,100) (1,211,785)
-------------- -------------- --------------
Net loss available to common stockholders.................... $ (593,113) $ (586,038) $ (5,453,295)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON PAID-IN ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT (DEFICIT)
---------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1991................... $ -- $ -- $ (16,216,897) $ (16,216,897)
Net income........................................ -- -- (4,241,510) (4,241,510)
Adjustment of consideration on stock issuance in
1991............................................. -- 8,505 -- 8,505
Undeclared dividends on mandatorily redeemable
convertible preferred stock...................... -- (8,505) (1,203,280) (1,211,785)
---------- -------------- --------------- ---------------
Balance as of December 31, 1992................... -- -- (21,661,687) (21,661,687)
Net income........................................ -- -- 1,107,062 1,107,062
Issuance of 81,281 shares of common
stock............................................ 406 40,235 -- 40,641
Direct costs incurred in connection with the
issuance of Series E mandatorily redeemable
convertible preferred stock...................... -- (488,766) -- (488,766)
Undeclared dividends on mandatorily redeemable
convertible preferred stock...................... (406) 448,531 (2,141,225) (1,693,100)
---------- -------------- --------------- ---------------
Balance as of December 31, 1993................... -- -- (22,695,850) (22,695,850)
Net income........................................ -- -- 1,114,617 1,114,617
Exercise of warrants (2,046,875 common shares).... 10,235 1,057,262 -- 1,067,497
Issuance of 45,000 shares of common
stock............................................ 225 22,275 -- 22,500
Undeclared dividends on mandatorily redeemable
convertible preferred stock...................... (10,460) (1,079,537) (617,733) (1,707,730)
---------- -------------- --------------- ---------------
Balance as of December 31, 1994................... $ -- $ -- $ (22,198,966) $ (22,198,966)
---------- -------------- --------------- ---------------
---------- -------------- --------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................... $ 1,114,617 $ 1,107,062 $ (4,241,510)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization..................................... 1,130,821 1,051,498 848,295
Increase in cash surrender value of life insurance policy......... (24,619) (23,144) (6,159)
Amortization on abandonment of lease.............................. 31,672 113,148 56,667
Loss on disposal of property and equipment........................ 839 45,516 31,581
Deferred tax benefit.............................................. (448,000) -- --
Changes in:
Decrease (increase) in contract revenues receivable, net........ 152,890 (459,306) (484,134)
Decrease (increase) in administrative services receivable....... 84,552 (166,148) (225,383)
Increase in notes receivable from related parties............... (1,453) (1,928) (1,691)
Decrease (increase) in other receivables........................ 90,610 290,023 (299,175)
Decrease in prepaid expenses.................................... 122,885 95,865 447,050
Increase in other assets........................................ -- (3,466) (53,624)
Increase (decrease) in accrued health care services............. (35,514) (1,297,459) 2,258,325
Increase (decrease) in accrued payroll, accounts payable and
other liabilities.............................................. 226,250 (190,110) (1,058,888)
Decrease in income tax payable.................................. (3,857) -- --
Increase (decrease) in unearned revenue......................... 14,394 6,680 (54,555)
-------------- -------------- --------------
Net cash provided by (used in) operating activities........... 2,456,087 568,231 (2,783,201)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment.................................. (648,476) (753,537) (530,065)
Proceeds from the sale of property and equipment.................... 500 -- 16,087
Increase in regulatory deposits..................................... -- (300,000) (30,000)
Decrease in deposits................................................ 8,834 121,178 (199,518)
-------------- -------------- --------------
Net cash used in investing activities......................... (639,142) (932,359) (743,496)
-------------- -------------- --------------
Cash flows from financing activities:
Payment of notes payable............................................ $ (410,102) $ (364,935) $ (368,741)
Payment of bridge loan.............................................. -- (1,500,000) --
Proceeds from issuance of bridge loan............................... -- -- 1,500,000
Proceeds from issuance of note payable.............................. 228,385 286,225 213,301
Payment of capital lease obligations................................ (360,264) (299,488) (348,372)
Proceeds from issuance of common stock.............................. 22,500 40,641 --
Proceeds from exercise of common stock warrants..................... 1,067,497 -- --
Proceeds from issuance of preferred stock........................... 50,000 5,611,234 252,505
-------------- -------------- --------------
Net cash provided by financing activities..................... 598,016 3,773,677 1,248,693
-------------- -------------- --------------
Net increase (decrease) in cash and invested cash............. 2,414,961 3,409,549 (2,278,004)
Cash and invested cash, beginning of year............................. 3,930,635 521,086 2,799,090
-------------- -------------- --------------
Cash and invested cash, end of year, including $118,151, $46,756 and
$46,756 of restricted cash, respectively............................. $ 6,345,596 $ 3,930,635 $ 521,086
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosures:
Cash paid during the year for:
Interest paid..................................................... $ 223,103 $ 231,659 $ 216,152
Income taxes paid................................................. 67,857 19,400 5,600
-------------- -------------- --------------
-------------- -------------- --------------
Noncash financing activity:
During 1994, 1993 and 1992, the Company entered into lease financing agreements totaling approxi-
mately $315,000, $450,000 and $377,000 for the purchase of property and equipment, respectively.
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
(1) ORGANIZATION
Managed Health Network, Inc. (the Company) is incorporated in the state of
Delaware. The Company serves as a holding company for subsidiaries that
specialize in the design and provision of specialized mental health and
substance abuse managed care programs. The Company provides services nationwide
through its seven subsidiaries. The most significant subsidiary is Managed
Health Network (MHNCA), a Knox-Keene licensed California health maintenance
organization (HMO). Employee Assistance Program (EAP) and third-party
administrator (TPA) services are the major sources of revenue for the other
subsidiaries.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Managed Health
Network, Inc. and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
CASH AND INVESTED CASH
Cash and invested cash consists of cash and short-term investments with
original maturities of 90 days or less. Restricted cash represents cash and
invested cash on deposit but assigned for the collateralization of capital
leased assets; restricted cash is included in cash for the purposes of the
consolidated statements of cash flows.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment is
provided on a straight-line basis over estimated useful lives of three to seven
years. Leasehold improvements are recorded at cost and amortized over the useful
life of the asset or the remaining life of the lease, whichever is shorter.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatorily redeemable convertible preferred stock is carried at redemption
value, which includes the $100 per share par value (and issuance price) plus
cumulative dividends from the accumulation date.
REVENUES
Revenues are derived from three sources: At-Risk Premiums, Employee
Assistance Programs (EAP) and Administrative Services Only (ASO) contracts.
Revenues from enrolled groups are reported as revenue in the month in which
enrollees are entitled to receive mental health service. Revenues received prior
to such period are recorded as unearned revenue.
HEALTH CARE SERVICES
The cost of patient health care is accrued during the period when services
are rendered, including an estimate of costs incurred but not yet reported to
the Company. The Company has contracted with health care providers to render
services specified in the subscriber groups' contractual arrangements. These
contracts generally require the Company to pay providers agreed-upon rates upon
receiving evidence of covered services being rendered.
Accrued health care services are based upon reported claims and estimates
based on historical Company and industry experience for unreported claims. The
Company prepares its own analysis of accrued health care services monthly and
adjustments are made as appropriate. The Company also utilizes the services of
an independent actuarial consultant to review its analysis of accrued health
F-8
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
care services at least annually. Management believes that the provision for
accrued health care services is adequate to cover the cost of claims incurred to
date whether or not reported. However, such liability is, by necessity, based
upon estimates and there can be no assurance that the ultimate liability will
not exceed the amount accrued.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109).
Statement 109 requires a change from the deferred method of accounting for
income taxes of APB Opinion 11 to the asset and liability method of accounting
for income taxes. Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The
adoption of Statement 109 did not have a significant impact on the Company's
financial position or results of operations in 1993.
EARNINGS PER SHARE
As the Company is a non-public entity and there are no earnings available to
common stockholders, earnings (loss) per common share is not presented.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year balances to
conform to the current year presentation.
(3) ACCRUED HEALTH CARE SERVICES
Activity in accrued health care services is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
Balance at January 1................................... $ 3,348,754 $ 4,646,211 $ 2,387,888
-------------- -------------- --------------
Incurred related to:
Current year......................................... 16,226,085 16,591,823 18,361,013
Prior years.......................................... (153,405) (262,508) (176,062)
-------------- -------------- --------------
Total incurred..................................... 16,072,680 16,329,315 18,184,951
-------------- -------------- --------------
Paid related to:
Current year......................................... 12,981,480 13,331,932 13,967,253
Prior years.......................................... 3,126,714 4,294,840 1,959,375
-------------- -------------- --------------
Total paid......................................... 16,108,194 17,626,772 15,926,628
-------------- -------------- --------------
Balance at December 31................................. $ 3,313,240 $ 3,348,754 $ 4,646,211
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The favorable development related to prior years' accrued health care
services is principally due to outpatient loss payments being reported faster
than anticipated.
F-9
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1993 by the major classes
were as follows:
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Office furniture........................................................ $ 1,623,013 $ 1,565,652
Computer equipment...................................................... 2,167,823 2,097,730
Computer software....................................................... 1,004,116 872,601
Telephone equipment..................................................... 963,314 902,205
Leasehold improvements.................................................. 375,153 388,190
Less accumulated depreciation and amortization.......................... (3,453,174) (2,977,835)
-------------- --------------
Net property and equipment.......................................... $ 2,680,245 $ 2,848,543
-------------- --------------
-------------- --------------
</TABLE>
Property and equipment under capital leases of $2,268,379 and $2,002,906 are
included within the above captions together with accumulated amortization of
$1,207,172 and $773,116 for the years ended December 31, 1994 and 1993,
respectively (note 6).
(5) RELATED PARTY TRANSACTIONS
Notes receivable from directors of the Company totaling $29,066 and $27,613,
respectively, were outstanding at December 31, 1994 and 1993, respectively.
These notes accrue interest at 9% and are due upon demand.
(6) NOTES PAYABLE AND CAPITAL LEASES
Notes payable at December 31, 1994 and 1993 consist of the following:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
8% unsecured notes payable to previous owners of acquired subsidiary,
installments of $15,903, including interest, due monthly through December
1997....................................................................... $ 507,483 $ 651,404
6.07% notes payable for insurance policies, monthly installments of $27,033,
including interest, due June 1995.......................................... 163,726 201,525
------------ ------------
671,209 852,929
Less current portion........................................................ (319,592) (345,446)
------------ ------------
Long-term portion of notes payable........................................ $ 351,617 $ 507,483
------------ ------------
------------ ------------
</TABLE>
Maturities of notes payable are as follows:
<TABLE>
<S> <C>
1995............................................................. $ 319,592
1996............................................................. 168,803
1997............................................................. 182,814
---------
$ 671,209
---------
---------
</TABLE>
F-10
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
(6) NOTES PAYABLE AND CAPITAL LEASES (CONTINUED)
The Company has entered into several capital leases for equipment. Interest
rates range from 9% to 20%. At December 31, 1994, future minimum payments on
capital leases are as follows:
<TABLE>
<S> <C>
1995................................................................... $ 592,854
1996................................................................... 574,396
1997................................................................... 270,310
1998................................................................... 130,974
1999................................................................... 1,792
----------
Total minimum lease payments....................................... 1,570,326
Less amounts representing interest..................................... (271,642)
----------
Present value of net minimum lease payments........................ 1,298,684
Less current obligation................................................ (446,461)
----------
Total long-term obligation......................................... $ 852,223
----------
----------
</TABLE>
(7) OPERATING LEASES
The Company has noncancelable operating lease obligations for office
locations. Terms of several leases provide for periods of free rent. These
benefits are being recognized evenly over the total lease periods. Additionally,
the Company has noncancelable operating lease obligations for office equipment.
Future minimum commitments under the leases are as follows:
<TABLE>
<CAPTION>
OPERATING INCOME FROM
LEASES SUBLEASES NET
------------- ------------ -------------
<S> <C> <C> <C>
1995........................................................ $ 1,551,000 $ (138,000) $ 1,413,000
1996........................................................ 1,416,000 (138,000) 1,278,000
1997........................................................ 737,000 (81,000) 656,000
1998........................................................ 10,000 -- 10,000
------------- ------------ -------------
$ 3,714,000 $ (357,000) $ 3,357,000
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
During 1989, the Company moved its corporate headquarters from Santa Monica,
California to Los Angeles, California. The Company has accrued approximately
$421,000 and $452,000 at December 31, 1994 and 1993, respectively, which
represents estimated future lease commitments in excess of expected sublease
income related to the Santa Monica office space. The accrual has been included
in other current and long-term other liabilities in the approximate amounts of
$176,000 and $245,000 for 1994 and $134,000 and $318,000 for 1993, respectively.
Net rental expense for the years ended December 31, 1994, 1993 and 1992 was
approximately $1,632,000, $1,612,000 and $1,285,000, respectively.
(8) COMMITMENTS AND CONTINGENCIES
The Company is party as plaintiff or defendant to various legal actions
arising in the normal course of business. In the opinion of management, based in
part on the opinion of legal counsel, resolution of such matters will not have a
material adverse effect on the financial position or operating results of the
Company.
F-11
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
(9) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
All series of preferred stock issued are mandatorily redeemable with a par
value of $100 and a cumulative dividend of 8%. The following tables display
general information regarding each of the series for the years ended December
31, 1994 and 1993 for the nearest whole share:
<TABLE>
<CAPTION>
1994 SHARES 1993 SHARES
------------------------ ------------------------
ISSUED AND ISSUED AND
AUTHORIZED OUTSTANDING AUTHORIZED OUTSTANDING
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Series A......................... 20,000 20,000 20,000 20,000
Series B......................... 81,352 81,351 81,352 81,351
Series C......................... 27,141 27,140 27,141 27,140
Series D......................... 40,000 22,981 40,000 22,981
Series E......................... 80,000 61,500 80,000 61,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1994 1993
REDEMPTION REDEMPTION
VALUE VALUE
-------------- --------------
<S> <C> <C>
Series A........................................... $ 3,084,055 $ 2,924,055
Series B........................................... 12,066,731 11,415,921
Series C........................................... 3,480,811 3,263,688
Series D........................................... 2,850,210 2,666,358
Series E........................................... 7,127,260 6,581,315
-------------- --------------
Total............................................ $ 28,609,067 $ 26,851,337
-------------- --------------
-------------- --------------
</TABLE>
The following table summarizes the cumulative redemption value of all issued
series of mandatorily redeemable convertible preferred stock as of December 31,
1994, for the following five years:
<TABLE>
<S> <C>
1995.................................................. $30,312,852
1996.................................................. 32,016,637
1997.................................................. 33,720,422
1998.................................................. 35,424,207
1999.................................................. 37,127,992
-----------
-----------
</TABLE>
The Company issued 2,440 shares of Series D preferred stock in 1992. In 1993
the Company issued 61,000 shares of Series E preferred stock and in 1994 issued
an additional 500 shares of Series E preferred stock.
F-12
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
(9) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Series A, B, C, D and E preferred stock are convertible at the option of the
holder into common stock of the Company as follows at December 31, 1994:
<TABLE>
<CAPTION>
IF
CONVERTED
CONVERSION COMMON
PRICE (1) SHARES
---------- -----------
<S> <C> <C>
Series A.................................................. .7074 2,827,255
Series B.................................................. 1.1200 7,263,504
Series C.................................................. 1.3000 2,087,723
Series D.................................................. 1.5000 1,532,099
Series E.................................................. 1.4400 4,270,832
</TABLE>
- ------------------------
(1) The conversion price of the Series A, B, C, D and E preferred stock is
adjustable to avoid dilution.
The preferred stock, other than Series E, will be automatically converted
into shares of common stock in the event of a successful underwritten public
offering of the Company's stock for more than $7,500,000 in the aggregate and at
a public offering price per share of not less than $2.60, or the vote of
two-thirds of the outstanding shares of the series approving conversion. The
Series E preferred stock will be automatically converted into shares of common
stock in the event of a successful underwritten public offering of the Company's
stock for more than $15,000,000 at a public offering price per share of not less
than $3.20. The preferred stock has various other rights, including the right to
be paid dividends concurrently with common stock, the right to vote with common
stock based on the underlying common stock into which it can be converted and
the right to vote as a class on certain matters. Additionally, each share of
preferred stock carries a liquidation right of $100 per share plus 8% cumulative
annual return thereon (accumulation date) from March 24, 1988, December 17,
1988, June 21, 1991, December 31, 1991 and January 6, 1993, respectively. On or
at any time after June 14, 1996, the holders of not less than 66 2/3% of the
then outstanding preferred stock may request in writing that the Company redeem
all, but not less than all, of the outstanding preferred stock by paying in cash
a sum equal to $100 per preferred share together with all declared and accrued
but unpaid dividends, including the 8% cumulative return described above. No
dividends have been declared on the preferred stock.
(10) STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has adopted two stock option plans. The Incentive Stock Option
Plan (1988 Plan) provides for the granting of options to key employees to
purchase common shares of stock at the estimated fair market value as determined
by the Board of Directors (Board). The maximum number of shares available for
grant is 1,250,000 shares as of December 31, 1994 and 1993. The options are
exercisable under conditions as determined by the Board and expire ten years
from the date of grant or earlier, if specified by the Board upon grant of the
option.
F-13
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
(10) STOCKHOLDERS' EQUITY (CONTINUED)
The 1988 Plan terminates on February 16, 1998, but may be terminated by the
Board at any time. The 1988 Plan is not a qualified plan under the Internal
Revenue Code. The following table summarizes stock option data relative to the
Company's 1988 Plan for the years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994
-------------------------- 1993
OPTION ---------------------------
NUMBER OF PRICE PER NUMBER OF OPTION PRICE
SHARES SHARE SHARES PER SHARE
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year.................... 480,000 $ .05 1,747,000 $ .05 - 1.30
Options granted........................................... -- -- -- --
Options exercised......................................... -- -- -- --
Options canceled.......................................... -- -- (1,267,000) .90 - 1.30
------------- ------------
Options outstanding, end of year.......................... 480,000(1) $ .05 480,000 $ .05
------------- --- ------------ -------------
------------- --- ------------ -------------
</TABLE>
- ------------------------
(1) All 480,000 shares are exercisable as of December 31, 1994.
Effective December 1991, the Company approved the 1991 Stock Option Plan
(1991 Plan). The 1991 Plan provides for the granting of both incentive stock
options, as defined under the Internal Revenue Code, and nonqualified options to
officers, key employees, directors and independent contractors of the Company.
Incentive stock options will consist of awards from the Company which enable the
holder to purchase a specific number of shares of common stock, under set terms
and at a set price which shall not be less than the fair market value of the
common stock on the date of the grant. Nonqualified options will consist of
awards from the Company which enable the holder to purchase a specific number of
shares of common stock, under set terms and at a set price which shall not be
less than 75% of the fair market value of the common stock on the date of the
grant.
The options (both incentive and nonqualified) are exercisable under
conditions as determined by the Board and expire ten years from the date of
grant or earlier, if specified by the Board upon grant of the option. The 1991
Plan terminates on December 31, 2001 but may be terminated by the Board at any
time. The maximum number of shares available for grant is 4,350,000 as of
December 31, 1994 and 1993. The maximum number of shares available for grant
under both the 1988 Plan and the 1991 Plan, in the aggregate, is 5,600,000
shares. The following table summarizes stock option data relative to the
Company's 1991 Plan for the years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---------------------------- ------------------------
OPTION OPTION
NUMBER OF PRICE PER NUMBER OF PRICE PER
SHARES SHARE SHARES SHARE
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year........................ 2,512,000 $ .50 1,310,000 $ .50
Options granted............................................... 475,000 .50 1,527,381 .50
Options exercised............................................. (60,000) .50 (81,281) .50
Options canceled.............................................. (798,000) .50 (244,100) .50
--------------- -----------
Options outstanding, end of year.............................. 2,129,000(1) .50 2,512,000 .50
--------------- --- ----------- ---
--------------- --- ----------- ---
</TABLE>
- ------------------------
(1) Includes 1,017,600 shares which are exercisable as of December 31, 1994.
Compensation expense for the excess of market value at the date of grant and
the exercise price is recognized as options
F-14
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
(10) STOCKHOLDERS' EQUITY (CONTINUED)
become vested and exercisable. During 1994 and 1993, no compensation expense
was recognized since the exercise price of all options equaled or exceeded
the estimated fair market value at the date they were granted.
WARRANTS
At December 31, 1993, warrants to purchase 2,046,875 shares of common stock
at $.50 and $1.44 per share were outstanding. Warrants to purchase 2,000,000
shares of common stock were exercised on August 30, 1994 at $.50 per share.
Additionally, warrants to purchase 46,875 shares of common stock were exercised
on December 8, 1994 at $1.44 per share.
(11) INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return and combined California franchise tax return.
Significant components of the Company's income tax provision (benefit) are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-------------------------------------
CURRENT DEFERRED TOTAL
--------- ------------ ------------
<S> <C> <C> <C>
Federal................................................................... $ 13,000 $ (408,000) $ (395,000)
State..................................................................... 51,000 (40,000) 11,000
--------- ------------ ------------
Total................................................................... $ 64,000 $ (448,000) $ (384,000)
--------- ------------ ------------
--------- ------------ ------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
-------------------------------------
CURRENT DEFERRED TOTAL
--------- ------------ ------------
<S> <C> <C> <C>
Federal................................................................... $ 23,000 $ -- $ 23,000
State..................................................................... 6,400 -- 6,400
--------- ------------ ------------
Total................................................................... $ 29,400 $ -- $ 29,400
--------- ------------ ------------
--------- ------------ ------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
-------------------------------------
CURRENT DEFERRED TOTAL
--------- ------------ ------------
<S> <C> <C> <C>
Federal................................................................... $ -- $ -- $ --
State..................................................................... 5,600 -- 5,600
--------- ------------ ------------
Total................................................................... $ 5,600 $ -- $ 5,600
--------- ------------ ------------
--------- ------------ ------------
</TABLE>
Under Statement 109, adopted by the Company effective January 1, 1993,
deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and
F-15
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
(11) INCOME TAXES (CONTINUED)
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets and
liabilities at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................ $ 3,969,585 $ 4,410,272
Discount on accrued health care services........................................ 30,651 38,087
Allowance for doubtful accounts................................................. 8,542 6,677
Accumulated depreciation and amortization....................................... 438,328 510,770
Accrued employee benefits....................................................... 183,573 100,985
Unearned revenue................................................................ 43,099 43,803
Alternative minimum tax credit.................................................. 48,000 35,670
Accrued operating lease......................................................... 156,886 168,700
State taxes..................................................................... 154,935 21,897
-------------- --------------
Total gross deferred tax assets............................................... 5,033,599 5,336,861
Less valuation allowance........................................................ (4,585,599) (5,336,861)
-------------- --------------
Net deferred tax assets....................................................... $ 448,000 --
-------------- --------------
-------------- --------------
</TABLE>
The Company's management believes that it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the net deferred tax assets, subject to the valuation allowance provided.
A reconciliation of income taxes computed at the U.S. statutory corporate
income tax rate of 34% and the effective tax rate is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ --------------
<S> <C> <C> <C>
Expected tax provision................................................ $ 248,410 386,397 (1,440,209)
State tax expense (benefit)........................................... 11,480 9,125 (1,904)
State minimum taxes................................................... -- 6,400 5,600
Change in valuation allowance......................................... (421,600) -- --
Alternative minimum taxes............................................. 13,000 23,000 --
Net operating loss carryforwards...................................... (268,458) (403,660) 1,429,833
Other, net............................................................ 33,168 8,138 12,280
------------ ------------ --------------
Provision (benefit) for income taxes................................ $ (384,000) $ 29,400 $ 5,600
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
At December 31, 1994, the Company had net operating loss carryforwards for
California state tax purposes of approximately $2,334,000 which expire from 1996
through 1998. Also at December 31,
F-16
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
(11) INCOME TAXES (CONTINUED)
1994, the Company had net operating loss carryforwards of approximately
$11,675,000 for Federal income tax purposes. The net operating loss
carryforwards for Federal purposes, which may provide future tax benefits,
expire as follows:
<TABLE>
<S> <C>
2003.................................................. $ 2,150,000
2004.................................................. 1,168,000
2006.................................................. 3,996,000
2007.................................................. 4,354,000
2008.................................................. 7,000
-----------
$11,675,000
-----------
-----------
</TABLE>
The Company has generated an Alternative Minimum Tax (AMT) credit of $48,000
which is available to reduce future Federal income taxes. The AMT credit does
not expire; however, it cannot be utilized to reduce the Federal income tax
liability below the annual amount of AMT.
(12) SIGNIFICANT CLIENTS
For the years ended December 31, 1994, 1993 and 1992, the Company derived
revenue from one major client totaling approximately $5,966,000, $6,011,000 and
$6,602,000, which represented 15%, 15% and 19% of total earned revenues for
1994, 1993 and 1992, respectively. The Company has contract revenues receivable
from this one major client approximating $506,000 and $461,000 at December 31,
1994 and 1993, respectively, which represents 21% and 28% of contract revenues
receivable, respectively.
(13) REGULATORY REQUIREMENTS
The California Department of Corporations (DOC) has requirements for
California HMOs to maintain a minimum level of tangible net equity based on
revenue and health care expenditure volume and a current ratio, as defined by
the DOC, of 1:1. Additionally, California HMOs are required to maintain deposits
with the DOC for noncontracting provider insolvencies based on the utilization
of noncontracting providers to all providers. At December 31, 1994 and 1993,
MHNCA was in compliance with the DOC requirements. As of December 31, 1992,
MHNCA was not in compliance with the above requirements.
(14) REGULATORY DEPOSITS
Cash in the amount of $750,000 has been assigned to the Commissioner of
Corporations pursuant to provisions under the Knox-Keene Act at December 31,
1994 and 1993, respectively. Funds will remain assigned until released by the
Commissioner.
(15) EMPLOYEE RETIREMENT PLAN
The Company has established the Managed Health Network, Inc. Profit Sharing
Plan (Plan) in which substantially all employees of the Company are eligible to
participate. Under the Plan, employees may elect to contribute 2% to 16% of
their eligible compensation up to the maximum allowed by the Internal Revenue
Code. The Company may make matching contributions up to 50% of the employee's
first 6% of contributions. Employees are always vested in their own
contributions and vest in the employer contributions after one year of service.
Total matching contributions to the Plan by the Company for the years ended
December 31, 1994, 1993 and 1992 were approximately $68,000, $60,000 and $0,
respectively. No matching contributions were made to the Plan for the year ended
December 31, 1992, due to the net loss incurred.
F-17
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
(16) SUBSEQUENT EVENTS (UNAUDITED)
HMC ACQUISITION
In June 1995, the Company acquired Health Management Center Companies (HMC)
for total consideration of up to $7,400,000, consisting of $4,250,000 in cash,
issuance of a promissory note for $1,650,000, issuance of 5,000 shares of Series
E preferred stock with a par value of $100 and $1,000,000 in payments contingent
on the retention of clients and the integration of operations. HMC consists of
the following four entities; Health Management Center, Inc., Health Management
Center, West, Inc., Health Management Center of Wisconsin, Inc. and HMC, PPO,
Inc.
HMC employs a systems approach to the design and implementation of employee
assistance and managed mental health care/substance abuse programs. The
Companies had operated under the direction of family members Janis S. DiMonaco,
then principal shareholder, and Vincent D. DiMonaco, and served a client base in
seven states. Subsequent to the acquisition both Janis S. DiMonaco and Vincent
D. DiMonaco became members of the Company's management and continue to serve the
HMC companies.
The acquisition was recorded under the purchase method of accounting. In
connection with the acquisition of HMC, the Company recorded $6,229,000 in
goodwill and began amortizing the amount over a period of fifteen years under
the straight-line method. The Company will capitalize the $1,000,000 contingent
payment in accordance with EITF 95-8 if and when the contingencies lapse. If any
portion of the $1,000,000 payment is paid it will be included in goodwill and
will be amortized over the remaining portion of the 15-year period.
The following pro forma financial information of the Company and HMC on a
combined basis has been prepared to show results as if the acquisition had been
consummated on January 1, 1994:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
--------------
<S> <C>
Revenue....................................................................... $ 45,988,000
Income before extraordinary items............................................. 509,000
Net income.................................................................... 509,000
--------------
--------------
</TABLE>
The Company incurred the following long-term obligations in connection with
the HMC acquisition:
The Company issued a promissory note of $1,650,000 in connection with
the HMC acquisition. The promissory note is due in five years, interest,
at 7% with stipulated payments of $550,000, $500,000 and $600,000 on May
31, 1998, 1999 and 2000, respectively.
The Company also obtained a $2,000,000 five-year term loan from a
bank, accruing interest at prime plus .75%. The Company is required to
make interest only payments during the first year with the principal and
accruing interest due in 48 equal installments. Additionally, the Company
drew $750,000 on its $2,500,000 credit facilities line of credit to
effect the acquisition. The credit facility accrues interest at prime. In
October 1995, the Company paid down $500,000 of the credit facility line.
The various lines of credit and the term loan are secured
substantially by all the assets of the Company and its subsidiaries,
except for MHN Reinsurance Company of Arizona.
FOUNDATION HEALTH CORPORATION MERGER
The Company on January 9, 1996 signed a definitive agreement with Foundation
Health Corporation ("FHC") to be acquired for approximately $45,000,000 in FHC
common stock.
F-18
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
1995 1994
----------- -----------
Current assets:
Cash and invested cash......................................... $ 4,707,443 $ 6,227,445
Receivables:
Contract revenues, net of allowance for doubtful accounts of
$90,000 and $63,000, respectively........................... 2,169,937 2,443,473
Administrative services...................................... 318,810 306,979
Related parties.............................................. 30,333 29,066
Other........................................................ 128,179 28,596
Deferred income taxes.......................................... 365,042 365,042
Prepaid expenses............................................... 734,806 654,705
----------- -----------
Total current assets....................................... 8,754,550 10,055,306
Regulatory deposits.............................................. 750,000 750,000
Restricted cash.................................................. 120,164 118,151
Property and equipment, net...................................... 2,998,116 2,680,245
Goodwill, net.................................................... 6,094,826 --
Other assets..................................................... 633,956 611,568
----------- -----------
$19,351,662 $14,215,270
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued health care services................................... $ 2,632,958 $ 3,313,240
Accrued payroll and related items.............................. 1,011,822 504,503
Accrued payroll and other liabilities.......................... 1,210,672 1,103,747
Income tax payable............................................. 242,951 6,143
Unearned revenue............................................... 570,733 661,317
Current portion of notes payable............................... 1,040,472 319,592
Current portion of capital lease obligations................... 620,825 446,461
----------- -----------
Total current liabilities.................................. 7,330,433 6,156,003
Other liabilities................................................ 228,157 246,326
Long-term portion of notes payable............................... 3,751,285 351,617
Long-term portion of capital lease obligations................... 851,099 852,223
----------- -----------
Total liabilities.......................................... 12,160,974 7,805,169
Mandatorily redeemable convertible preferred stock............... 30,396,557 28,609,067
Stockholders' deficit:
Common stock, $.005 par value. Authorized 40,000,000 shares;
issued and outstanding 7,409,800 and 7,363,847 shares,
respectively.................................................. -- --
Additional paid-in capital..................................... -- --
Accumulated deficit............................................ (23,205,869) (22,198,966)
Commitments and contingencies
----------- -----------
$19,351,662 $14,215,270
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-19
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Revenue:
Contract revenue............................................................... $ 13,781,405 $ 16,035,597
Employee assistance program.................................................... 8,581,616 7,448,898
Administrative services........................................................ 8,110,126 6,143,715
Private practice............................................................... 164,920 --
Other revenue.................................................................. 30,407 35,251
-------------- --------------
Total operating revenue...................................................... 30,668,474 29,663,461
-------------- --------------
Expenses:
Health care services........................................................... 10,337,691 12,297,112
Payroll and related items...................................................... 13,374,182 11,306,199
Marketing, general and administrative.......................................... 5,448,500 5,180,921
Depreciation and amortization.................................................. 979,900 852,718
Unusual item -- merger related expenses........................................ 112,112 --
-------------- --------------
Total operating expenses..................................................... 30,252,385 29,636,950
-------------- --------------
Income from operations....................................................... 416,089 26,511
Other income (expense):
Interest income................................................................ 158,402 59,065
Interest expense............................................................... (288,904) (164,704)
Other expense.................................................................. (112,112) (839)
-------------- --------------
Income (loss) before income taxes............................................ 285,587 (79,967)
Provision for income taxes....................................................... (31,000) (10,000)
-------------- --------------
Net income (loss)............................................................ 254,587 (89,967)
Undeclared dividends on mandatorily redeemable convertible preferred stock....... (1,287,489) (1,271,346)
-------------- --------------
Net loss available to common stockholders.................................... $ (1,032,902) $ (1,361,313)
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-20
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Cash provided by operating activities............................................... $ 1,279,042 $ 1,150,819
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment................................................ (695,365) (425,186)
Proceeds from the sale of property and equipment.................................. -- 500
Increase in deposits.............................................................. (5,788) (3,457)
Acquisition of HMC................................................................ (4,250,000) --
------------- -------------
Net cash used in investing activities........................................... (4,951,153) (428,143)
------------- -------------
Cash flows from financing activities:
Payment of notes payable.......................................................... (279,454) (308,382)
Payment of capital lease obligations.............................................. (342,424) (256,315)
Proceeds from issuance of common stock............................................ 26,000 22,500
Proceeds from exercise of common stock warrants................................... -- 1,000,000
Proceeds from issuance of term loan............................................... 2,000,000 --
Proceeds from drawing on line of credit........................................... 750,000 --
------------- -------------
Net cash provided by financing activities....................................... 2,154,122 457,803
------------- -------------
Net increase (decrease) in cash and invested cash............................... (1,570,728) 1,180,479
Cash and invested cash, beginning of period......................................... 6,345,596 3,930,635
------------- -------------
Cash and invested cash, end of period, including $120,164 and $118,151 of restricted
cash, respectively................................................................. $ 4,827,607 $ 5,111,114
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(UNAUDITED)
(1) GENERAL
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with requirements for filing with the Securities and Exchange Commission.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. The results of operations for the nine-month
period ended September 30, 1995 are not necessarily indicative of the results to
be expected for the full year. For further information, refer to the Company's
audited financial statements and notes thereto for the year ended December 31,
1994 and 1993.
(2) BUSINESS COMBINATION
HMC ACQUISITION
In June 1995, the Company acquired Health Management Center Companies (HMC)
for total consideration of up to $7,400,000, consisting of $4,250,000 in cash,
issuance of a promissory note for $1,650,000, issuance of 5,000 shares of Series
E preferred stock, $100 par value, and $1,000,000 in payments contingent on the
retention of clients and the integration of operations. HMC consists of the
following four entities; Health Management Center, Inc., Health Management
Center, West, Inc., Health Management Center of Wisconsin, Inc. and HMC, PPO,
Inc.
HMC employs a systems approach to the design and implementation of employee
assistance and managed mental health care/substance abuse programs. The
Companies had operated under the direction of family members Janis S. DiMonaco,
then principal shareholder, and Vincent D. DiMonaco, and served a client base in
seven states. Subsequent to the acquisition both Janis S. DiMonaco and Vincent
D. DiMonaco became members of the Company's management and continue to serve the
HMC companies.
The acquisition was recorded under the purchase method of accounting. In
connection with the acquisition of HMC, the Company recorded $6,229,000 in
goodwill and began amortizing the amount over a period of fifteen years under
the straight-line method. The Company will capitalize the $1,000,000 contingent
payment in accordance with EITF 95-8 if and when the contingencies lapse. If any
portion of the $1,000,000 payment is paid, it will be included in goodwill and
will be amortized over the remaining portion of the 15-year period.
The following pro forma financial information of the Company and HMC on a
combined basis has been prepared to show results as if the acquisition had been
consummated on January 1, 1994:
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
<S> <C> <C>
Revenue................................................................ $ 35,653,000 $ 45,988,000
Income before extraordinary items...................................... 62,000 509,000
Net income............................................................. 62,000 509,000
-------------- --------------
-------------- --------------
</TABLE>
F-22
<PAGE>
MANAGED HEALTH NETWORK, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(UNAUDITED)
(3) LONG-TERM BORROWINGS
The Company has incurred the following new long-term obligations during the
nine months ended September 30, 1995.
As previously mentioned, the Company issued a promissory note of $1,650,000
in connection with the HMC acquisition. The promissory note is due in five years
accruing interest at 7% with stipulated payments of $550,000, $500,000 and
$600,000 on May 31, 1998, 1999 and 2000, respectively.
The Company obtained a $2,000,000 five-year term loan, accruing interest at
prime plus .75%, from a bank, of which the proceeds were used in the funding of
the $4,250,000 cash payment in the above-referenced acquisition of HMC. The
Company is required to make interest-only payments in the first year, with the
remaining due in 48 equal installments. Additionally, the Company drew $750,000
on its $2,500,000 credit facilities line of credit to assist in the funding of
the above-referenced $4,250,000 cash payment. The credit facility accrues
interest at prime. The remaining $1,500,000 of the $4,250,000 cash was Company
funded. In October 1995, the Company paid down $500,000 of the credit facility
line.
The Company renegotiated its New York City office space lease in 1995. The
lease was extended to May 2002 with monthly lease payments of $31,409, $24,460
and $27,920 for the periods ended December 31, 1995, December 31, 1996 and May
31, 2002, respectively. In connection with the above lease, the Company was
required to issue a standby letter of credit to the landlord in the amount of
$250,000. The $250,000 effectively draws down the availability of the credit
facility to $1,500,000 as of September 30, 1995. Also in connection with the New
York lease, the Company entered into three capital leases to finance telephone
and computer network equipment and furniture. The future minimum payments under
the aforementioned capital leases are $195,000, $205,000 and $222,000 and expire
in May 2000, May 1998 and August 1998, respectively, with interest accruing at a
range of 10.5% to 11.5%.
The various lines of credit and the term loan are secured substantially by
all the assets of the Company and its subsidiaries, except for MHN Reinsurance
Company of Arizona.
(4) SUBSEQUENT EVENTS
In October 1995, the Company obtained an additional line of credit. The line
is nonreplacing with a term of 32 months with repayment provisions of equal
installments, including accruing interest of prime plus .75%. Borrowings under
the line are secured substantially by all the assets of the Company and its
subsidiaries, except for MHN Reinsurance Company of Arizona.
In November 1995, Managed Health Network (California HMO) was released by
the Department of Corporations of the State of California (DOC), under the
Knox-Keene Act, from $700,000 in nonpanel provider deposits.
The Company on January 9, 1996 signed a definitive agreement with Foundation
Health Corporation ("FHC") to be acquired for approximately $45,000,000 in FHC
common stock.
F-23
<PAGE>
ANNEX 1
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
FOUNDATION HEALTH CORPORATION
AND
MANAGED HEALTH NETWORK, INC.
JANUARY 9, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<C> <C> <S> <C> <C>
ARTICLE 1 THE MERGER................................................................................. 1-1
1.1 Effective Time of the Merger............................................................... 1-1
1.2 Effects of the Merger...................................................................... 1-1
1.3 Effect on Capital Stock.................................................................... 1-1
(a) Capital Stock of Acquisition Corporation........................................ 1-1
(b) Cancellation of MHN-Owned and Acquisition Corporation-Owned Stock............... 1-2
(c) Exchange of MHN Common and MHN Preferred........................................ 1-2
(d) Treatment of MHN Options........................................................ 1-3
(e) Fractional Shares............................................................... 1-3
1.4 Exchange of Certificates and Options....................................................... 1-3
(a) MHN Common and MHN Preferred Exchange Procedures................................ 1-3
(b) MHN Option Procedures........................................................... 1-4
(c) Escrow Arrangements............................................................. 1-4
(d) FHC to Provide Common Stock..................................................... 1-4
1.5 No Further Ownership Rights in MHN Common.................................................. 1-4
1.6 Board of Directors; Officers............................................................... 1-5
1.7 Dissenters' Rights......................................................................... 1-5
1.8 Adjustments for Capital Changes............................................................ 1-5
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF MHN...................................................... 1-6
2.1 Organization............................................................................... 1-6
2.2 Capital Structure.......................................................................... 1-6
2.3 Equity Investments......................................................................... 1-6
2.4 Authority.................................................................................. 1-7
2.5 No Conflicts............................................................................... 1-7
2.6 Consents................................................................................... 1-7
2.7 Financial Statements....................................................................... 1-8
2.8 Business Changes........................................................................... 1-9
2.9 Properties................................................................................. 1-10
2.10 Accounts Receivable........................................................................ 1-11
2.11 Taxes...................................................................................... 1-11
2.12 Compensation............................................................................... 1-12
2.13 Compliance with Law........................................................................ 1-12
2.14 Litigation................................................................................. 1-12
2.15 Contracts.................................................................................. 1-13
2.16 No Default................................................................................. 1-13
2.17 Business and Customers..................................................................... 1-14
2.18 Proprietary Rights......................................................................... 1-14
2.19 Insurance.................................................................................. 1-14
2.20 Bank Accounts.............................................................................. 1-14
2.21 Brokers or Finders......................................................................... 1-15
2.22 Certain Advances........................................................................... 1-15
2.23 Related Parties............................................................................ 1-15
2.24 Employees and Union Activities............................................................. 1-15
2.25 ERISA...................................................................................... 1-15
2.26 Activities of Providers.................................................................... 1-17
2.27 Fraud and Abuse............................................................................ 1-17
2.28 Underlying Documents....................................................................... 1-17
2.29 Full Disclosure............................................................................ 1-17
2.30 Terminated Transaction..................................................................... 1-18
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF FHC...................................................... 1-18
3.1 Organization............................................................................... 1-18
3.2 Acquisition Corporation Capital Structure.................................................. 1-18
</TABLE>
1-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
3.3 Authority.................................................................................. 1-18
<C> <C> <S> <C> <C>
3.4 Brokers or Finders......................................................................... 1-19
3.5 FHC Capital Structure...................................................................... 1-19
3.6 SEC Documents.............................................................................. 1-19
3.7 Absence of Certain Changes or Events....................................................... 1-20
3.8 Shares of Common Stock..................................................................... 1-20
3.9 Information Supplied....................................................................... 1-20
3.10 Disclosure................................................................................. 1-20
ARTICLE 4 COVENANTS RELATING TO CONDUCT OF BUSINESS.................................................. 1-20
4.1 Ordinary Course............................................................................ 1-20
4.2 Dividends; Changes in Stock................................................................ 1-20
4.3 Issuance of Securities..................................................................... 1-20
4.4 Governing Documents........................................................................ 1-21
4.5 No Other Bids.............................................................................. 1-21
4.6 No Acquisitions............................................................................ 1-21
4.7 No Dispositions............................................................................ 1-21
4.8 Indebtedness............................................................................... 1-21
4.9 Employee Plans, Etc........................................................................ 1-21
4.10 FHPS Representative........................................................................ 1-21
ARTICLE 5 ADDITIONAL AGREEMENTS...................................................................... 1-22
5.1 Access to Information...................................................................... 1-22
5.2 Legal Conditions to the Merger............................................................. 1-22
5.3 Communications............................................................................. 1-22
5.4 Update to Disclosures...................................................................... 1-22
5.5 Good Faith................................................................................. 1-22
5.6 Treatment of Employee Plans................................................................ 1-22
5.7 Release of Letter of Intent................................................................ 1-23
5.8 Form S-4................................................................................... 1-23
5.9 MHN Stockholders' Approval................................................................. 1-23
5.10 Affiliates................................................................................. 1-24
5.11 Pooling Accounting......................................................................... 1-24
5.12 Publication of Post-Merger Results......................................................... 1-24
5.13 Regulatory Approvals....................................................................... 1-24
ARTICLE 6 CONDITIONS PRECEDENT....................................................................... 1-24
6.1 Conditions to Obligations of FHC and MHN To Effect the Merger.............................. 1-24
(a) Stockholder Approval............................................................ 1-24
(b) Government Approvals............................................................ 1-24
(c) Third-Party Approvals........................................................... 1-25
(d) Legal Action.................................................................... 1-25
(e) Statutes........................................................................ 1-25
(f) Tax Opinion..................................................................... 1-25
6.2 Conditions to Obligations of FHC........................................................... 1-25
(a) Representations and Warranties.................................................. 1-25
(b) Performance of Obligations of MHN............................................... 1-25
(c) Opinion of MHN's Counsel........................................................ 1-25
(d) Customer Relationships.......................................................... 1-25
(e) No Material Adverse Change...................................................... 1-26
(f) Related Agreements.............................................................. 1-26
(g) Accounting Issues............................................................... 1-26
6.3 Conditions to Obligations of MHN........................................................... 1-26
(a) Representations and Warranties.................................................. 1-26
(b) Performance of Obligations of FHC............................................... 1-26
(c) Opinion of FHC's Counsel........................................................ 1-26
(d) Related Agreements.............................................................. 1-26
</TABLE>
1-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
ARTICLE 7 CLOSING.................................................................................... 1-26
<C> <C> <S> <C> <C>
7.1 Closing Date............................................................................... 1-26
7.2 Filing Date................................................................................ 1-27
7.3 Best Efforts............................................................................... 1-27
ARTICLE 8 PAYMENT OF EXPENSES........................................................................ 1-27
8.1 Expenses................................................................................... 1-27
ARTICLE 9 TERMINATION, AMENDMENT AND WAIVER.......................................................... 1-27
9.1 Termination................................................................................ 1-27
9.2 Effect of Termination...................................................................... 1-28
9.3 Amendment.................................................................................. 1-28
9.4 Extension; Waiver.......................................................................... 1-28
ARTICLE 10 SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION................................................................ 1-28
10.1 Survival of Representations and Warranties................................................. 1-28
10.2 Indemnification............................................................................ 1-29
10.3 Procedures................................................................................. 1-29
ARTICLE 11 GENERAL.................................................................................... 1-29
11.1 Notices.................................................................................... 1-29
11.2 Headings................................................................................... 1-30
11.3 Counterparts............................................................................... 1-30
11.4 Binding Nature............................................................................. 1-30
11.5 Merger of Documents........................................................................ 1-30
11.6 Incorporation of Schedules................................................................. 1-30
11.7 Applicable Law............................................................................. 1-30
11.8 Parties in Interest........................................................................ 1-30
11.9 Integrated Agreement....................................................................... 1-30
Exhibit A Agreement of Merger
Exhibit B Escrow Agreement
Exhibit C Affiliate Agreement
Schedule 2.1 Organization
Schedule 2.2 Capital Stock
Schedule 2.6 Consents
Schedule 2.7 Financial Statements
Schedule 2.8 Business Changes
Schedule 2.9 Properties
Schedule 2.11 Taxes
Schedule 2.12 Change in Control Payments
Schedule 2.13 Compliance with Law
Schedule 2.14 Litigation
Schedule 2.15 Contracts
Schedule 2.16 Defaults
Schedule 2.17 Business and Customers
Schedule 2.19 Insurance
Schedule 2.21 Brokers
Schedule 2.22 Certain Advances
Schedule 2.23 Related Parties
Schedule 2.25 ERISA
Schedule 2.26 Activities of Providers
Schedule 2.28 Underlying Documents
Schedule 5.6 Treatment of Employee Plans
Schedule 5.10 Affiliates
Schedule 6.2 (d) Customer Relationships
</TABLE>
1-iii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
January 9, 1996 by and between FOUNDATION HEALTH CORPORATION, a Delaware
corporation ("FHC") and MANAGED HEALTH NETWORK, INC., a Delaware corporation
("MHN").
RECITALS
A. Immediately following the satisfaction or waiver of all conditions to
this Agreement, MHN and a wholly-owned subsidiary of FHC to be formed for the
purpose of this transaction as a Delaware corporation (the "Acquisition
Corporation") shall execute a Certificate of Merger (the "Certificate of
Merger") in substantially the form attached hereto as Exhibit A, which provides
for the merger (the "Merger") of Acquisition Corporation into MHN on the date
provided for in Article 7 hereof (the "Closing Date"). Under the Certificate of
Merger, shares of Common Stock, $.005 par value per share, of MHN issued and
outstanding ("MHN Common") and shares of Preferred Stock, $100 par value per
share, of MHN issued and outstanding ("MHN Preferred") will be converted into
the right to receive Common Stock, $.01 par value per share, of FHC and the
Preferred Share Purchase Rights attached thereto (together, the "FHC Common"),
in accordance with Section of this Agreement. Outstanding Options to acquire MHN
Common shall be treated in accordance with Section 1.3(d) hereto.
B. The parties hereto desire to enter into this Agreement for the purpose
of setting forth certain representations, warranties and covenants made by each
to the other as an inducement to the execution and delivery of this Agreement
and the conditions precedent to the consummation of the Merger.
NOW, THEREFORE, in consideration of the premises and of the mutual
provisions, agreements and covenants herein contained, FHC and MHN agree as
follows:
ARTICLE 1
THE MERGER
1.1 EFFECTIVE TIME OF THE MERGER. Subject to the provisions of this
Agreement and the Certificate of Merger, the Certificate of Merger shall be
filed in accordance with the Delaware General Corporation Law (the "Delaware
Law") as soon as practicable on or after the Closing Date (as defined in Article
7 of this Agreement). The Merger shall become effective upon the filing of the
Certificate of Merger with the Delaware Secretary of State (the "Effective
Time").
1.2 EFFECTS OF THE MERGER. At the Effective Time, (a) the separate
existence of Acquisition Corporation shall cease and Acquisition Corporation
shall be merged with and into MHN as the surviving corporation (the "Surviving
Corporation"); (b) the Certificate of Incorporation of the Surviving Corporation
shall be in the form of the Restated Certificate of Incorporation which is an
exhibit to the Certificate of Merger; (c) the Bylaws of the Surviving
Corporation shall be the Bylaws of MHN as amended immediately following the
Effective Time; and (d) the Merger shall, from and after the Effective Time,
have all the effects provided by applicable law.
1.3 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any of the issued and
outstanding shares of MHN Common or MHN Preferred (each, an "MHN Stockholder"):
(a) CAPITAL STOCK OF ACQUISITION CORPORATION. The issued and
outstanding share of capital stock of Acquisition Corporation shall continue
to be issued and shall be converted into one share of Common Stock of the
Surviving Corporation. The stock certificate of Acquisition Corporation
evidencing ownership of any shares shall continue to evidence ownership of
all such shares of capital stock of the Surviving Corporation.
1-1
<PAGE>
(b) CANCELLATION OF MHN-OWNED AND ACQUISITION CORPORATION-OWNED
STOCK. All shares of MHN Common or MHN Preferred, if any, that are owned
directly or indirectly by MHN or by Acquisition Corporation or any of their
respective subsidiaries shall be canceled, and no consideration shall be
delivered in exchange therefor.
(c) EXCHANGE OF MHN COMMON AND MHN PREFERRED. The number of shares of
FHC Common issuable at the Effective Time to holders of MHN Common and MHN
Preferred and into which MHN Options shall be exercisable shall be
determined as follows:
(i) First, the Aggregate Potential Shares shall be determined as an
amount equal to (A) $45,000,000, less Excess Transactional Costs (as
defined below), divided by (B) the Assumed Closing Price. "Excess
Transactional Costs" shall mean all amounts paid or payable by MHN for
legal, accounting and financial services as a proximate result of the
transactions contemplated by the Agreement in excess of $900,000, all as
identified by FHC and MHN no later than two days prior to the Closing
Date. The "Assumed Closing Price" shall be calculated as follows:
(A) In the event that the average of the per share closing prices
of FHC Common during the ten trading days ending on the second
trading day prior to Closing as reported on the New York Stock
Exchange ("NYSE") Composite Transaction Tape (the "Closing Price") is
no less than 92.5% of $42.475, which is the average of the per share
closing prices of FHC Common during the ten trading days ending on
the trading day prior to the date of execution of this Agreement by
MHN and FHC as reported on the NYSE Composite Transactions Tape (the
"Signing Price"), and no more than 107.5% of the Signing Price, then
the Assumed Closing Price shall be the Closing Price.
(B) In the event that the Closing price is greater than 107.5%
but no more than 115% of the Signing Price, then the Assumed Closing
Price shall be 107.5% of the Signing Price.
(C) In the event that the Closing Price is less than 92.5% of the
Signing Price but no less than 85% of the Signing Price, then the
Assumed Closing Price shall be 92.5% of the Signing Price.
(D) In the event that the Closing Price is less than 85% of the
Signing Price, then MHN may in its sole discretion terminate this
Agreement by giving notice of termination to FHC no later than one
day prior to Closing; provided, however, that FHC may cause the
Closing to occur notwithstanding any such notice if it notifies MHN
no later than the day prior to Closing of its intent to cause the
issuance of that number of shares of FHC Common based on an Assumed
Closing Price equal to (1) 92.5% of the Signing Price divided by 85%
of the Signing Price, times (2) the Closing Price.
(E) In the event that the Closing Price is more than 115% of the
Signing Price, then FHC may in its sole discretion terminate this
Agreement.
(ii) Each share and fractional share of MHN Preferred issued and
outstanding immediately prior to the Effective Time shall be converted,
without any action on the part of the holders thereof, into that number
of shares of FHC Common equal to the Preference Amount divided by the
Closing Price. The "Preference Amount" for each share of MHN Preferred is
as determined in accordance with Section 2 of MHN's Fifth Amended and
Restated Certificate of Incorporation as of the Effective Time. The
aggregate number of shares of FHC Common issuable to the holders of MHN
Preferred shall be referred to herein as the "Preferred Holders' Shares."
(iii) Each share and fractional share of MHN Common issued and
outstanding immediately prior to the Effective Time shall be converted,
without any action on the part of the
1-2
<PAGE>
holders thereof, into that number of shares of FHC Common (the "MHN
Common Conversion Amount") equal to (i) the Aggregate Potential Shares
less the Preferred Holders' Shares, divided by (ii) an amount equal to
the aggregate number of shares of MHN Common and that number of shares of
MHN Common underlying all fully vested (taking into account any
accelerated vesting as a result of the Merger), outstanding and
unexercised options to purchase MHN Common ("MHN Options") outstanding as
of the Effective Time. The aggregate number of shares of FHC Common
issuable to the holders of MHN Common shall be referred to herein as the
Common Holders' Shares.
(iv) Notwithstanding the foregoing, Dissenting Shares shall be treated
in accordance with Section 1.7 and fractional shares of FHC Common that
would be issuable to any holder of MHN Preferred or MHN Common or MHN
Options shall be treated in accordance with Section 1.3(e).
(v) The shares of FHC Common to be delivered pursuant to this Section
1.3(c) are hereinafter referred to as the "Closing Shares."
(d) TREATMENT OF MHN OPTIONS. Each MHN Option shall be treated as the
right to receive, in exchange for the payment of the exercise price set
forth in such MHN Option, that number of shares of FHC Common per share of
fully vested MHN Common underlying such MHN Option equal to the MHN Common
Conversion Amount. Notwithstanding the foregoing, FHC agrees to consider
requests received by FHC at least 10 days prior to the Closing from any
holder of MHN Options to receive in full settlement of such holder's MHN
Options that number of shares of FHC Common equal to: (a) the number of
shares of FHC Common otherwise allocable to such MHN Options, less (b) an
amount equal to (i) the aggregate exercise price of such MHN Option, divided
by (ii) the Assumed Closing Price; provided, however, that as a condition of
such settlement of the MHN Options, the holder of the MHN Option tenders to
FHC the cash to satisfy any required tax withholding amounts.
(e) FRACTIONAL SHARES. No fractional shares of FHC Common shall be
issued, but in lieu thereof each holder of shares of MHN Preferred, or MHN
Common or MHN Options who would otherwise be entitled to receive a fraction
of a share of FHC Common (after aggregating all fractional shares of FHC
Common to be received by such holder) shall receive from FHC an amount of
cash (rounded up to the nearest whole cent) equal to the product of (i) the
fraction of a share of FHC Common to which such holder would otherwise be
entitled, times the Closing Price (in the case of MHN Preferred) or Assumed
Closing Price (in the case of MHN Common or MHN Options).
1.4 EXCHANGE OF CERTIFICATES AND OPTIONS.
(a) MHN COMMON AND MHN PREFERRED EXCHANGE PROCEDURES. Within five
business days after the Effective Time, FHC shall mail, or cause to be
mailed by its transfer agent, Chemical Trust Company of California, or such
other person reasonably acceptable to MHN (the "Exchange Agent"), to each
holder of record of a certificate or certificates which immediately prior to
the Effective Time represented outstanding shares of MHN Common or MHN
Preferred (the "Certificates") whose shares are being converted into shares
of FHC Common (or in the case of fractional shares, cash) (the "Merger
Consideration") pursuant to Section 1.3 and the Certificate of Merger,
instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. As a condition to each such MHN
Stockholder's receipt of Merger Consideration, each MHN Stockholder must
sign instructions appointing a representative (the "MHN Stockholders'
Representative") authorizing him to take all actions on behalf of the MHN
Stockholders for purposes of the Escrow Agreement (as defined below). Upon
surrender of a Certificate for cancellation to FHC and the instruction
referred to in the prior sentence, the holder of such Certificate shall be
entitled to receive in exchange therefor (i) a certificate representing that
number of whole shares of FHC Common to which such holder of MHN Preferred
or MHN Common shall have become entitled pursuant to Section 1.3(c), and
(ii) if applicable, a check
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representing the amount of cash in lieu of fractional shares of FHC Common
to which such holder shall have become entitled pursuant to 1.3(e) hereof,
and the Certificate so surrendered shall forthwith be canceled. In the event
of a transfer of ownership of MHN Common or MHN Preferred which is not
registered in the transfer records of MHN, the Merger Consideration may be
delivered to a transferee if the Certificate representing the right to
receive Merger Consideration is presented to FHC and accompanied by all
documents required to evidence and effect such transfer and to evidence that
any applicable stock transfer taxes have been paid. FHC shall follow the
same procedure with respect to lost, stolen or mutilated MHN Certificates as
are followed with respect to lost, stolen or mutilated FHC stock
certificates. Unless and until any such Certificates shall be so
surrendered, or such procedures respecting lost, stolen or mutilated
Certificates are followed, the holders of such Certificates shall not be
entitled to receive any Merger Consideration.
(b) MHN OPTION PROCEDURES. Within five business days after the
Effective Time, FHC shall mail, or cause to be mailed by the Exchange Agent,
to each holder of record of an agreement which immediately prior to the
Effective Time represented an outstanding MHN Option (collectively, the "MHN
Option Agreements") notification of the number of shares of FHC Common with
respect to which such MHN Option is exercisable as a result of the Merger as
described in Section 1.3(d) above. Upon surrender of an MHN Option Agreement
in accordance with its terms for cancellation to FHC (an affidavit of lost
MHN Option Agreement shall be sufficient if the MHN Option is reflected in
Schedule 2.2), and payment of the exercise price specified in such MHN
Option Agreement, the holder of such MHN Option Agreement shall be entitled
to receive in exchange therefor (i) a certificate representing that number
of whole shares of FHC Common to which such holder of MHN Options shall have
become entitled pursuant to Section 1.3 , and (ii) if applicable, a check
representing the amount of cash in lieu of fractional shares of FHC Common.
(c) ESCROW ARRANGEMENTS. On or before the Effective Time, that number
of shares of FHC Common equal to $1,500,000 divided by the Closing Price or
Assumed Closing Price used in computing the Common Stock Exchange Ratio (the
"Escrow Shares") otherwise issuable to the holders of the MHN Preferred and
the MHN Common pursuant to Section 1.3(c) shall be delivered by FHC to an
escrow agent mutually acceptable to FHC and MHN (the "Escrow Agent") for
deposit in accordance with the terms of an Escrow Agreement established by
the parties (the "Escrow Agreement") substantially in the form of Exhibit B
hereto. Such shares deposited with the Escrow Agent (the "Escrow Fund")
shall be applied by the Escrow Agent in accordance with the terms of the
Escrow Agreement to pay to FHC any amounts owing thereto pursuant to Section
10.2. Except as set forth in Section 10.1(c), the liability of any holder of
MHN Preferred or MHN Common for claims of indemnification under Article 10
and the Escrow Agreement shall be limited to the Escrow Fund. Any shares of
FHC Common remaining with the Escrow Agent on the one year anniversary of
the Closing not subject to a reserve for claims previously made against the
Escrow Fund in accordance with the Escrow Agreement shall be transferred by
the Escrow Agent to the MHN Stockholders as provided in the Escrow Agreement
to each holder of MHN Preferred and MHN Common on a pro rata basis in
proportion to the number of shares of FHC Common received by such
stockholder in the Merger.
(d) FHC TO PROVIDE COMMON STOCK. At the Effective Time, FHC through
its transfer agent shall make available the shares to the Exchange Agent for
exchange in accordance with this Article 1.
1.5 NO FURTHER OWNERSHIP RIGHTS IN MHN COMMON, MHN PREFERRED AND MHN
OPTIONS. All Merger Consideration delivered upon the surrender for exchange of
shares of MHN Common and MHN Preferred in accordance with the terms hereof shall
be deemed to have been delivered in full satisfaction of all rights pertaining
to such shares of MHN Common and MHN Preferred. All shares of FHC Common
delivered to holders of MHN Options in accordance with the terms hereof shall be
deemed to have been delivered in full satisfaction of all rights pertaining to
such MHN Options. There
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shall be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of MHN Common, MHN Preferred and MHN Options
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates or rights to MHN Options are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article 1.
1.6 BOARD OF DIRECTORS; OFFICERS. Upon the Effective Time:
(a) The directors of the Surviving Corporation shall be as determined by
FHC immediately following the Effective Time and each shall remain a
director from the Effective Time until such director's successor shall have
been elected and shall qualify, or as otherwise provided in the Bylaws of
the Surviving Corporation.
(b) The officers of the Surviving Corporation shall be as determined by
FHC immediately following the Effective Time and shall each hold office from
the Effective Time until such officer's successor shall have been elected
and shall qualify, or as otherwise provided in the Bylaws of the Surviving
Corporation.
(c) If at the Effective Time a vacancy shall exist in the Board of
Directors or in any of the offices of the Surviving Corporation, such
vacancy may thereafter be filled in the manner provided in the Bylaws of the
Surviving Corporation.
1.7 DISSENTERS' RIGHTS. Any shares of MHN Common or MHN Preferred which
shall be owned by stockholders (each, a "Dissenting Stockholder") who shall duly
perfect and pursue their appraisal rights with respect to such shares
("Dissenting Shares") in accordance with Section 262 of the Delaware General
Corporation Law or, to the extent applicable, Sections 1300 ET SEQ. of the
California Corporations Code shall not be converted into FHC Common but shall be
converted into the right to receive such consideration as may be determined
pursuant to Section 262 of the Delaware General Corporation Law or, to the
extent applicable, Sections 1300 ET SEQ. of the California Corporations Code.
MHN agrees that, except with the prior written consent of FHC, or as required
under applicable law, it will not voluntarily make any payment with respect to,
or settle or offer to settle, any such demand for appraisal. Each Dissenting
Stockholder who, pursuant to the provisions of Section 262 of the Delaware
General Corporation Law or, to the extent applicable, Sections 1300 ET SEQ. of
the California Corporations Code, becomes entitled to payment of the value of
shares of MHN Common or MHN Preferred shall receive payment therefor (but only
after the value therefor shall have been agreed upon or finally determined
pursuant to such provisions). In the event of the legal obligation, after the
Effective Time, to deliver shares of FHC Common to any Dissenting Stockholder
who shall have failed to make an effective demand for appraisal or shall have
lost his status as a Dissenting Stockholder, FHC shall issue and deliver, upon
surrender by such Dissenting Stockholder of his certificate or certificates
representing shares of MHN Preferred or MHN Common, the shares of FHC Common to
which such Dissenting Stockholder is then entitled under this Section 1.3 and
Section 262 of the Delaware General Corporation Law or, to the extent
applicable, Sections 1300 ET SEQ. of the California Corporations Code.
1.8 ADJUSTMENTS FOR CAPITAL CHANGES. If, prior to the Effective Time, FHC
recapitalizes through a subdivision of its outstanding shares into a greater
number of shares, or a combination of its outstanding shares into a lesser
number of shares, or reorganizes, reclassifies or otherwise changes its
outstanding shares into the same or a different number of shares of other
classes, or declares a dividend on its outstanding shares payable in shares of
its capital stock or securities convertible into shares of its capital stock,
then the Common Stock Exchange Ratio will be adjusted appropriately.
1.9 TAX-FREE REORGANIZATION. The parties intend to adopt this Agreement
and the Merger as a tax-free plan of reorganization under Section 368(a)(1)(A)
of the Code by virtue of the provisions of Section 368(a)(2)(E) of the Code. The
parties shall not take a position on any tax return inconsistent with this
Section 1.9.
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ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF MHN
Except as otherwise set forth in written information (the "Disclosure
Schedule") delivered to FHC prior to the date hereof, MHN represents and
warrants to FHC as of the date hereof as follows:
2.1 ORGANIZATION. Each of MHN and its direct or indirect wholly-owned
subsidiaries listed on Schedule 2.1 hereof (each, a "Sub," and collectively, the
"Subs"), is a corporation duly organized, validly existing and in good standing
under the laws of its state of incorporation, and is qualified to do business in
the states listed in Schedule 2.1, and is not required to be qualified in any
other jurisdiction except where the failure to be so qualified will not have an
MHN Material Adverse Effect (as defined below). Each of MHN and the Subs has all
requisite power and authority to own, lease and operate its properties and to
carry on its business as now being conducted and possesses all licenses,
franchises, rights and privileges material to the conduct of its respective
business. For the purpose of this Agreement, all references to materiality to
MHN or any of the Subs shall refer to materiality to MHN and the Subs taken as a
whole.
2.2 CAPITAL STRUCTURE.
(a) The authorized capital stock of MHN consists of 40,000,000 shares of
MHN Common and 248,493 shares of MHN Preferred. As of December 31, 1995: (i)
7,415,847 shares of MHN Common are issued and outstanding; (ii) 2,831,292
shares of MHN Common are reserved for issuance upon exercise of the MHN
Options; and (iii) 217,973.15 shares of MHN Preferred are issued and
outstanding, in the series and amounts described in Schedule 2.2, and which
are convertible into that number of shares of MHN Common set forth in
Schedule 2.2. MHN has provided to FHC a true and complete list of holders of
record of MHN Common, MHN Preferred and MHN Options to purchase same showing
the number of shares and options held by each such shareholder or
optionholder, and in the case of MHN Options, the exercise price and vesting
schedule, in each case as of December 31, 1995. This Schedule shall be
updated as of the Closing Date.
All of the outstanding MHN Common, MHN Preferred and MHN Options were
issued in compliance with applicable federal and state securities laws,
and no further registration, qualification or other compliance under such
securities laws is required in connection with the issuance of the MHN
Common upon exercise of the MHN Options or upon conversion of any MHN
Preferred. All of the outstanding shares of MHN Common are, and any shares
of MHN Common issuable upon exercise of any MHN Option or upon conversion of
any MHN Preferred, when issued pursuant to such exercise or conversion, will
be, duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights created by statute, MHN's Certificate of
Incorporation or Bylaws or any agreement to which MHN is a party or is
bound.
(b) MHN shall provide notice of the Merger to the holders of all MHN
Options. All MHN Options shall have vested at or prior to the Effective
Time. Except as set forth in Section 2.2(a), there are no equity securities
of any class of MHN or any of the Subs, or any security exchangeable into or
exercisable for such equity securities, issued, reserved for issuance or
outstanding. Except as set forth in Section 2.2(a), there are not any
options, warrants, calls, rights, commitments or agreements of any character
to which MHN or any of the Subs is a party or by which it is bound
obligating MHN or any of the Subs to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock of MHN or any
of the Subs or obligating MHN or any of the Subs to grant, extend or enter
into any such option, warrant, call, right, commitment or agreement. Except
as set forth in Schedule 2.2, there are no voting trusts, proxies or other
agreements or understandings with respect to the shares of capital stock of
MHN or any of the Subs.
2.3 EQUITY INVESTMENTS. MHN owns directly or indirectly all of the
outstanding capital stock of the Subs. Except for MHN's direct or indirect
ownership of the Subs, and the ownership by certain of
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the Subs of all of the outstanding capital stock of any of the other Subs, as
described in Schedule 2.1, neither MHN nor any of the Subs owns any equity
interest, directly or indirectly, in any corporation, partnership, joint
venture, firm or other entity.
2.4 AUTHORITY. MHN has all requisite corporate power and authority to
enter into this Agreement and the Escrow Agreement and, subject to satisfaction
of the conditions set forth herein, to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and the Escrow
Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of MHN. This Agreement has been duly executed and delivered by MHN and the
Escrow Agreement will be duly executed and delivered by MHN, and where
applicable, the MHN Representatives acting on behalf of the MHN Stockholders and
the holders of MHN Options, and constitutes or in the case of the Escrow
Agreement when executed will constitute valid and binding obligations of MHN,
enforceable in accordance with their terms, subject to the effect of applicable
bankruptcy, insolvency, reorganization, moratorium or other similar federal or
state laws affecting the rights of creditors and the effect or availability of
rules of law governing specific performance, injunctive relief or other
equitable remedies (regardless of whether any such remedy is considered in a
proceeding at law or in equity). Provided the conditions set forth in Article 6
are satisfied, the execution and delivery of this Agreement and the Escrow
Agreement do not or will not, and the consummation of the transactions
contemplated hereby and thereby will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under (a) any provision of the
Certificate of Incorporation or Bylaws of MHN or any of the Subs or (b) any
agreement or instrument, permit, franchise, license, judgment or order,
applicable to MHN or any of the Subs or their respective properties or assets,
other than any such conflicts, violations, defaults, terminations, cancelations
or accelerations which individually or in the aggregate would not have a
material adverse effect on the financial condition, business, operations,
assets, properties or net worth of MHN and the Subs taken as a whole (an "MHN
Material Adverse Effect"). For purposes of this Agreement, a "Material Adverse
Effect" with respect to any particular entity shall mean a material adverse
effect on the financial condition, business, operations, assets, properties or
net worth of such entity.
2.5 NO CONFLICTS. The execution and delivery of this Agreement and the
Escrow Agreement and the consummation of the transactions contemplated hereby
and thereby (i) will not result in the creation or imposition of any lien,
encumbrance, equity or restriction in favor of any third party upon any of the
assets or properties of MHN or any of the Subs; and (ii) will not to the
knowledge of MHN conflict with or violate any applicable law, rule, regulation,
judgment, order or decree of any court, administrative agency or commission or
other governmental authority or instrumentality (each, a "Governmental Entity")
having jurisdiction over MHN or any of the Subs or any of their assets or
properties other than any conflict or violation which individually or in the
aggregate would not have a Material Adverse Effect upon MHN or any of the Subs
individually or any of their respective assets or properties.
2.6 CONSENTS. Schedule 2.6 sets forth a full and complete list of all
necessary consents, waivers and approvals ("Consents") of third parties
applicable to the operations of MHN and any of the Subs and relating to
agreements or obligations involving more than $100,000 to be paid by any party
thereto within the twelve (12) months following the signing of this Agreement
that are required to be obtained by MHN and any of the Subs in connection with
the execution and delivery of this Agreement, the Certificate of Merger or the
Escrow Agreement by MHN and the performance of MHN's obligations hereunder or
thereunder. Prior to the Closing Date, MHN and the Subs, as applicable, will use
their best efforts to obtain all such Consents.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to MHN or any of the Subs in connection with the execution and delivery
of this Agreement or the consummation by MHN of the transactions contemplated
hereby or thereby, except for (a) the filing of the Certificate of Merger with
the Delaware
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Secretary of State, and appropriate documents with the relevant authorities of
other states in which MHN is qualified to do business, (b) filings required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules promulgated thereunder ("HSR Act"), (c) filings with and approval of
the California Department of Corporations and Arizona Department of Insurance,
and (d) such other consents, approvals, orders, authorizations, registrations,
declarations and filings which if not obtained or made would not have an MHN
Material Adverse Effect.
2.7 FINANCIAL STATEMENTS.
(a) MHN has furnished to FHC its audited consolidated balance sheets as
of December 31, 1993 and 1994, and the related audited consoli-dated
statements of income, stockholders' equity (deficit) and cash flows for the
years then ended and MHN's unaudited consolidated balance sheet, statement
of income, stockholders' equity and cash flows at and for the eight (8)
months ended August 31, 1995. MHN shall furnish FHC with unaudited
consolidated and consolidating balance sheets and income statements at and
for each monthly period beginning with September 1995 as soon as such
financial statements may practicably be prepared. The balance sheet at
August 31, 1995 is hereinafter referred to as the "MHN Balance Sheet," and
all such financial statements described in this Section 2.7(a) are
hereinafter referred to collectively as the "MHN Financial Statements." The
MHN Financial Statements have been and will be complete, true and accurate
in all material respects and prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis during the
periods involved, except as noted in the Notes to the Financial State-ments,
and are and will be in accordance with MHN's books and records, and fairly
present the financial position of MHN and the results of its operations as
of the date and for the periods indicated thereon, subject in the case of
the unaudited portion of the MHN Financial Statements to normal year-end
audit adjustments which will not be material and the absence of footnote
disclosures. At the date of the MHN Balance Sheet (the "MHN Balance Sheet
Date") and as of the Closing Date, MHN and the Subs had and will have no
liabilities or obligations, secured or unsecured (whether accrued, absolute,
contingent or otherwise) not reflected on the MHN Balance Sheet or the
accompanying notes thereto except for (i) liabilities and obligations listed
in the Disclosure Schedule, (ii) liabilities and obligations that exist
solely by reason of the mere existence of the agreements listed in Schedule
2.15 (but only to the extent that the existence of such liabilities and
obligations is ascertainable solely by reference to Schedule 2.15 or such
agreements), and (iii) liabilities incurred in the ordinary course of
business since the MHN Balance Sheet Date which are usual and normal in
amount.
(b) The reserves reflected on the MHN Financial Statements and the
Regulatory Financial Statements (as defined below) for incurred but not yet
reported claims ("IBNR") for, or relating to, medical treatment or similar
claims (i) are computed in accordance with presently accepted industry
standards consistently applied, (ii) meet the material requirements of any
law, rule or regulation applicable to such reserves, and (iii) are computed
on the basis of assumptions materially consistent with those used in
computing the corresponding reserve in the prior fiscal year. Neither MHN,
nor senior management of MHN, is aware of any fact or circumstance which
would necessitate as of the date of the most recent balance sheet included
in the MHN Financial Statements, in the good faith application of prudent
reserving practices and policies, any material adverse change in reserves
for such IBNR claims above that reflected in the most recent balance sheet
included in the MHN Financial Statements.
(c) MHN has made available to FHC all financial statements it or any of
its Subs has filed with any state or federal regulatory agency ("Regulatory
Financial Statements") from January 1, 1993 to the date hereof, and shall
provide promptly to FHPS after filing all Regulatory Financial Statements it
makes prior to the Effective Time. All Regulatory Financial Statements have
been, and will be, prepared in accordance with the applicable statutory
accounting principles, are or will be in material com-pliance with
applicable law, and constitute all state-mandated periodic statutory reports
required to be filed by MHN or any Sub since January 1, 1993.
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2.8 BUSINESS CHANGES. Since the MHN Balance Sheet Date, except as
otherwise contemplated by this Agreement or disclosed in writing to FHC:
(a) There have been no changes in the condition (financial or
otherwise), business, net worth, assets, prospects, properties, employees,
operations, obligations or liabilities of MHN or any of the Subs which, in
the aggregate, have had or may be reasonably expected to have an MHN
Material Adverse Effect.
(b) Neither MHN nor any of the Subs has issued, or authorized for
issuance, or entered into any commitment to issue, any equity security,
bond, note or other security of MHN or any of the Subs, except for shares of
MHN Common issued upon the exercise of outstanding MHN Options or upon
conversion of any MHN Preferred.
(c) Neither MHN nor any of the Subs has incurred additional debt for
borrowed money, nor incurred any obligation or liability except in the
ordinary and usual course of business and in any event not in excess of
$100,000 for any single occurrence.
(d) Neither MHN nor any of the Subs has paid any obligation or
liability, or discharged, settled or satisfied any claim, lien or
encumbrance, except for current liabilities in the ordinary and usual course
of business and in any event not in excess of $100,000 for any single
occurrence.
(e) MHN has not declared or made any dividend, payment or other
distribution on or with respect to any share of capital stock of MHN.
(f) Neither MHN nor any of the Subs has purchased, redeemed or otherwise
acquired or committed itself to acquire, directly or indirectly, any share
or shares of capital stock of MHN or any of the Subs.
(g) Neither MHN nor any of the Subs has mortgaged, pledged, or
otherwise, voluntarily or involuntarily, encumbered any of its assets or
properties, except for liens for current taxes which are not yet delinquent
and purchase-money liens arising out of the purchase or sale of services or
products made in the ordinary and usual course of business and in any event
not in excess of $25,000 for any single item or $100,000 in the aggregate.
(h) Neither MHN nor any of the Subs has disposed of, or agreed to
dispose of, by sale, lease, license or otherwise, any capital stock of MHN
or any Sub or any other asset or property, tangible or intangible, except,
in the case of such other assets and property, in the ordinary and usual
course of business, and in each case for a consideration believed to be at
least equal to the fair value of such asset or property and in any event not
in excess of $25,000 for any single item or $100,000 in the aggregate.
(i) Neither MHN nor any of the Subs has purchased or agreed to purchase
or otherwise acquire any securities of any corporation, partnership, joint
venture, firm or other entity; neither MHN nor any of the Subs has made any
expenditure or commitment for the purchase, acquisition, construction or
improvement of a capital asset, except in the ordinary and usual course of
business and in any event not in excess of $25,000 for any single item or
$100,000 in the aggregate.
(j) Neither MHN nor any of the Subs has entered into any transaction or
contract, or made any commitment to do the same, except in the ordinary and
usual course of business.
(k) Neither MHN nor any of the Subs has sold, assigned, trans-ferred or
conveyed, or committed itself to sell, assign, transfer or convey, any
Proprietary Rights (as defined in Section 2.18).
(l) Neither MHN nor any of the Subs has adopted or amended any bonus,
incentive, profit-sharing, stock option, stock purchase, pension,
retirement, deferred-compensation, severance, life insurance, medical or
other benefit plan, agreement, trust, fund or arrangement for the
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benefit of employees of any kind whatsoever, nor entered into or amended any
agreement relating to employment, services as an independent contractor or
consultant, or severance or termination pay, nor agreed to do any of the
foregoing.
(m) Neither MHN nor any of the Subs has effected or agreed to effect any
change in its directors, officers or key employees.
(n) Neither MHN nor any of the Subs has effected or committed itself to
effect any amendment or modification in its Certificate of Incorporation or
Bylaws, except as contemplated in this Agreement or the Certificate of
Merger.
(o) To the best knowledge of MHN, no statute has been enacted nor has
any rule or regulation been adopted by the State of California nor to the
knowledge of management of MHN and any of the Subs, has any statute been
enacted nor has any rule or regulation been adopted by any other state where
laws apply to the business of MHN or any of the Subs or any federal agency
or authority which may reasonably be expected to have a Material Adverse
Effect on MHN or any of the Subs which has not yet been reflected in the
operating results of MHN and the Subs.
2.9 PROPERTIES.
(a) MHN and the Subs own no real property. The MHN Balance Sheet
reflects all of the real and personal property used by MHN and any of the
Subs in their business or otherwise held by MHN and any of the Subs, except
for (i) property acquired or disposed of in the ordinary and usual course of
the business of MHN and any of the Subs since the MHN Balance Sheet Date,
and (ii) real and personal property not required under GAAP to be reflected
thereon. Except as reflected in the notes to the MHN Balance Sheet, MHN and
the Subs have good and marketable title to all assets and properties listed
on the MHN Balance Sheet and thereafter acquired, free and clear of any
imperfections of title, lien, claim, encumbrance, restriction, charge or
equity of any nature whatsoever, except for the lien of current taxes not
yet delinquent and except for minor imperfections of title which do not
materially impair MHN's or the Sub's use of such property. All of the fixed
assets and properties reflected on the MHN Balance Sheet or thereafter
acquired are in satisfactory condition and repair for the requirements of
the business as presently conducted by MHN and the Subs.
(b) MHN and any of the Subs have provided FHC with a full and complete
list of all real property leased by MHN or any of the Subs or under option
to purchase by MHN or any of the Subs. All such property leased by MHN or
any of the Subs is held under valid, subsisting and enforceable leases. To
the best knowledge of MHN neither real property owned or leased by MHN or
any of the Subs, nor the operations of MHN or any of the Subs thereon,
violate any applicable material building code, zoning requirement or
classification, or pollution control ordinance or statute relating to the
property or to such operations.
(c) To the best knowledge of MHN there are no Hazardous Substances in,
under or about the soil, sediment, surface water or groundwater on, under or
around any properties at any time owned, leased or occupied by MHN or any of
the Subs. Neither MHN nor any of the Subs have disposed of any Hazardous
Substances on or about such property. "Hazardous Substances" shall mean any
substance regulated or prohibited by any law or designated by any
governmental agency to be hazardous, toxic, radioactive, regulated medical
waste or otherwise a danger to health or the environment.
(d) MHN and the Subs have conducted their business materially in
accordance with all applicable material laws, regulations, orders and other
requirements of governmental authorities relating to Hazardous Substances
and the use, storage, treatment, disposal, transport, generation, release
and exposure of others to Hazardous Substances. MHN has not received any
notice of any investigation, claim or proceeding against MHN or any of the
Subs relating to Hazardous Substances and MHN is not aware of any fact or
circumstance which could involve MHN or any of the Subs in any environmental
litigation, proceeding, investigation or claim or impose any
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environmental liability upon MHN or any of the Subs. MHN has not received
any notice of any investigation, claim or proceeding against MHN or any of
the Subs relating to Hazardous Substances and MHN is not aware of any fact
or circumstance which could involve MHN or any of the Subs in any
environmental litigation, proceeding, investigation or claim or impose any
material environmental liability upon MHN or any of the Subs.
2.10 ACCOUNTS RECEIVABLE. All of the accounts receivable of MHN and any of
the Subs shown on the MHN Balance Sheet, or which have arisen thereafter, arose
in the ordinary and usual course of its business. The values at which accounts
receivable are carried reflect the accounts receivable valuation policy of MHN
which is consistent with past practice and in accordance with GAAP applied on a
consistent basis.
2.11 TAXES.
(a) MHN has duly filed with the appropriate United States, state, local
and foreign governmental agencies all tax returns and reports required to be
filed (subject to permitted extensions applicable to such filings and
disclosed on Schedule 2.11), which returns are accurate and complete.
(b) MHN has paid or accrued in full all taxes, duties, charges,
withholding obligations and other governmental liabilities as well as any
interest, penalties, assessments or deficiencies, if any, due to, or claimed
to be due by, any governmental authority. (All such items are collectively
referred to herein as "Taxes".) The MHN Balance Sheet fully accrues or
reserves (and the post-August 31, 1995 balance sheets described in Section
2.7(a) will fully accrue) all unpaid current and deferred Taxes.
(c) MHN is not a party to any pending action or proceeding, nor is any
such action or proceeding threatened by any governmental authority for the
assessment or collection of Taxes.
(d) Schedule 2.11 sets forth, with respect to the five preceding taxable
years, those years for which any examination by any taxing authority has
been completed, and the results of any such examination.
(e) Since January 1, 1995, no liability for Taxes has been incurred
other than in the ordinary course of business.
(f) There are no liens for Taxes except for liens for property taxes not
yet delinquent.
(g) MHN is not a party to any Tax sharing, Tax allocation, Tax indemnity
or statute of limitations extension or waiver agreement and in the preceding
five (5) taxable years has not been included on any consolidated combined or
unitary return with any entity.
(h) There are no outstanding requests for a ruling by any taxing
authority.
(i) All material elections with respect to taxes affecting MHN as of the
date hereof are set forth in Schedule 2.11.
(j) MHN has not filed a consent pursuant to the collapsible corporation
provisions of section 341(f) of the Code (or any corresponding provision of
state, local, or foreign income tax law) or agreed to have section 341(f)(2)
of the Code (or any corresponding provision of state, local, or foreign
income tax law) apply to any disposition of any asset owned by it.
(k) None of the assets of MHN is "tax-exempt use property" within the
meaning of section 168(h) of the Code.
(l) MHN has not agreed to make nor is it required to make any adjustment
under section 481(a) of the Code by reason of a change in accounting method
or otherwise.
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(m) MHN is not and has not been a United States real property holding
corporation (as defined in section 897(c)(2) of the Code) during the
applicable period specified in section 897(c)(1)(A)(ii) of the Code.
(n) To the best knowledge of MHN, none of the MHN Stockholders is a
person other than a United States person within the meaning of the Code.
(o) MHN does not have and has not had a permanent establishment in any
foreign country, as defined in any applicable tax treaty or convention
between the United States and such foreign country.
(p) Schedule 2.11 accurately sets forth, for MHN and each Sub, the
amounts and expiration dates of all existing federal and state net operating
loss carryforwards, capital loss carryforwards and excess credit
carryforwards.
2.12 COMPENSATION. Except as set forth in that certain letter of December
29, 1995 from Franklin Tom of MHN to Gary Velasquez of FHPS, since January 1,
1995, neither MHN nor any of the Subs has paid or committed itself to pay to or
for the benefit of any of its directors, officers, employees or stockholders any
compensation of any kind other than wages, salaries and benefits at times and
rates in effect on January 1, 1995, subject to compensation paid or committed to
officers or employees who commenced employment after January 1, 1995 and subject
to wage increases of less than five percent, nor has it effected or agreed to
effect any amendment or supplement to any employee profit sharing, stock option,
stock purchase, pension, bonus, incentive, retirement, medical reimbursement,
life insurance, deferred compensation or any other employee benefit plan or
arrangement. Neither MHN nor any of the Subs has any bonus plan or obligations
with respect to any bonus plan. MHN has furnished to FHC a full and complete
list by job title of all directors, officers, or employees of MHN and any of the
Subs as of August 31, 1995, specifying each such person's annual compensation
level as of August 31, 1995. MHN has provided in Schedule 2.12 a list as of the
date hereof setting forth all amounts (whether currently payable or payable in
the future) payable as a result of a change in control of MHN or any of the Subs
to which current or former officers, directors or employees of MHN or any Sub
are entitled or would become entitled after the Merger, under the terms of any
benefit or other arrangements.
2.13 COMPLIANCE WITH LAW. All material licenses, franchises, permits,
clearances, consents, certificates and other evidences of authority of MHN and
any of the Subs which are necessary to the conduct of the business of MHN or any
of the Subs as conducted during the two (2) years prior to the Closing Date
("Material Permits") are in full force and effect or, in the case of Material
Permits no longer necessary to the current conduct of the business, were in full
force and effect at the time such Material Permits were necessary and neither
MHN nor any of the Subs is in violation of any such Material Permit in any
material respect. Except for possible exceptions, the curing or non-curing of
which would not have an MHN Material Adverse Effect, the business of MHN and any
of the Subs has been conducted with all applicable laws, regulations, orders and
other requirements of Governmental Entities, including, without limiting the
generality of the foregoing, all laws, regulations and orders relating to the
Knox-Keene Health Care Service Plan Act of 1975, as amended, and employment
practices and procedures affecting the health and safety of employees.
2.14 LITIGATION. Except as set forth in Schedule 2.14, there is no claim,
dispute, action, proceeding, notice, order, suit, appeal or investigation, at
law or in equity, pending against MHN or any of the Subs, or involving any of
their respective assets or properties, before any court, agency, authority,
arbitration panel or other tribunal (other than those, if any, with respect to
which service of process or similar notice has not yet been made on MHN or any
of the Subs), and to the best knowledge of MHN none have been threatened. MHN is
aware of no facts which, if known to stockholders, customers, governmental
authorities or other persons, would result in any such claim, dispute, action,
proceeding, suit or appeal or investigation which would have an MHN Material
Adverse Effect. Neither MHN
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nor any of the Subs is subject to any order, writ, injunction or decree of any
court, agency, authority, arbitration panel or other tribunal which has not been
satisfied in full, nor is it in default with respect to any such notice, order,
writ, injunction or decree.
2.15 CONTRACTS. Schedule 2.15 sets forth a complete list of each executory
contract and agreement in the following categories to which MHN or any of the
Subs is a party, or by which it is bound in any respect: (a) agreements for the
purchase, sale, lease or other disposition of equipment, goods, materials or
capital assets, or for the performance of services, in any case involving more
than $50,000 per year; (b) contracts or agreements for the joint performance of
work or services, and all other joint venture agreements; (c) management or
employment contracts, consulting contracts, collective bargaining contracts,
termination and severance agreements; (d) notes, mortgages, deeds of trust, loan
agreements, security agreements, guarantees, debentures, indentures, credit
agreements and other evidences of indebtedness; (e) pension, retirement,
profit-sharing, deferred compensation, bonus, incentive, life insurance,
hospitalization or other employee benefit plans or arrangements (including,
without limitation, any contracts or agreements with trustees, insurance
companies or others relating to any such employee benefit plan or arrangement);
(f) stock option, stock purchase, warrant, repurchase or other contracts or
agreements relating to any share of capital stock of MHN or any of the Subs; (g)
contracts or agreements with agents, brokers, consignees, sale representatives
or distributors; (h) contracts or agreements with any director, officer,
employee, consultant or stockholder; (i) powers of attorney or similar
authorizations granted by MHN or any of the Subs to third parties; (j) licenses,
sublicenses, royalty agreements and other contracts or agreements to which MHN
or any of the Subs is a party, or otherwise subject, relating to Proprietary
Rights as defined below; and (k) employer contracts for the twenty (20) employer
groups who provided the greatest amount of revenues for MHN and the Subs during
the twelve (12) months ended August 31, 1995.
Neither MHN nor any of the Subs has entered into any contract or agreement
containing covenants limiting the right of MHN or any of the Subs to compete in
any business or with any person. As used in this Agreement, the terms "contract"
and "agreement" include every contract, agreement, commitment, understanding and
promise, whether written or oral.
2.16 NO DEFAULT.
(a) Each of the contracts, agreements or other instruments referred to
in Section 2.15 of this Agreement and each of the standard provider or
employer group agreements of MHN or any of the Subs is a legal, binding and
enforceable obligation by or against MHN or any of the Subs, subject to the
effect of applicable bankruptcy, insolvency, reorganization, moratorium or
other similar federal or state laws affecting the rights of creditors and
the effect or availability of rules of law governing specific performance,
injunctive relief or other equitable remedies (regardless of whether any
such remedy is considered in a proceeding at law or in equity). To the
knowledge of MHN, no party with whom MHN or any of the Subs has an agreement
or contract is in default thereunder or has breached any terms or provisions
thereof which is material to the conduct of the business of MHN or the Subs.
(b) MHN and the Subs in all material respects have performed, or are now
performing, their obligations under, and MHN and any of the Subs are not in
material default (or would by the lapse of time and/or the giving of notice
be in material default) in respect of, any contract, agreement or commitment
binding upon it or its assets or properties and material to the conduct of
its business including without limitation each of the contracts, agreements
or other instruments referred to in Section 2.15. Except for those matters
which, individually or in the aggregate, do not and will not materially
adversely affect the business of MHN and any of the Subs, no third party has
raised any claim, dispute or controversy with respect to any of the
executory contracts of MHN and any of the Subs, nor has MHN or any of the
Subs received notice or warning of alleged nonperformance, delay in delivery
or other noncompliance by MHN or any of the Subs with respect to its
obligations under any of those contracts.
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2.17 BUSINESS AND CUSTOMERS. To the knowledge of MHN, no client paying
annual premiums of more than $100,000 during 1995 has evidenced to MHN its
intention to cancel or fail to renew the services provided by MHN and any of the
Subs.
2.18 PROPRIETARY RIGHTS.
(a) MHN has provided FHC in writing a complete list of all computer
software, software programs, patents and applications for patents,
trademarks, trade names, service marks, and copyrights, and applications
therefor, owned or used by MHN or any of the Subs or in which either has any
rights or licenses, except for software used by MHN and any of the Subs and
generally available on the commercial market. MHN has provided FHC with a
complete and accurate description of all agreements of MHN and any of the
Subs with each officer, employee or consultant of MHN and any of the Subs
providing MHN and any of the Subs with title and ownership to patents,
patent applications, trade secrets and inventions developed or used by MHN
and any of the Subs in its business. All of such agreements so described are
valid, enforceable and legally binding, subject to the effect or
availability of rules of law governing specific performance, injunctive
relief or other equitable remedies (regardless of whether any such remedy is
considered in a proceeding at law or in equity).
(b) To the knowledge of MHN, each of MHN and any of the Subs owns or
possesses licenses or other rights, or can acquire such rights on reasonable
commercial terms, to use all computer software, software programs, patents,
patent applications, trademarks, trademark applications, trade secrets,
service marks, trade names, copyrights, inventions, drawings, designs,
customer lists, proprietary know-how or information, or other rights with
respect thereto (collectively referred to as "Proprietary Rights"), used in
the business of MHN and any of the Subs, and the same are sufficient to
conduct MHN's and any of the Subs' business as it has been and is now being
conducted.
(c) To the best knowledge of MHN the operations of MHN or any of the
Subs do not conflict with or infringe, and no one has asserted to MHN or any
of the Subs that such operations conflict with or infringe, any Proprietary
Rights, owned, possessed or used by any third party. There are no claims,
disputes, actions, proceedings, suits or appeals pending against MHN or any
of the Subs with respect to any Proprietary Rights (other than those, if
any, with respect to which service of process or similar notice may not yet
have been made on MHN or any of the Subs), and to the knowledge of MHN and
the MHN Stockholders none has been threatened against MHN or any of the
Subs. To the best knowledge of MHN, there are no facts or alleged facts
which would reasonably serve as a basis for any claim that MHN or any of the
Subs does not have the right to use, free of any rights or claims of others,
all Proprietary Rights in the development, manufacture, use, sale or other
disposition of any or all products or services presently being used,
furnished or sold in the conduct of the business of MHN and any of the Subs
as it has been and is now being conducted.
(d) To the best knowledge of MHN, no employee of MHN or any of the Subs
is in violation of any term of any employment contract, or any other
contract or agreement relating to the relationship of any such employee with
MHN, any of the Subs or any previous employer.
2.19 INSURANCE. MHN has provided FHC with a complete list of all policies
of insurance to which MHN or any of the Subs is a party or is a beneficiary or
named insured. MHN and the Subs have in full force and effect, with all premiums
due thereon paid, the policies of insurance set forth therein. There were no
claims in excess of $5,000 asserted under any of the insurance policies of MHN
and the Subs in respect of all motor vehicle, general liability, professional
liability, directors and officers, errors and omissions, and worker's
compensation, and medical claims for the period from January 1, 1994 to the date
of this Agreement.
2.20 BANK ACCOUNTS. MHN has separately delivered to FHC a true and correct
list (which will be amended as of the Closing as required) of the names and
addresses of all banks, other institutions
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and state governmental departments at which MHN or any of the Subs have
accounts, deposits or safety deposit boxes, or special deposits required to be
held by such state governmental departments with the nature of such account, the
amount on account, and the names of all persons authorized to draw on or give
instructions with respect to such accounts or deposits, or to have access
thereto, and the names and addresses of all persons, if any, holding a
power-of-attorney on behalf of MHN or any of the Subs.
2.21 BROKERS OR FINDERS.
(a) Except as described in Schedule 2.21, MHN has not paid or become
obligated to pay any brokerage or finders' fees or agents' commissions or
any similar charges in connection with this Agreement or any transaction
contemplated hereby.
(b) There is no investment banker, broker, finder or other intermediary
which has been retained by or is authorized to act on behalf of MHN or any
MHN Stockholder who might be entitled to any fee or commission from FHC or
any of their respective affiliates upon consummation of the transactions
contemplated by this Agreement.
2.22 CERTAIN ADVANCES. Except for intercompany receivables, there are no
receivables of MHN or any of the Subs owing from directors, officers, employees,
consultants or shareholders of MHN or any of the Subs, or owing by any affiliate
of any director or officer of MHN or any of the Subs.
2.23 RELATED PARTIES. Except as previously disclosed in writing to FHC, to
the best knowledge of MHN no officer or director of MHN or MHN Stockholder or
any of the Subs, or any affiliate of any such person, has, either directly or
indirectly, (a) an interest in any corporation, partnership, firm or other
person or entity which furnishes or sells services or products which are similar
to those furnished or sold by MHN or any of the Subs, or (b) a beneficial
interest in any contract or agreement to which MHN or any of the Subs is a party
or by which MHN or any of the Subs may be bound. For purposes of this Section
2.23, there shall be disregarded any interest which arose solely from the
ownership of less than a five percent (5%) equity interest in a corporation.
2.24 EMPLOYEES AND UNION ACTIVITIES. MHN and the Subs have complied with
all applicable state and federal laws related to employment, except where the
failure to comply would have no Material Adverse Effect on MHN and any of the
Subs. None of the employees of MHN or any of the Subs are repre-sented by any
union or are parties to any collective bargaining arrangement, and, to the best
knowledge of MHN management, no attempts are being made to organize or unionize
any of the employees of MHN and any of the Subs.
2.25 ERISA.
(a) MHN has identified to FHC each "employee benefit plan," as defined
in section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), (including any employment agreements entered into between
MHN and any of the Subs and any employee of MHN or any of the Subs, but
excluding worker's compensation, unemployment compensation and other
government-mandated programs) currently or previously maintained,
contributed to or entered into by MHN or any of the Subs or any ERISA
Affiliate thereof for the benefit of any employee or former employee of MHN
or any of the Subs under which MHN or any of the Subs or any ERISA Affiliate
thereof has any present or future obligation or liability (collectively, the
"Employee Plans"). For purposes of this Section 2.25 "ERISA Affiliate" shall
mean any entity which is a member of (i) a "controlled group of
corporations," as defined in section 414(b) of the Internal Revenue Code of
1986, as amended (the "Code"), (ii) a group of entities under "common
control," as defined in section 414(c) of the Code or (iii) an "affiliated
service group," as defined in section 414(m) of the Code or treasury
regulations promulgated under section 414(o) of the Code, any of which
includes MHN or any of the Subs. Copies of all Employee Plans (and, if
applicable, related trust agreements), and all amendments thereto and
summary plan descriptions (including any summary of material modifications)
with respect thereto have been made available to FHC, together with (A) the
most recent annual report (Form 5500), including if applicable,
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Schedule B thereto prepared in connection with any such Employee Plan, (B)
the most recent actuarial valuation prepared in connection with any such
Employee Plan, and (C) with respect to any Employee Plan providing
post-retirement medical or other welfare benefits, an estimate of the
present value of the liability accrued under such Employee Plans determined
in accordance with FASB 106. MHN has identified to FHC which of its Employee
Plans, individually or collectively, constitute an "employee pension benefit
plan," as defined in section 3(2) of ERISA (collectively, the "Pension
Plans").
(b) No Pension Plan is subject to Title IV of ERISA, Part 3 of Title I
of ERISA or section 412 of the Code. No Pension Plan constitutes or has
since the enactment of ERISA constituted a "multiemployer plan," as defined
in section 3(37) of ERISA. No "prohibited transaction," as defined in
section 406 of ERISA or section 4975 of the Code, excluding transactions
effected pursuant to a statutory or administrative exemption, has occurred
with respect to any Employee Plan which is covered by Title I of ERISA which
would make MHN or any of the Subs or any officer or director thereof subject
to any liability under Title I of ERISA or liable for any tax pursuant to
section 4975 of the Code in excess of $20,000 in the aggregate.
(c) A favorable determination letter has been received from the Internal
Revenue Service as to the qualification under section 401(a) of the Code of
each Pension Plan that is intended to so qualify, and nothing has occurred
since such determination to adversely affect such determination. MHN has
made available to FHC copies of the most recent Internal Revenue Service
determination letters with respect to each such Pension Plan. Each Pension
Plan has been maintained substantially in compliance with its terms and with
the applicable requirements of ERISA and the Code.
(d) MHN has furnished to FHC copies or descriptions of each employment,
severance or other similar contract, arrangement or policy (including any
employment agreements entered into between MHN and any of the Subs and any
employee of MHN or any of the Subs, but excluding worker's compensation,
unemployment compensation and other government-mandated pro-grams) and each
plan, agreement, policy or arrangement (written or oral) providing for
insurance coverage (including any self-insured arrangements), vacation
benefits, severance benefits, disability benefits, early retirement
benefits, death benefits, hospitalization benefits, retirement benefits,
deferred compensation, profit-sharing, bonuses, stock options, stock
purchase, phantom stock, stock appreciation or post-retirement benefits (i)
which is not an Employee Plan, (ii) which is entered into, maintained or
contributed to, as the case may be, by MHN or any of the Subs and (iii)
which covers any employee or former employee of MHN or any of the Subs and
(iv) under which MHN or any of the Subs has any present or future obligation
or liability. Such contracts, plans and arrangements as are described in
this Section 2.25(d) are herein referred to collectively as the "Benefit
Arrangements." Each Benefit Arrangement has been maintained in substantial
compliance with its terms and with the requirements prescribed by any and
all statutes, orders, rules and regulations which are applicable to such
Benefit Arrangements.
(e) There has been no amendment to, written interpretation or
announcement (whether or not written) by MHN or any of the Subs relating to,
or change in employee participation or coverage under, any Employee Plan or
Benefit Arrangement which would increase materially the expense of
maintaining such Employee Plan or Benefit Arrangement above the level of the
expense incurred in respect thereof for the year ended December 31, 1994.
(f) MHN has materially complied with the requirements of section 4980B
of the Code with respect to any "qualifying event" (as defined in section
4980B(f)(3) of the Code) occurring prior to and including the Closing Date,
and to the actual knowledge of MHN, no tax payable on account of section
4980B of the Code has been incurred with respect to any current or former
employee of MHN or any of the Subs.
(g) Neither MHN nor any of the Subs is a party to any contract,
instrument, agreement or arrangement with a "disqualified individual" (as
defined in section 280G(c) of the Code) that
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could result in a disallowance of the deduction for any "excess parachute
payment" (as defined in section 280G(b)(i) of the Code) or subject any such
disqualified individual to the excise tax imposed under section 4999 of the
Code.
(h) Each Employee Plan or Benefit Arrangement complies in all material
respects with all applicable requirements of (i) the Age Discrimination in
Employment Act of 1967, as amended, and the regulations thereunder, (ii)
Title VII of the Civil Rights Act of 1964, as amended, and the regulations
thereunder, and (iii) any other applicable law.
(i) There is no pending or threatened litigation relating to any
Employee Plan or Benefit Arrangement.
2.26 ACTIVITIES OF PROVIDERS. Those two certain Binders dated June 27,
1995 entitled "National Provider Network, Volumes I and II" previously delivered
to FHC, list all psychiatrists, psychologists, social workers and other clinical
providers and health care professionals, hospitals and clinics, providing
services to MHN and its Subs (each, "Provider," and collectively the
"Providers") as of such date. To the best of MHN's knowledge, all Providers are
in material compliance with MHN's credentialing and professional liability
insurance requirements subject to any waivers thereof approved by MHN in the
ordinary course of business and listed in Schedule 2.26. MHN has no knowledge of
any individual Provider or Provider network or organization with which MHN
contracts which serves individually or in the aggregate more than 250 employees
which has expressed to MHN management an intent (whether or not legally binding)
to terminate its respective contracts with MHN.
2.27 FRAUD AND ABUSE. Neither MHN nor the Subs, and to the best of MHN's
knowledge, their respective officers and directors, have engaged in any
activities which are prohibited under U.S.C. Section 1320a-7b, or the
regulations promulgated thereunder pursuant to such statutes, or related state
or local statutes or regulations, or which are prohibited by rules of
professional conduct, including but not limited to the following: (a) knowingly
and willfully making or causing to be made a false statement or representation
of a material fact in any application for any benefit or payment; (b) knowingly
and willfully making or causing to be made any false statement or representation
of a material fact for use in determining rights to any benefit or payment; (c)
failure to disclose knowledge by a claimant of the occurrence of any event
affecting the initial or continued right to any benefit or payment on its own
behalf or on behalf of another, with intent to fraudulently secure such benefit
or payment; and (d) knowingly and willfully soliciting or receiving any
remuneration (including any kickback, bribe, or rebate), directly or indirectly,
overtly or covertly, in cash or in kind or offering to pay or receive such
remuneration (i) in return for referring an individual to a person for the
furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part by Medicare or Medicaid, or (ii) in
return for purchasing, leasing, or ordering or arranging for or recommending
purchasing, leasing, or ordering any good, facilities, service, or item for
which payment may be made in whole or in part by Medicare or Medicaid.
2.28 UNDERLYING DOCUMENTS. Copies of any underlying documents listed or
described as having been disclosed to FHC pursuant to this Agreement, if
requested by FHC, have been furnished to FHC. All such documents furnished to
FHC are true and correct copies, and there are no amendments or modifi-cations
thereto, that have not been disclosed to FHC. The minute books of MHN and the
Subs contain complete and accurate records of all meetings and other corporate
actions taken by the directors and shareholders of MHN and the Subs, and the
minute books, books of account, stock record books and other records of MHN and
the Subs are complete and correct in all material respects and have been
maintained in accordance with sound business practices, including the
maintenance of an adequate system of controls. At the Closing, all such books
and records will be in the possession of MHN and the Subs.
2.29 FULL DISCLOSURE. Any information furnished by or on behalf of MHN to
FHC in writing pursuant to or in connection with this Agreement and any
information contained in the Schedules referred to in this Agreement, at any
time prior to the Effective Time, does not and will not contain
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any untrue statement of a material fact and does not and will not omit to state
any material fact necessary to make any statement, in light of the circumstances
under which such statement is made, not misleading.
2.30 TERMINATED TRANSACTION. The release dated December 1, 1995 relating
to a letter of intent, dated May 17, 1995, between MHN and First Hospital
Corporation, a copy of which has been provided to FHC, is in full force and
effect.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF FHC
Except as set forth in written information (the "FHC Disclosure Schedule")
delivered to MHN prior to the date hereof, FHC represents and warrants to MHN as
of the date hereof as follows:
3.1 ORGANIZATION. FHC is, and as of Closing, Acquisition Corporation will
be, a corporation duly incorporated, validly existing and in good standing under
the laws of its state of incorporation. FHC is, and as of Closing, Acquisition
Corporation will be, duly qualified to do business and is in good standing in
its state of incorporation and in each of the other jurisdictions in which it
owns or leases property or conducts business, except where the failure to be so
qualified would not have a an FHC Material Adverse Effect (as defined below).
FHC has, and as of Closing, Acquisition Corporation will have, all requisite
power and authority to own, lease and operate its properties and to carry on its
business as now being conducted, and possesses all licenses, franchises, rights
and privileges material to the conduct of its respective business. For purposes
of this Agreement, all references to materiality to FHC and Acquisition
Corporation shall be deemed to refer to materiality to FHC and its subsidiaries,
including Acquisition Corporation, taken as a whole.
3.2 ACQUISITION CORPORATION CAPITAL STRUCTURE. The authorized and
outstanding capital stock of Acquisition Corporation will be owned by FHC as of
Closing. Acquisition Corporation will be formed for the purpose of the
transactions contemplated by this Agreement and will have no other business as
of Closing.
3.3 AUTHORITY. FHC has all requisite corporate power and authority to
enter into this Agreement, the Exchange Agent Agreement and the Escrow Agreement
and the related agreements contemplated herein, and, subject to satisfaction of
the conditions set forth herein, to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and the
Exchange Agent Agreement and the Escrow Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of FHC. This Agreement has been duly
executed and delivered by FHC and the Exchange Agent Agreement and the Escrow
Agreement will be duly executed and delivered by FHC and each such agreement
constitutes valid and binding obligations of FHC enforceable in accordance with
their terms, subject to the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or other similar federal or state laws affecting the
rights of creditors and the effect or availability of rules of law governing
specific performance, injunctive relief or other equitable remedies (regardless
of whether any such remedy is considered in a proceeding at law or in equity).
Provided the conditions set forth in Article 6 are satisfied, the execution and
delivery of this Agreement, the Exchange Agent Agreement, and the Escrow
Agreement do not, and the consummation of the transactions contemplated hereby
and thereby will not, conflict with, or result in any violation of or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any obligation or to loss
of a material benefit under (a) any provision of the Certificate of
Incorporation or Bylaws of FHC or Acquisition Corporation, or (b) any material
agreement or instrument, permit, license, judgment, order, statute, law,
ordinance, rule or regulation applicable to FHC and Acquisition Corporation or
their respective properties or assets, other than any such conflicts,
violations, defaults, terminations, cancelations or accelerations which
individually or in the aggregate would not have an FHC Material Adverse Effect.
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No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to FHC in connection with the execution and delivery of this Agreement,
the Exchange Agent Agreement or the Escrow Agreement by FHC or the consummation
by FHC of the transactions contemplated hereby or thereby, except for (a) the
filing of the Certificate of Merger with the Delaware Secretary of State, (b)
filings required under the HSR Act, (c) the approval of the California
Department of Corporations and the Arizona Department of Insurance, and (d) such
other consents, authorizations, filings, approvals and registrations which if
not obtained or made would not have an FHC Material Adverse Effect.
3.4 BROKERS OR FINDERS. FHC has neither paid nor become obligated to pay
any brokerage or finders' fees or agents commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
3.5 FHC CAPITAL STRUCTURE.
(a) The authorized capital stock of FHC consists of 100,000,000 shares
of FHC Common, and 1,000,000 shares of Preferred Stock, $1.00 par value
("FHC Preferred Stock"). At the close of business on November 30, 1995: (i)
57,416,580 shares of FHC Common were issued and outstanding; (ii) 6,077,410
shares of FHC Common were reserved for issuance upon exercise of options
(the "FHC Options") under FHC's option plans, of which options to purchase
3,720,874 shares were outstanding; (iii) 1,375,687 shares of FHC Common were
reserved but were unissued under FHC's Employee Stock Purchase Plan and
Profit-Sharing and 401(k) Plan; and (iv) 30,000 shares of FHC Series A
Preferred Stock were reserved for issuance pursuant to that certain Rights
Agreement (the "FHC Rights Agreement") dated as of October 10, 1991 between
FHC and Chemical Trust Company of California as rights agent. No shares of
FHC Preferred Stock are outstanding.
(b) All of the outstanding shares of FHC Common are, and any shares of
FHC Common issuable upon exercise of any FHC Option, when issued pursuant to
such exercise, will be duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, FHC's
Certificate of Incorporation or Bylaws or any agreement to which FHC is a
party or by which it is bound.
3.6 SEC DOCUMENTS. FHC has made available to MHN a true and complete copy
of FHC's Form 10-K for the year ended June 30, 1995 and Form 10-Q for the three
months ended September 30, 1995 and any other statement, report, registration
statement or definitive proxy statement filed by FHC with the Securities and
Exchange Commission ("SEC") since June 30, 1995 to the Effective Time (the "SEC
Documents"). As of their respective filing dates, FHC has made all necessary SEC
filings, the SEC Documents comply or will comply in all material respects with
the requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or the Securities Act of 1933, as amended (the "Securities Act")
and the rules and regulations (including accounting rules) of the SEC, and as of
the date of such filing, none of the SEC Documents as amended or supplemented
contain or will contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. Without limiting the foregoing, each of the consolidated
balance sheets included in or incorporated by reference into the SEC Documents
fairly presented the consolidated financial position of FHC and its subsidiaries
as of its date and each of the consolidated statements of income, stockholders'
equity and cash flows included in or incorporated by reference into the SEC
Documents fairly presented the results of operations, stockholders' equity and
cash flows of FHC and its subsidiaries for the period set forth therein
(subject, in the case of unaudited statements, to normal year-end audit
adjustments which would not be material and the absence of certain footnote
disclosures), in each case in accordance with GAAP consistently applied during
the periods involved.
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3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since September 30, 1995 (the
"Balance Sheet Date"), there has been no change, or any event involving a
prospective change, in the business, assets, financial condition or results of
operations of FHC which has had, or is reasonably likely to have a FHC Material
Adverse Effect.
3.8 SHARES OF COMMON STOCK. The shares of FHC Common will, when issued and
delivered to the MHN Stockholders and holders of MHN Options in accordance with
this Agreement, be duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive rights created by statute, FHC's Certificate of
Incorporation, Bylaws or any agreement to which FHC is a party or by which it is
bound and will be issued with the rights pursuant to the FHC Rights Agreement.
3.9 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by FHC for inclusion or incorporation by reference in the Form S-4 and
Prospectus/Proxy Statement will, at the time the Form S-4 is declared effective,
at the date the Prospectus/Proxy Statement is mailed to the stockholders of MHN
or at the time of the MHN Stockholders' Meeting, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading. The Prospectus/Proxy Statement will comply
as to form in all material respects with the provisions of the Exchange Act and
the rules and regulations promulgated by the SEC thereunder.
3.10 DISCLOSURE. Any information furnished by or on behalf of FHC to MHN
in writing pursuant to or in connection with this Agreement and any information
contained in the Schedules referred to in this Agreement, at any time prior to
the Effective Time, does not and will not contain any untrue statement of a
material fact and does not and will not omit to state any material fact
necessary to make any statement, in light of the circumstances under which such
statement is made, not misleading.
ARTICLE 4
COVENANTS RELATING TO CONDUCT OF BUSINESS
During the period from the date of this Agreement and continuing until the
Effective Time, MHN agrees on behalf of MHN and the Subs (except as otherwise
set forth in written information delivered to FHC prior to the date hereof or as
expressly contemplated by this Agreement or to the extent that FHC shall
otherwise consent in writing, which consent shall not be unreasonably withheld)
that:
4.1 ORDINARY COURSE. Each of MHN and the Subs shall carry on its
businesses in the usual, regular and ordinary course, including the payment of
all state and federal taxes, in substantially the same manner as heretofore
conducted and, to the extent consistent with such business, use all commercially
reasonable efforts consistent with past practice and policies to preserve intact
its present business organization, will use its best efforts to keep available
the services of its present officers and key employees and preserve its
relationship with present and potential customers, providers and others having
business dealings with it to the end that its goodwill and ongoing businesses
shall be unimpaired at the Effective Time.
4.2 DIVIDENDS; CHANGES IN STOCK. Neither MHN nor any of the Subs shall, or
shall propose to, (a) declare or pay any dividends on or make other
distributions in respect of any of its capital stock, (b) split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of
capital stock of MHN or any of the Subs, or (c) repurchase or otherwise acquire
any shares of its capital stock or rights to acquire any shares of its capital
stock.
4.3 ISSUANCE OF SECURITIES. Neither MHN nor any of the Subs shall issue,
deliver or sell or authorize or propose the issuance, delivery or sale of, or
purchase or propose the purchase of, any shares of its capital stock of any
class or securities convertible into, or rights, warrants or options to acquire,
any such shares or other convertible securities, other than the issuance of MHN
options to employees in accordance with MHN's past practice, or the issuance of
MHN Common upon the
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exercise of the MHN Options or the conversion of the MHN Preferred, in
accordance with their present terms. In addition, neither MHN nor its Board of
Directors shall take any action to change the exercise price, vesting schedule
or any other term of presently outstanding MHN Options or any of the rights,
privileges and restrictions of the MHN Preferred.
4.4 GOVERNING DOCUMENTS. Neither MHN nor any of the Subs shall amend its
respective Certificate or Articles of Incorporation or Bylaws.
4.5 NO OTHER BIDS. Neither MHN nor any of the Subs nor any of their
respective directors, officers or agents, will, directly or indirectly, solicit
or initiate or encourage any discussions or negotiations with, or participate in
any negotiations with or provide any information to or otherwise cooperate in
any other way with any corporation, partnership, person or other entity or group
(other than FHC or its affiliates) concerning any merger, sale of substantial
assets, sale of shares of capital stock or any division of MHN or any of the
Subs or control thereof. MHN shall promptly notify FHC in writing of any of the
events referred to in this Section 4.5 including a summary of the material terms
of any other bid.
4.6 NO ACQUISITIONS. Neither MHN nor any of the Subs shall (a) acquire or
agree to acquire by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof or (b) otherwise acquire or agree to acquire any assets which
are material, individually or in the aggregate, to MHN and any of the Subs,
except in the ordinary course of business consistent with prior practice.
4.7 NO DISPOSITIONS. Neither MHN nor any of the Subs shall lease or
otherwise dispose of any of its assets, individually or in the aggregate, to MHN
and any of the Subs except in the ordinary course of business consistent with
prior practice and in any event not in excess of $25,000 in the aggregate.
4.8 INDEBTEDNESS. Neither MHN nor the Subs shall incur any indebtedness
for borrowed money or guarantee any indebtedness or issue or sell any debt
securities of MHN or any of the Subs or guarantee any obligations of others.
4.9 EMPLOYEE PLANS, ETC. Neither MHN nor any of the Subs shall adopt or
amend in any material respect any collective bargaining agreement or any other
agreement with employees, including the Employee Plans and Benefit Arrangements,
other than as provided in this Agreement. FHC acknowledges and agrees that MHN
may make a discretionary contribution for 1995 to its 401(k) plan, in accordance
with MHN's past practices for making such contributions, provided that such
contribution shall not be in excess of $70,000.
4.10 FHPS REPRESENTATIVE. MHN shall provide a representative (the
"Representative") employed by FHC or Foundation Health PsychCare Services, Inc.
("FHPS") with an office and customary office equipment at the principal
executive offices of MHN. MHN shall cause Ronald W. Moreland and Alethea
Caldwell to meet regularly with the Representative to discuss, in advance,
pending decisions relating to the business and operations of MHN and the Subs
and to discuss operation of the business in accordance with FHPS's interim
operating and integration plan for MHN, a copy of which previously has been
provided to MHN by FHC, but in no event less than once per week. Mr. Moreland
and Ms. Caldwell shall include in such meetings those members of MHN's
management staff which they deem reasonably necessary or appropriate given the
subject matters to be discussed thereat, and shall give good faith consideration
to suggestions and comments put forth by the Representative; PROVIDED, HOWEVER,
that the Representative shall have no decision-making authority, all of which
shall reside with MHN. The Representative shall conduct himself or herself in
such a manner so as to minimize any disruption to MHN's operations while still
performing his or her function and shall not disclose any confidential
information regarding MHN learned while at MHN's offices other than to the
directors, employees or professional advisors of FHC or FHPS who have the need
to know such information for purposes of the transactions contemplated by this
Agreement.
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ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 ACCESS TO INFORMATION. MHN shall afford to FHC and FHPS and shall
cause its independent accountants to afford to FHC and FHPS, and their
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to MHN and the
Subs' properties, books, contracts, commitments and records and to the
independent accountants reasonable access to the audit work papers and other
records of MHN's accountants. During such period, MHN shall use reasonable
efforts to furnish promptly to FHC and FHPS all information concerning the
business, properties and personnel of MHN and any of the Subs as FHPS may
reasonably request. Neither FHC nor FHPS will use such information for purposes
other than this Agreement and will otherwise hold such information in confidence
(and FHPS will cause its consultants and advisors also to hold such information
in confidence). FHC understands and agrees that MHN's obligations pursuant to
this Section 5.1 are subject to MHN's confidentiality obligations regarding
patient records.
5.2 LEGAL CONDITIONS TO THE MERGER. Each party will take all reasonable
actions necessary to comply promptly with all legal requirements which may be
imposed on such party with respect to the Merger and will promptly cooperate
with and furnish information to the other party in connection with any such
requirements imposed upon such other party in connection with the Merger. Each
party will take all reasonable actions to obtain (and to cooperate with the
other party in obtaining) any consent, authorization, order or approval of, or
any exemption by, any governmental authority, or other third party, required to
be obtained or made by such party in connection with the Merger or the taking of
any action contemplated thereby or by this Agreement.
5.3 COMMUNICATIONS. Between the date hereof and the Effective Time,
neither MHN nor FHC will furnish any communication to their respective
stockholders or to the public generally, if the subject matter thereof relates
to the other party or to the transactions contemplated by this Agreement or the
Certificate of Merger without the prior approval of the other party as to the
content thereof, which approval shall not be unreasonably withheld, and subject
to each party's compliance with applicable law.
5.4 UPDATE TO DISCLOSURES. Without limiting FHC's right to rely on the
representations and warranties as of the date of this Agreement, MHN shall
provide FHC with updates to the disclosures provided or made available to FHC as
to material facts which arise between the date of this Agreement and the Closing
Date and which, if they had occurred and been known prior to the date of this
Agreement, would have been required to have been disclosed in order to make the
representations and warranties contained in Article 2 to be true and correct as
of the date of this Agreement.
5.5 GOOD FAITH. Each party shall act in good faith in an attempt to cause
to be satisfied all the conditions precedent to its obligations and those of the
other parties to this Agreement over which it has control or influence. Each
party will act in good faith and take all reasonable action within its
capability necessary to render accurate as of the Effective Time its
representations and warranties contained in this Agreement. MHN further agrees
to cooperate in good faith with FHC and FHPS before the Closing to develop a
plan for the integration of MHN and the Subs with FHPS and its affiliates
following the Merger.
5.6 TREATMENT OF EMPLOYEE PLANS. FHC and MHN agree that the Employee Plans
and Benefit Arrangements in effect at the date of this Agreement shall, to the
extent practicable, remain in effect from and after the Effective Time, until
otherwise determined by FHC after the Effective Time and, to the extent such
Employee Plans and Benefit Arrangements are not continued, it is the current
intent of the parties that employee plans and benefit arrangements which are
comparable in the aggregate to the current plans and arrangements will be
provided to the employees covered by such Employee Plans and Benefit
Arrangements who are the employees of the Surviving Corporation and its
subsidiaries. FHC acknowledges that MHN's current policy is to pay employees
(other than senior managers)
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one-half of their accrued and unused sick leave at the end of each year.
Notwithstanding the foregoing, FHC agrees that it shall assume and continue,
without modification, MHN's pay-to-stay program for aggregate payments of no
more than $320,000 and its six month severance program for senior management
described in Schedule 5.6 (including in each case the identity of potential
recipients and amounts payable to each, as in effect as of the date hereof),
provided that any payment thereunder shall be subject to the receipt of an
appropriate release by the employee receiving a payment of MHN and its directors
and officers.
5.7 RELEASE OF LETTER OF INTENT. Each of FHC and FHPS and MHN hereby
release, waive and forever discharge one another of and from any and all manner
of claims, causes of action, liabilities, obligations, costs or expenses of any
kind or nature whatsoever, known or unknown, fixed or contingent, foreseen or
unforeseen, suspected or unsuspected, whether presently accrued or to accrue
hereafter, which any one or more of them may have jointly or severally, arising
out of or by reason of or relating to the several draft letters of intent
circulated between and among such parties dated between July 18, 1995 and August
22, 1995. All such parties hereby waive any and all rights under California
Civil Code Section 1542 (as well as under any successor statute or common law
principles relating to release of unknown or unanticipated claims), which
section reads follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
5.8 FORM S-4.
(a) As promptly as practicable after the date hereof, FHC, with the
cooperation of MHN, shall prepare and file a registration statement on Form
S-4 with the SEC providing a prospectus in connection with the issuance of
FHC Common pursuant to the Merger (the "Form S-4"). FHC shall use its best
efforts to have the Form S-4 declared effective under the Securities Act as
promptly as practicable after such filing. FHC shall also take any action
required to be taken under any applicable state securities or blue sky laws
and for listing of the FHC Common on the NYSE in connection with the
issuance of the FHC Common in the Merger.
(b) MHN shall use its best efforts to furnish to FHC all information
concerning MHN and the MHN Stockholders as may be reasonably requested in
connection with the Form S-4. None of the information supplied or to be
supplied by FHC for inclusion in the Form S-4, and the prospectus included
therein, at each of the times of the effective date of the Form S-4, and the
Effective Time contains or will contain any untrue statement of a material
fact or omits or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, not
misleading.
5.9 MHN STOCKHOLDERS' APPROVAL. MHN shall take all action necessary in
accordance with Delaware Law and its Certificate of Incorporation and Bylaws to
convene a meeting of its Stockholders (the "MHN Stockholders' Meeting") to
consider and vote upon the Merger or conduct a solicitation of consents adopting
and approving the Merger as soon as practicable after the Form S-4 is declared
effective, and MHN shall consult with FHC in connection therewith. MHN shall use
its reasonable efforts to solicit from the MHN Stockholders, proxies or consents
in favor of the Merger and shall take all other actions necessary or advisable
to secure the vote or consent of stockholders required by the Delaware General
Corporation Law, and to the extent applicable, the California Corporations Code,
to approve this Agreement. In connection with MHN Stockholders' Meeting, FHC
shall provide to MHN for dissemination to holders of MHN Preferred and MHN
Common the prospectus included as part of the Form S-4. The Board of Directors
of MHN will unanimously recommend to the MHN Stockholders that such stockholders
approve the transactions contemplated by this Agreement.
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5.10 AFFILIATES. Schedule 5.10 sets forth a list of names and addresses of
those persons who are, in MHN's reasonable judgment, Affiliates of MHN within
the meaning of Rule 145 of the rules and regulations promulgated by the SEC
under the Securities Act ("Rule 145"). As of the date hereof, MHN has delivered
from each of the Affiliates of MHN identified in Schedule 5.10 agreements
(collectively, the "Affiliate Agreements") in a form attached to this Agreement
as Exhibit C. FHC shall be entitled to issue appropriate stop transfer
instructions to the transfer agent for FHC Common, consistent with the terms of
such Affiliate Agreements.
5.11 POOLING ACCOUNTING. None of the parties shall take, and each party
shall use its best efforts to cause its affiliates not to take, any action that
would prevent FHC from accounting for the business combination to be effected by
the Merger as a pooling of interests.
5.12 PUBLICATION OF POST-MERGER RESULTS. As soon as practicable following
the Effective Time, and in any event not more than 30 days after the end of the
next calendar month commencing after the Closing Date, FHC shall make
publication sufficient to satisfy SEC rules governing pooling of interests
accounting in such form of publication which complies with SEC rules covering at
least 30 days of post-Merger combined operations of FHC and MHN.
5.13 REGULATORY APPROVALS. FHC and MHN shall use all reasonable efforts to
file as soon as practicable after the date of this Agreement all notices,
reports and other documents required by law to be filed with any governmental
authority with respect to the Merger and to submit promptly any additional
information requested by any such governmental authority. In furtherance of the
foregoing, FHC and MHN (i) shall promptly prepare and file the notifications
required under the HSR Act in connection with the Merger, shall request early
termination of the applicable waiting period under the HSR Act and shall use
their best efforts to cause the expiration of the waiting period under the HSR
Act as promptly as possible and (ii) shall promptly prepare and file all
required filings in connection with the Merger with the California Department of
Corporations (the "DOC") requesting DOC approval of the change of control of MHN
(the "DOC Filing") and the Arizona Department of Insurance and shall use their
best efforts to have such filings approved as promptly as possible.
5.14 FORM S-8. FHC shall file a Registration Statement on Form S-8 within
fifteen (15) calendar days of the Effective Time, which registration statement
shall cover the FHC Common issuable upon the exercise of the MHN Options that
can be registered on a Form S-8, and FHC will use its best efforts to cause such
shares of FHC Common to be registered under the Securities Act and to maintain
such registration in effect until the exercise or termination of all such MHN
Options.
ARTICLE 6
CONDITIONS PRECEDENT
6.1 CONDITIONS TO OBLIGATIONS OF FHC AND MHN TO EFFECT THE MERGER. The
obligations of FHC and MHN to effect the Merger shall be subject to the
satisfaction on or prior to the Closing Date of the following conditions unless
waived in whole or in part by both of FHC and MHN:
(a) STOCKHOLDER APPROVAL. This Agreement and the Certificate of Merger
shall have been approved and adopted by (i) the required affirmative vote of
the holders of the outstanding shares of MHN Common, and, if outstanding,
any other voting securities of MHN required to vote on the Merger, and (ii)
the affirmative vote of the holders of at least a majority in interest of
shares of MHN Common who are not otherwise holders of MHN Preferred.
(b) GOVERNMENT APPROVALS. All authorizations, consents, orders or
approvals of, or declarations or filings with, or expiration of waiting
periods imposed by, any Governmental Entity necessary for the consummation
of the transactions contemplated by this Agreement including, but not
limited to, approval of the California Department of Corporations with
respect to the DOC Filing (the DOC Filing being understood by the parties
hereto to be the only filing under the Knox-Keene Health Care Service Plan
Act which shall be a condition precedent hereunder), and
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the Arizona Department of Insurance, other than filings with and approvals
by any Governmental Entity relating to the Merger if failure to make such
filings or obtain such approvals would not be materially adverse to FHC,
FHPS or MHN.
(c) THIRD-PARTY APPROVALS. Any and all consents or approvals required
from third parties relating to contracts, agreements, licenses, leases and
other instruments, material to the respective businesses of FHC, FHPS and
MHN shall have been obtained.
(d) LEGAL ACTION. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the
consummation of the Merger shall have been issued by any federal or state
court and remain in effect, and no litigation seeking the issuance of such
an order or injunction, shall be pending which, in the good faith judgment
of FHC or MHN has a reasonable probability of resulting in such order,
injunction or damages. In the event any such order or injunction shall have
been issued, each party agrees to use its reasonable efforts to have any
such injunction lifted.
(e) STATUTES. No statute, rule or regulation shall have been enacted
by the government of the United States or any state or agency thereof which
would (i) make the consummation of the Merger illegal, (ii) prohibit FHC or
Surviving Corporation's ownership or operation of all or a material portion
of the business or assets of MHN and any of the Subs, or compel FHC or MHN
to dispose of or hold separate all or a material portion of the business or
assets of MHN or any of the Subs, as a result of the Merger, or (iii) render
FHC or MHN unable to consummate the Merger, except for any waiting period
provisions.
(f) TAX OPINION. Each of FHC and MHN shall have received an opinion,
in form and substance satisfactory to them from their respective counsel, to
the effect that the Merger should be treated for Federal income tax purposes
as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of
the Code by virtue of the provisions of Section 368(a)(2)(E) of the Code. In
preparing the FHC and MHN tax opinions, counsel may rely upon, and to the
extent reasonably required, the parties shall make representations related
thereto.
6.2 CONDITIONS TO OBLIGATIONS OF FHC. The obligations of FHC and FHPS to
effect the Merger are subject to the satisfaction on or prior to the Closing
Date of the following conditions, unless waived by FHC:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of MHN set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as if made at and as of the
Closing Date, except as otherwise contemplated by this Agreement, and FHC
shall have received a certificate signed by the chief executive officer and
chief financial officer of MHN to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF MHN. MHN shall have performed in all
material respects all obligations required to be performed by it under this
Agreement and the Certificate of Merger prior to the Closing Date, and FHC
shall have received a certificate signed by the chief executive officer and
chief financial officer of MHN to such effect.
(c) OPINION OF MHN'S COUNSEL. FHC shall have received an opinion dated
the Closing Date of Cooley Godward Castro Huddleston & Tatum, special
counsel to MHN, in form and substance reasonably satisfactory to FHC and its
counsel.
(d) CUSTOMER RELATIONSHIPS. Except as set forth in Schedule 6.2(d),
FHC shall have no reasonable basis for believing that any customers of MHN
or any of the Subs that individually accounts for at least five percent (5%)
or that in the aggregate account for at least ten percent (10%) of MHN's
estimated 1995 consolidated total revenues will not continue to contract
with MHN after the Closing.
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(e) NO MATERIAL ADVERSE CHANGE. Since the date of this Agreement there
shall have been no changes in the condition (financial or otherwise),
business, prospects, employees, operations, obligations or liabilities of
MHN or any of the Subs which, in the aggregate, have had or may be
reasonably expected to have an MHN Material Adverse Effect.
(f) RELATED AGREEMENTS. MHN shall have signed the Certificate of
Merger and MHN and the MHN Representative shall have signed the Escrow
Agreement.
(g) ACCOUNTING ISSUES. FHC shall have received an opinion of Deloitte
& Touche, independent certified public accountants, satisfactory to FHC
concerning accounting for the transaction including that the Merger
satisfies all the requirements for treatment as a pooling transaction under
the accounting rules. The Affiliate Agreements shall be in full force and
effect.
(h) All of the directors and officers of MHN shall have provided their
written resignations, effective as of Closing.
(i) The number of Dissenting Shares at Closing shall not exceed 6.5% of
the MHN Common and MHN Preferred (on an as-converted basis), taken as a
whole, outstanding as of the date of the MHN Stockholders' Meeting;
provided, however, that this condition shall not apply if at the MHN
Stockholders' Meeting, this Agreement and the Certificate of Merger shall
have been approved and adopted by the affirmative vote of (A) at least 90%
of the holders in interest of MHN Common and (B) 92% of the holders of the
MHN Common and MHC Preferred (on an as-converted basis), taken as a whole,
in each case outstanding as of the date of the MHN Stockholders' Meeting.
6.3 CONDITIONS TO OBLIGATIONS OF MHN. The obligations of MHN to effect the
Merger are subject to the satisfaction on or prior to the Closing Date of the
following additional conditions unless waived by MHN:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of FHC set forth in this Agreement and the Certificate of Merger shall be
true and correct in all material respects as of the date of this Agreement
and as if made at and as of the Closing Date, except as otherwise
contemplated by this Agreement, and MHN shall have received a certificate
signed by the chief executive officer and chief financial officer of FHC to
such effect.
(b) PERFORMANCE OF OBLIGATIONS OF FHC. FHC shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to the Closing Date, and MHN shall have received a
certificate signed by the chief executive officer or a senior vice president
and the chief financial officer of FHC to such effect.
(c) OPINION OF FHC'S COUNSEL. MHN shall have received an opinion dated
the Closing Date of Pillsbury Madison & Sutro LLP, outside counsel to FHC,
in form and substance reasonably satisfactory to MHN and its counsel.
(d) RELATED AGREEMENTS. FHC shall have signed the Escrow Agreement and
Exchange Agent Agreement.
ARTICLE 7
CLOSING
7.1 CLOSING DATE. The Closing under this Agreement (the "Closing") shall
be held not more than two (2) business days following the satisfaction of all
other conditions precedent to the Merger specified in this Agreement, unless
duly waived by the party entitled to satisfaction thereof. In any event, if the
Closing has not occurred on or before March 31, 1996, this Agreement may be
terminated as provided in Section 9.1(c), unless the failure to effect the
Closing is due to the lack of the stockholder approval described in Section
6.2(i)(A) and (B) (but in no event shall the Closing occur later than the date
set forth in Section .1(c)). Such date on which the Closing is to be held is
herein referred
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<PAGE>
to as the "Closing Date." The Closing shall be held at the offices of Pillsbury
Madison & Sutro LLP, 235 Montgomery Street, San Francisco, California, at 10:00
A.M. on such date, or at such other time and place as FHC and MHN may agree upon
in writing.
7.2 FILING DATE. Subject to the provisions of this Agreement and the
Certificate of Merger, on the Closing Date a fully executed and acknowledged
copy of the Certificate of Merger, along with required related certificates of
MHN and FHPS meeting the requirements of the Delaware General Corporation Law,
shall be filed with the Delaware Secretary of State, all in accordance with the
provisions of the Certificate of Merger (the "Filing Date").
7.3 BEST EFFORTS. All the parties hereto shall use their respective best
efforts to cause the Closing Date and Filing Date to be no later than March 31,
1996.
ARTICLE 8
PAYMENT OF EXPENSES
8.1 EXPENSES.
(a) Except as provided in Section 1.3 and 8.1(b), FHC, MHN and the MHN
Stockholders shall each pay its own fees and expenses incurred incident to
the preparation and carrying out of the transactions herein contemplated
(including legal, accounting and travel). Each party shall promptly advance
on request or reimburse such party's portion of these fees.
(b) Subject to the provisions of Section 10.2, the MHN Stockholders
shall be solely responsible and liable for any Excess Transactional Costs
not reflected as a deduction to the Purchase Price pursuant to Section 1.3.
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
9.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time:
(a) by mutual written consent of MHN and FHC;
(b) by either FHC or MHN if there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement
on the part of any party set forth in this Agreement and, if such breach is
curable, such breach has not been promptly cured after written notice of
such breach;
(c) by either FHC or MHN if the Merger shall not have been consummated
before March 31, 1996 unless any such failure to consummate the Merger by
such date is due to the failure to obtain the MHN Stockholders' vote
described in Section 6.2(i)(A) and (B), but in no event later than April 30,
1996;
(d) by either FHC or MHN if (i) there shall be a final nonappealable
order of a federal or state court in effect preventing consummation of the
Merger or (ii) there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any governmental authority which would make consummation of
the Merger illegal;
(e) by FHC if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any governmental authority, which would (i) prohibit FHC's or
MHN's ownership or operation of all or a material portion of the business or
assets of MHN or any of the Subs or FHC, or compel FHC or MHN or any of the
Subs to dispose of or hold separate all or a material portion of the
business or assets of MHN, any of the Subs or FHC, as a result of the Merger
or (ii) render FHC or MHN unable to consummate the Merger;
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<PAGE>
(f) by FHC if any condition to FHC's obligations to complete the Merger
has not been satisfied or waived by FHC;
(g) by MHN if any condition to MHN's obligation to complete the Merger
has not been satisfied or waived by MHN; and
(h) by MHN or FHC, as applicable, pursuant to Section 1.3(c)(i)(D) or
(E).
9.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either MHN or FHC as provided in Section 9.1, this Agreement and the
Certificate of Merger shall forthwith become void and there shall be no
liability or obligation on the part of the parties hereto or their respective
officers or directors except as set forth in Section 5.1 and Article 8; and to
the extent that such termination results from the willful breach by a party
hereto of any of its covenants or agreements set forth in this Agreement;
provided, however, that:
(a) in the event of the termination of this Agreement other than
pursuant to Section 9.1(a) or under circumstances involving actual fraud on
the part of MHN or its representatives or the MHN Stockholders or by reason
of MHN failing to satisfy a condition precedent to Closing, set forth in
Section 6.1(a) or in Sections 6.2(a), (b), (c), (d), (e), (f), (h) or (i),
FHC shall pay to MHN a termination fee of $500,000 within five business days
after such termination; provided further, that if within twelve months after
such termination MHN consummates a transaction or series of related
transactions with any party other than FHC and its affiliates which involves
the sale, lease or other transfer, by merger or otherwise, of all or
substantially all of the assets or stock of MHN or the Subs, then MHN shall
immediately repay the termination fee to FHC;
(b) in the event of the termination of this Agreement by MHN pursuant to
Section 1.3(c)(i)(D), where FHC does not proceed with the Merger in
accordance with the terms of such provision, MHN shall pay to FHC a
termination fee of $500,000 within five business days after such
termination.
9.3 AMENDMENT. This Agreement may not be amended exce pt by an instrument
in writing signed on behalf of each of the parties hereto.
9.4 EXTENSION; WAIVER. At any time prior to the Effective Time, FHC or
MHN, by such corporate action as shall be appropriate, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties made to FHC or MHN or the MHN
Stockholders contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions for the benefit
thereof contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE 10
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
(a) Except as set forth below, all representations and warranties of MHN
in this Agreement or in any instrument delivered pursuant to this Agreement
(each as modified by the Disclosure Schedules) shall terminate at the
Effective Time.
(b) The covenants, agreements, representations and warranties of MHN as
to the matters set forth in Sections 2.2, 2.21 and 8.1(b) shall survive
until the one-year anniversary of the Closing Date.
(c) Except as provided in Section 10.2, no stockholder or optionholder
of MHN or FHC shall have any liability hereunder except for his or her own
personal, actual fraud.
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<PAGE>
10.2 INDEMNIFICATION. Subject to the provisions of this Article 10, the
MHN Stockholders will, in accordance with the terms of the Escrow Agreement,
indemnify FHC and MHN after the Closing against and agree to hold each of them
harmless from any and all damage, loss, liability and expense (including without
limitation reasonable expenses of investigation and reasonable attorneys' fees
and reasonable expenses in connection with any action, suit or proceeding)
("Damages") incurred or suffered by FHC or MHN arising out of any
misrepresentation or breach of warranty, covenant or agreement referred to in
Section 10.1(b) ("Indemnifiable Damages"). The shares of FHC Common Stock held
in the Escrow Fund shall be available for purposes of satisfying claims for
which FHC and MHN entitled to indemnification under this Article 10 and the
liability of the MHN Stockholders for claims by FHC and MHN for indemnification
under this Article 10 shall be limited to the Escrow Fund. Subject to Section
10.1(c), FHC agrees that the sole and exclusive remedy of FHC against the MHN
Stockholders for any damage, loss, liability and expense under this Agreement or
in connection with the transactions contemplated hereunder shall be limited to
the Escrow Fund.
10.3 PROCEDURES. The party seeking indemnification under Section 10.2 (the
"Indemnified Party") agrees to give prompt notice to the party against whom
indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or
the commencement of any suit, action or proceeding in respect of which indemnity
may be sought under such Section. The Indemnifying Party may, participate in and
control the defense of any such suit, action or proceeding at its own expense.
The Indemnifying Party shall not be liable under Section 10.2 for any settlement
effected without its consent of any claim, litigation or proceeding in respect
of which indemnity may be sought hereunder.
ARTICLE 11
GENERAL
11.1 NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party to the other shall be in writing and delivered
personally or sent by certified mail, postage prepaid by telecopy, or by courier
service, as follows:
Foundation Health Corporation
3400 Data Drive
Rancho Cordova, CA 95670
Attention: Mr. Kirk A. Benson
Senior Vice President, Corporate Development
Fax: (916) 631-5335
and
Foundation Health PsychCare Services, Inc.
1600 Los Gamos Drive, Suite 300
San Rafael, CA 94903
Attention: Mr. Gary Velasquez
President
Fax: (415) 491-7491
with a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Attention: Linda C. Williams, Esq.
Fax: (415) 983-1200
and
Pillsbury Madison & Sutro LLP
725 S. Figueroa Street
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<PAGE>
Suite 1200
Los Angeles, CA 90017-5443
Attention: Blase P. Dillingham, Esq.
Fax: (213) 629-1033
and to:
Managed Health Network, Inc.
5100 West Goldleaf Circle
Suite 300
Los Angeles, CA 90056
Attn: Ronald W. Moreland
Chairman and Chief Executive Officer
with a copy to:
Cooley Godward Castro Huddleston & Tatum
4365 Executive Drive
Suite 120
San Diego, California 92121
Attention: Frederick T. Muto, Esq.
or to such other persons as may be designated in writing by the parties, by a
notice given as aforesaid.
11.2 HEADINGS. The headings of the several sections of this Agreement are
inserted for convenience of reference only and are not intended to affect the
meaning or interpretation of this Agreement.
11.3 COUNTERPARTS. This Agreement may be executed in counterparts, and
when so executed each counterpart shall be deemed to be an original, and said
counterparts together shall constitute one and the same instrument.
11.4 BINDING NATURE. This Agreement shall be binding upon and inure to the
benefit of the parties hereto. No party may assign or transfer any rights under
this Agreement.
11.5 MERGER OF DOCUMENTS. This Agreement and all agreements and documents
contemplated hereby constitute one agreement and are interdependent upon each
other in all respects.
11.6 INCORPORATION OF SCHEDULES. All Exhibits and Schedules attached
hereto are by this reference incorporated herein and made a part hereof for all
purposes as if fully set forth herein.
11.7 APPLICABLE LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of California as applied to
contracts entered into solely between residents of, and to be performed entirely
in, such state.
11.8 PARTIES IN INTEREST. Except for the provisions of Section 1.4, 5.6
and 5.12 and matters in Sections 8.1(b) and Article 10 relating to limitations
on stockholders' and optionholders' liability, this Agreement shall be binding
upon and inure solely to the benefit of each party hereto and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
11.9 INTEGRATED AGREEMENT. This Agreement, along with the Certificate of
Merger, and the exhibits, schedules and other instruments referenced herein,
constitutes the entire understanding and agreement among the parties hereto with
respect to the subject matter hereof, and there are no agreements, covenants,
understandings, restrictions, representations or warranties among the parties
other than those set forth herein or therein or herein or therein provided for,
any and all prior agreements and understandings being superseded hereby.
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<PAGE>
IN WITNESS WHEREOF, FHC and MHN have caused this Agreement to be signed by
their respective officers thereunto duly authorized, all as of the date first
above written.
FOUNDATION HEALTH CORPORATION
By /s/ DANIEL D. CROWLEY
--------------------------------------
Title Chairman of the Board
- --------------------------------------------------------------------------------
MANAGED HEALTH NETWORK, INC.
By /s/ RONALD W. MORELAND
--------------------------------------
Title Chairman of the Board and
- --------------------------------------------------------------------------------
Chief Executive Officer
- --------------------------------------------------------------------------------
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<PAGE>
EXHIBIT A
CERTIFICATE OF MERGER
OF
[FH ACQUISITION CORPORATION]
INTO
MANAGED HEALTH NETWORK, INC.
Managed Health Network, Inc. hereby certifies that:
FIRST: The name and state of incorporation of each of the constituent
corporations of the merger is as follows:
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
- ------------------------------------------------------------ --------------------
<S> <C>
FH Acquisition Corporation.................................. Delaware
Managed Health Network, Inc................................. Delaware
</TABLE>
SECOND: An Agreement and Plan of Reorganization, dated as of January 9,
1996, between the constituent corporations has been approved, adopted,
certified, executed and acknowledged by each of the constituent corporations in
accordance with the requirements of Section 251 of the General Corporation Law
of the State of Delaware.
THIRD: The name of the surviving corporation of the merger is Managed
Health Network, Inc.
FOURTH: The Restated and Amended Certificate of Incorporation of the
surviving corporation shall be as set forth in Exhibit A attached hereto.
FIFTH: The executed Agreement and Plan of Reorganization is on file at the
principal place of business of the surviving corporation, the address of which
is 5100 West Goldleaf Circle, Suite 300, Los Angeles, California 90056.
SIXTH: A copy of the Agreement and Plan of Reorganization will be furnished
by the surviving corporation, on request and without charge, to any stockholder
of either of the constituent corporations.
SEVENTH: The merger shall be effective at on , 1996.
IN WITNESS WHEREOF, Managed Health Network, Inc. has caused this certificate
to be executed by its officers thereunto duly authorized this day of
, 1996.
MANAGED HEALTH NETWORK, INC.
By
--------------------------------------
PRESIDENT
Attest:
- --------------------------------------
SECRETARY
A-1
<PAGE>
EXHIBIT A
RESTATED AND AMENDED
CERTIFICATE OF INCORPORATION
OF
MANAGED HEALTH NETWORK, INC.
FIRST: The name of the corporation is:
Managed Health Network, Inc.
SECOND: The address of its registered office in the State of Delaware is
The Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the corporation shall
have authority to issue is Ten Thousand (10,000) shares of common stock, One
Cent ($.01) par value per share.
FIFTH: The Board of Directors is authorized to adopt, amend or repeal the
By-Laws of the corporation. Election of directors need not be by ballot.
SIXTH: No director of the corporation shall be liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit.
If the Delaware General Corporation Law hereafter is amended to permit the
further elimination or limitation of the liability of directors, then the
liability of a director of the corporation, in addition to the limitation on
personal liability provided herein, shall be limited to the fullest extent
permitted by the amended Delaware General Corporation Law. Any repeal or
modification of this paragraph by the stockholders of the corporation shall be
prospective only, and shall not adversely affect any limitation on the personal
liability of a director of the corporation existing at the time of such repeal
or modification.
SEVENTH: The corporation may, to the fullest extent permitted by the
Delaware General Corporation Law, as the same may be amended and supplemented
from time to time, indemnify any and all persons whom it shall have the power to
indemnify under said Law from and against all expenses, liabilities or other
matters referred to in or covered by said Law, as so amended. Such
indemnification may be provided through By-Law provisions, agreements with
persons to be indemnified, vote of shareholders or disinterested directors or
otherwise, and shall continue as to a person who has ceased to be a director,
officer, employee or agent of the corporation in respect of all actions taken by
such person while holding such office. Such indemnification shall inure to the
benefit of the heirs, executors and administrators of such person.
If the Delaware General Corporation Law, or any successor statute having
similar import or effect, is hereafter amended to permit the corporation to
provide broader indemnification rights than such statute permitted the
corporation to provide prior to such amendment, the indemnification rights
conferred by this Article Seventh shall be broadened to the fullest extent
permitted by such Law, as so amended.
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<PAGE>
Any amendment or repeal of this Article Seventh shall be prospective only,
and shall not adversely affect any right of any person to indemnification
hereunder existing at the time such amendment or repeal becomes effective.
MANAGED HEALTH NETWORK, INC.
By
--------------------------------------
PRESIDENT
Attest:
- --------------------------------------
SECRETARY
A-3
<PAGE>
EXHIBIT B
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement"), made as of , 1996, by
and among FOUNDATION HEALTH CORPORATION, a Delaware corporation ("FHC"), MANAGED
HEALTH NETWORK, INC., a Delaware corporation ("MHN"), , as
Representative of the stockholders of MHN (the "Representative") and ,
(the "Escrow Agent"),
W I T N E S S E T H:
WHEREAS, FHC and MHN have entered into an Agreement and Plan of
Reorganization dated as of January 9, 1996 (the "Reorganization Agreement"), a
copy of which has been delivered to the Escrow Agent and to the holders of the
capital stock of MHN named on SCHEDULE A hereto (collectively, the
"Stockholders") (all capitalized terms not otherwise defined in this Agreement
having the meanings set forth in the Reorganization Agreement); and
WHEREAS, Section 1.4(c) of the Reorganization Agreement provides that FHC
will deliver the Escrow Shares to the Escrow Agent to be held in the Escrow Fund
(each as defined in Section 1.4(c) of the Reorganization Agreement) for the
purpose of securing the Stockholders' obligation to reimburse FHC for the
Indemnifiable Damages enumerated in Article 10 of the Reorganization Agreement;
and
WHEREAS, the Escrow Agent is willing to act as escrow agent for FHC and the
Stockholders on the terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the mutual covenants, agreements and
conditions set forth herein, the parties agree as follows:
1. ESTABLISHMENT OF ESCROW; ESCROW SHARE CERTIFICATES. Promptly after the
Effective Time and in accordance with the exchange procedures set forth in the
Reorganization Agreement and the Exchange Agent Agreement dated as of the date
hereof between FHC and Chemical Bank, as Exchange Agent, FHC will issue the
Escrow Shares in the name of the Representative on behalf of the Stockholders
and cause them to be delivered (together with assignments in blank to be
executed by the Representative, with each assignment to include a signature
guarantee containing an affixed medallion certifying the authenticity of the
signature) to the Escrow Agent. The Escrow Shares shall be held by the Escrow
Agent in escrow subject to the terms and conditions set forth herein. FHC will
cooperate with the Escrow Agent, including making any written instructions
required by its stock transfer agent, to permit the Escrow Agent to make any
necessary exchanges of FHC stock certificates so as to facilitate any
distribution of Escrow Shares pursuant to this Agreement.
The Representative shall deliver to FHC for delivery to FHC's stock transfer
agent at the Closing a letter, substantially in the form of EXHIBIT A hereto,
instructing the transfer agent to distribute all distributions in respect of the
Escrow Shares, other than taxable dividends, to the Escrow Agent pursuant to
Section 3 of this Agreement.
2. CLAIMS AGAINST ESCROW FUND. Pursuant to Section 10.2 of the
Reorganization Agreement, FHC is entitled to make claims against the Escrow Fund
for Indemnifiable Damages, and the Representative is entitled to make claims
against the Escrow Fund for his actual out-of-pocket expenses incurred in any
defense against FHC's claims against the Escrow Fund and any reasonable out-of-
pocket expenses incurred by the Representative in fulfilling his responsibili-
ties as Representative under this Agreement, in an aggregate amount not to
exceed $100,000 (the "Representative's Expenses"). Unless this Agreement is
terminated at an earlier date, FHC or the Representative shall be entitled to
make claims against the Escrow Fund for such purpose at any time prior to the
first
B-1
<PAGE>
anniversary of the date of this Agreement (the "Escrow Period"). Any claim by
FHC against the Escrow Fund for Indemnifiable Damages or by the Representative
for Representative's Expenses during the above time period shall be presented to
the Escrow Agent as follows:
(a) FHC shall notify the Escrow Agent and the Representative in writing
of any Indemnifiable Damages which FHC claims are subject to indemnification
under Section 10.2 of the Reorganization Agreement. The notice shall
describe the claim and specify the amount thereof.
(b) The Representative may contest FHC's claim on behalf of the
Stockholders by giving the Escrow Agent and FHC written notice of such
contest within twenty (20) business days after receipt of such claim for
indemnification. If FHC's indemnification claim remains in dispute and
unresolved for thirty (30) days following FHC's receipt of the written
notice of contest, the disputed claim shall be submitted to arbitration in
accordance with Section 7 below.
(c) If the Representative on behalf of the Stockholders does not contest
FHC's indemnification claim pursuant to Section 2(b) above, then the Escrow
Agent shall deliver to FHC an amount from the Escrow Fund equal to the
dollar amount of the Indemnifiable Damages claimed by FHC in its written
notice. For this purpose, Escrow Shares so delivered shall be valued as of
the date of delivery to FHC at the higher of (i) $ [the Closing Price
or the Assumed Closing Price] or (ii) the average closing price of FHC
Common Stock for the ten (10) trading days ending one (1) trading day before
such date (the "Indemnity Price").
(d) If the Representative on behalf of the Stockholders contests FHC's
indemnification claim pursuant to Section 2(b) above, the Escrow Agent shall
deliver an amount from the Escrow Fund to FHC upon receipt of either:
(i) a copy of a written settlement agreement signed by both FHC and
the Representative, or
(ii) a copy of a final and nonappealable arbitration award pursuant
to the arbitration procedure in Section 7 below.
The amount to be delivered to FHC by the Escrow Agent under this Section
2(d) shall be equal to the dollar amount of FHC's Indemnifiable Damages, as
set forth in the settlement agreement or the arbitration award, as
applicable, and shall be calculated and delivered in the manner set forth in
Section 2(c).
(e) If the Representative contests FHC's indemnification claim pursuant
to Section 2(d), at any time prior to the end of the Escrow Period,
Representative may tender a signed affidavit tendering for reimbursement or
payment his Representative's Expenses, together with receipts for payment or
invoices for payment, and the Escrow Agent shall make such payment on behalf
of the Representative or reimburse the Representative from the Escrow Fund,
up to an aggregate of $100,000.
(f) All references to the Indemnity Price in this Agreement shall be
subject to adjustment for any stock split, reverse stock split or similar
event with respect to the FHC Common Stock which may occur after the
Effective Time.
3. DIVIDENDS, STOCK SPLITS AND OTHER DISTRIBUTIONS. Other than taxable
dividends (which shall be distributed to the Representative for distribution to
the Stockholders and shall not be made part of the Escrow Fund), distributions
declared in respect of the Escrow Shares (including without limitation stock
splits and non-taxable stock dividends) during the term of this Agreement shall
be made part of the Escrow Fund. If the Escrow Shares are reclassified or
changed into other securities or property pursuant to a reclassification of all
shares of FHC Common or a merger of FHC, then such reclassified shares or other
securities or property, as the case may be, shall be made part of the Escrow
Fund.
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<PAGE>
4. VOTING RIGHTS OF ESCROW SHARES. Each Stockholder shall have the right
to vote his pro rata number of Escrow Shares in the Escrow Fund (as set forth in
SCHEDULE A of this Agreement) on any issues that come for a vote before the
stockholders of FHC by directing the Representative on how to vote pursuant to
procedures determined by the Representative in his reasonable discretion. Prior
to any vote of FHC stockholders during the term of this Agreement, FHC shall
cause to be delivered to the Representative for delivery to the Stockholders
appropriate voting and proxy materials in the same manner as provided to other
stockholders of FHC so as to permit the Stockholders to exercise their voting
rights with respect to the Escrow Shares.
5. TERMINATION. This Agreement shall terminate and the Escrow Agent shall
have no further responsibilities hereunder upon the expiration of the Escrow
Period set forth in Section 2 above. At such time, the Escrow Agent shall
reserve from the Escrow Fund an amount sufficient to pay any outstanding claims
("Reserve Claims") of FHC against the Escrow Fund and any estimated
Representative Expenses set forth in an affidavit signed by the Representative
(which reserved amount may not, when aggregated with all previous payments of
Representative's Expenses, exceed $100,000) on that date. For purposes of
establishing the reserve, any Escrow Shares so reserved shall be valued as of
the date of termination at the Indemnity Price. This Agreement shall continue in
force as to the amount so reserved until the resolution of such Reserve Claims
in accordance with the terms hereof. The Escrow Agent shall distribute to the
Representative on behalf of the Stockholders all amounts (if any) in the Escrow
Fund not so reserved, and the Escrow Agent shall thereafter have no
responsibilities with respect to such distributed amounts. Upon the final
resolution of each Reserve Claim, on a claim-by-claim basis, the Escrow Agent
shall distribute to FHC the amount that FHC is entitled to receive with respect
to such Reserve Claim and to the Representative amounts constituting
Representative's Expenses in accordance with Section 2(e). Escrow Shares so
delivered shall be valued as of the date of such final resolution at the
Indemnity Price. Upon the final resolution of all Reserve Claims and the
distribution to FHC of all reserved amounts to which FHC is entitled pursuant to
such claims and to Representative amounts constituting Representative's
Expenses, in accordance with Section 2(e), all remaining reserved amounts shall
be promptly distributed to the Representative on behalf of the Stockholders. The
Representative shall deliver the Escrow Shares to the Stockholders in amounts as
equal as possible (without issuance of fractional shares) to the percentages
shown on SCHEDULE A, and FHC shall cause its transfer agent to issue shares in
the names of the Stockholders pursuant to the Representative's instructions in
exchange for the certificate(s) representing the Escrow Shares.
6. THE ESCROW AGENT.
(a) FHC shall pay the Escrow Agent's fee for its ordinary services under
this Agreement in accordance with the fee schedule set forth on SCHEDULE B
attached hereto.
(b) In performing any duties under this Agreement, the Escrow Agent
shall not be liable for damages, losses, or expenses, except for gross
negligence or willful misconduct on the part of the Escrow Agent. The Escrow
Agent shall not incur any such liability for (i) any act or failure to act
made or omitted in good faith, or (ii) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that such agent shall in good faith believe
to be genuine, nor will the Escrow Agent be liable or responsible for
forgeries, fraud, impersonations, or determining the scope of any
representative authority. In addition, the Escrow Agent may consult with
legal counsel in connection with its duties under this Agreement and shall
be fully protected in any act taken, suffered, or permitted by it in good
faith in accordance with the advice of counsel. The Escrow Agent is not
responsible for determining and verifying the authority of any such person
acting or purporting to act on behalf of any party to this Agreement.
(c) If any controversy arises between the parties to this Agreement, or
with any other party, concerning the subject matter of this Agreement, its
terms or conditions, the Escrow Agent will not be required to determine the
controversy or to take any action regarding it. The Escrow Agent
B-3
<PAGE>
may hold the Escrow Fund and may wait for settlement of any such controversy
by final appropriate legal proceedings or other means as, in the Escrow
Agent's discretion, may be required, despite what may be set forth elsewhere
in this Agreement. In such event, the Escrow Agent will not be liable for
interest or damage. Furthermore, the Escrow Agent may at its option, file an
action of interpleader requiring the parties to answer and litigate any
claims and rights among themselves. The Escrow Agent is authorized to
deposit with the clerk of the court the entire Escrow Fund, except for such
part of the Escrow Fund as shall reimburse the Escrow Agent for all costs,
expenses, charges and reasonable attorneys' fees incurred by the Escrow
Agent due to the interpleader action and which the parties jointly and
severally agree to pay. Upon initiating such action, the Escrow Agent shall
be fully released and discharged of and from all obligations and liabilities
imposed by the terms of this Agreement, except for obligations or
liabilities arising by reason of the prior gross negligence or willful
misconduct on the part of the Escrow Agent.
(d) The Stockholders and FHC shall jointly and severally indemnify and
hold harmless the Escrow Agent for any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation and
attorneys' fees) which it may incur or which may be imposed on it in
connection with the performance of the Escrow Agent's duties under this
Agreement, including but not limited to any litigation arising from this
Agreement, except losses, claims, damages, liabilities or expenses arising
out of gross negligence or willful misconduct on the part of the Escrow
Agent.
(e) The Escrow Agent may resign at any time upon giving at least thirty
(30) days' prior written notice to the parties; provided, however, that no
such resignation shall become effective until the appointment of a successor
escrow agent which shall be accomplished as follows: The parties shall use
their best efforts to mutually agree on a successor escrow agent within
thirty (30) days after receiving such notice. If the parties fail to agree
upon a successor escrow agent within such time, the Escrow Agent shall have
the right to appoint a successor escrow agent authorized to do business in
the state of California. The successor escrow agent shall execute and
deliver an instrument accepting such appointment, and it shall, without
further acts, be vested with all the estates, properties, rights, powers and
duties of the predecessor Escrow Agent as if originally named as the Escrow
Agent. Upon such appointment, the predecessor Escrow Agent shall be
discharged from any further duties and liability under this Agreement,
except for obligations or liabilities arising by reason of the prior gross
negligence or willful misconduct on the part of the Escrow Agent.
7. ARBITRATION. All disputes or controversies arising under or in
connection with this Agreement shall be settled exclusively by final and binding
arbitration in Sacramento, California which arbitration shall be in accordance
with the rules of the American Arbitration Association ("AAA"), except as
modified herein, and as such rules shall be in effect on the date of delivery of
demand for arbitration (as described below). The arbitration of such issues,
including the determination of the amount of any damages suffered by any party,
shall be to the exclusion of any court of law. In the event of a timely demand
for arbitration, FHC shall provide the Representative with a list of three
arbitrators from the AAA listing of arbitrators and the Representative shall
select the arbitrator from such list of three. The decision of the arbitrator
shall be final and binding upon the parties and their respective personal
representatives, heirs, devisees, successors and assigns. A party wishing to
submit a dispute or controversy to arbitration must submit a written demand for
arbitration to the other party to this Agreement (and deliver a copy of such
demand to the Escrow Agent) not less than thirty (30) days after the
transaction, occurrence or event giving rise to such dispute or controversy.
Such written demand for arbitration shall be provided to the arbitrator and
shall contain a statement of the matter in dispute and a statement of the facts
the party demanding arbitration is relying on to support his or its position.
Each party shall be entitled to take one discovery deposition in preparation for
the arbitration in accordance with the deposition procedures of the California
Code of Civil Procedure. Judgment may be entered on the arbitrator's award in
any court having proper jurisdiction. The costs of arbitration, including
attorneys' fees, shall be awarded by the arbitrator to the prevailing party.
B-4
<PAGE>
8. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California without regard to principles of conflicts of laws.
9. AMENDMENTS; MODIFICATIONS. This Agreement may not be amended or
modified except pursuant to a written agreement signed by each of the parties
hereto.
10. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given on the same day if delivered personally, or by
facsimile transmission with voice confirmation of receipt, or shall be deemed
given on the date receipt is confirmed if mailed by registered or certified mail
or commercial overnight courier (e.g., Federal Express, DHL, Network Courier,
Sonic, etc.), return receipt or confirmation of delivery requested, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
<TABLE>
<S> <C> <C>
If to Foundation Health Corporation
FHC: 3400 Data Drive
Rancho Cordova, CA 95670
Attention: Mr. Kirk A. Benson
Senior Vice President, Corporate Development
and
Patricia A. Burgess, Esq.
Vice President
FAX: (916) 631-5027
with a Pillsbury Madison & Sutro
copy to: 235 Montgomery Street
San Francisco, CA 94104
Attention: Linda C. Williams, Esq.
FAX: (415) 477-4816
If to the
Representative:
[To Come]
with a [To Come]
copy to:
If to the
Escrow Agent: [To Come]
</TABLE>
11. EFFECT ON SUCCESSORS IN INTEREST, ASSIGNEES. This Agreement shall
inure to the benefit of and be binding upon the heirs, administrators,
executors, assignees and successors of each of the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
FOUNDATION HEALTH CORPORATION
By
--------------------------------------
Title
--------------------------------------
REPRESENTATIVE on behalf of himself
and as representative of the
individual stockholders of Managed
Health Network, Inc.
--------------------------------------
B-5
<PAGE>
ESCROW AGENT:
--------------------------------------
By
--------------------------------------
Title
--------------------------------------
B-6
<PAGE>
EXHIBIT A
Chemical Trust Company of California, as Exchange Agent
50 California Street, 10th Floor
San Francisco, CA 94111
Re: Foundation Health Corporation ("FHC") -- Escrow Shares
Ladies and Gentlemen:
The following shares of Common Stock of FHC are currently being held by
as Escrow Agent pursuant to that certain Escrow Agreement, dated as
of , 1996 by and among FHC, the undersigned and the Escrow Agent
(the "Escrow Agreement"):
<TABLE>
<CAPTION>
SHARE CERTIFICATE NO. NO. OF FHC SHARES REPRESENTED
- ----------------------------------------- -----------------------------------------
<S> <C>
[insert certif. numbers] [insert number of shares]
</TABLE>
We hereby instruct you to pay and deliver any certificates representing
stock splits or non-taxable stock dividends, or any other form of distribution
made by FHC in respect of the shares identified above (except for taxable
dividends) to the Escrow Agent pursuant to the terms of the Escrow Agreement.
--------------------------------------
[Name of Representative]
B-7
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
STOCKHOLDER NAME ESCROW SHARES ESCROW SHARES
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
</TABLE>
B-8
<PAGE>
SCHEDULE B
FEE SCHEDULE
See attached.
B-9
<PAGE>
EXHIBIT C
AFFILIATE AGREEMENT
THIS AFFILIATE AGREEMENT (the "Agreement") is made and entered into as of
, 1996 between FOUNDATION HEALTH CORPORATION, a Delaware corporation
("FHC"), and the undersigned director or executive officer ("Executive") of
MANAGED HEALTH NETWORK, INC., a Delaware corporation ("MHN").
This Agreement is entered into in connection with that certain Agreement and
Plan of Reorganization dated as of January 9, 1996 (the "Reorganization
Agreement") between FHC and MHN. (Capitalized terms used herein and not defined
herein shall have their defined meanings as set forth in the Reorganization
Agreement.) The Reorganization Agreement provides for the merger (the "Merger")
of MHN with and into a wholly owned subsidiary of FHC in a transaction in which
issued and outstanding shares of common and preferred stock of MHN (the "MHN
Stock") will be exchanged for shares of Common Stock of FHC (the "FHC Stock") on
the terms and conditions set forth in the Reorganization Agreement.
1. TAX AND ACCOUNTING TREATMENT. Executive understands and agrees that it
is intended that the Merger will be treated as a "reorganization" for federal
income tax purposes and as a "pooling of interests" in accordance with generally
accepted accounting principles and the applicable General Rules and Regulations
published by the Securities and Exchange Commission (the "SEC"). Executive
further understands and agrees that Executive may be deemed to be an "affiliate"
of MHN (a) for application of the pooling of interests requirements and (b)
within the meaning of Rule 145 ("Rule 145") promulgated under the Securities Act
of 1933, as amended (the "Securities Act"), although nothing contained herein
should be construed as an admission of either such fact.
2. RELIANCE UPON REPRESENTATIONS, WARRANTIES AND COVENANTS. Executive has
been informed that the treatment of the Merger as a pooling of interests for
financial accounting purposes is dependent upon the accuracy of Executive's
representations and warranties set forth herein, and upon Executive's compliance
with Executive's covenants set forth herein. Executive understands that the
representations and warranties and covenants of Executive set forth herein will
be relied upon by FHC, MHN, their respective counsel and accounting firms and
stockholders of MHN.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF EXECUTIVE. Executive
represents, warrants and covenants as follows:
(a) Executive has full power and authority to execute this Agreement, to
make the representations, warranties and covenants herein contained and to
perform Executive's obligations hereunder.
(b) The signature page hereto sets forth all shares of MHN Stock
beneficially owned by Executive, including all MHN Stock as to which
Executive has sole or shared voting or investment power and all rights,
options and warrants to acquire MHN Stock. Executive currently owns no
shares of FHC Stock.
(c) Except as otherwise permitted by the Reorganization Agreement,
Executive will not sell, transfer, exchange, pledge, or otherwise dispose
of, or make any offer or agreement relating to any of the foregoing with
respect to, any shares of FHC Stock that Executive may acquire in connection
with the Merger, or any securities that may be paid as a dividend or
otherwise distributed thereon or with respect thereto or issued or delivered
in exchange or substitution therefor (all such shares and other securities
of FHC being herein sometimes collectively referred to as "Restricted
Securities"), or any option, right or other interest with respect to any
Restricted Securities, unless (i) such transaction is permitted pursuant to
Rules 145(c) and 145(d) under the Securities Act (as described in Section 5
below), (ii) counsel representing Executive, which counsel is reasonably
satisfactory to FHC, shall have advised FHC in a written opinion letter
satisfactory to FHC and FHC's legal counsel, and upon which FHC and its
legal counsel may rely,
C-1
<PAGE>
that no registration under the Securities Act would be required in
connection with the proposed sale, transfer or other disposition, (iii) a
registration statement under the Securities Act covering the FHC Stock
proposed to be sold, transferred or otherwise disposed of, describing the
manner and terms of the proposed sale, transfer or other disposition, and
containing a current prospectus, shall have been filed with the SEC and made
effective under the Securities Act, or (iv) an authorized representative of
the SEC shall have rendered written advice to Executive (sought by Executive
or counsel to Executive, with a copy thereof and all other related
communications delivered to FHC) to the effect that the SEC would take no
action, or that the Staff of the SEC would not recommend that the SEC take
action, with respect to the proposed disposition if consummated.
(d) Notwithstanding any other provision of this Agreement to the
contrary, Executive will not sell, transfer, exchange, pledge or otherwise
dispose of, or in any other way reduce Executive's risk of ownership or
investment in, or make any offer or agreement relating to any of the
foregoing with respect to any MHN Stock, or any Restricted Securities or
other securities of FHC (i) during the 30-day period immediately preceding
the Effective Time and (ii) until such time after the Effective Time as FHC
has publicly released a report including the combined financial results of
FHC and MHN for a period of at least 30 days of combined operations of FHC
and MHN within the meaning of Accounting Series Release No. 135, as amended,
of the SEC; provided that an Executive who is a holder of MHN Options (as
defined in the Reorganization Agreement) shall be permitted to sell,
transfer or otherwise dispose of MHN Stock, Restricted Securities or other
securities of FHC during the foregoing periods for the purpose of satisfying
any tax withholding or other tax obligations of such Executive relating to
the exercise or settlement of such MHN Options, subject to the de minimis
transfer limitations set forth in Staff Accounting Bulletin No. 76.
4. RULES 144 AND 145. From and after the Effective Time and for so long as
is necessary in order to permit Executive to sell the FHC Stock held by and
pursuant to Rule 145 and, to the extent applicable, Rule 144 under the
Securities Act, FHC will file on a timely basis all reports required to be filed
by it pursuant to Section 13 of the Securities Exchange Act of 1934, as amended,
referred to in paragraph (c)(1) of Rule 144 under the Securities Act. Executive
understands that FHC is under no obligation to register the sale, transfer or
other disposition of any Restricted Securities by or on behalf of Executive or
to take any other action necessary in order to make compliance with an exemption
from registration available.
5. LIMITED RESALES. Executive understands that, in addition to the
restrictions imposed under Section 3 of this Agreement, the provisions of Rule
145 limit Executive's public resales of Restricted Securities, in the manner set
forth in subsections (a), (b) and (c) below:
(a) Rule 145(d)(1) permits such resales only (i) while FHC meets the
public information requirements of Rule 144(c), (ii) in brokers'
transactions or in transactions with a market maker and (iii) where the
aggregate number of Restricted Securities sold at any time together with all
sales of restricted FHC Stock sold for Executive's account pursuant to Rule
145 during the preceding three-month period does not exceed the greater of
(1) one percent of the FHC Stock outstanding or (2) the average weekly
volume of trading in FHC Stock on all national securities exchanges, or
reported through the automated quotation system of a registered securities
association, during the four calendar weeks preceding the date of receipt of
the order to execute the sale.
(b) Executive may make unrestricted resales of Restricted Securities
pursuant to Rule 145(d)(2) if (i) Executive has beneficially owned (within
the meaning of Rule 144(d) under the Securities Act) the Restricted
Securities for at least two years after the Effective Time, (ii) Executive
is not an affiliate of FHC and (iii) FHC meets the public information
requirements of Rule 144(c).
C-2
<PAGE>
(c) Executive may make unrestricted resales of Restricted Securities
pursuant to Rule 145(d)(3) if Executive has beneficially owned (within the
meaning of Rule 144(d) under the Securities Act) the Restricted Securities
for at least three years and is not, and has not been for at least three
months, an affiliate of FHC.
(d) FHC acknowledges that the provisions of Section 3(c) of this
Agreement will be satisfied as to any sale by the undersigned of the
Restricted Securities pursuant to Rule 145(d), by a broker's letter and a
letter from the undersigned with respect to that sale stating that each of
the above-described requirements of Rule 145(d)(1) has been met or is
inapplicable by virtue of Rule 145(d)(2) or Rule 145(d)(3); provided,
however, that FHC has no reasonable basis to believe such sales were not
made in compliance with such provisions of Rule 145(d).
6. STOP TRANSFER INSTRUCTIONS. Executive also understands and agrees that
stop transfer instructions will be given to FHC's transfer agent with respect to
certificates evidencing the Restricted Securities. FHC agrees to remove promptly
such stop transfer instructions upon full compliance with this Agreement by the
undersigned, including, without limitation, a sale or transfer of FHC Stock
permitted under Section 3(c) above.
7. NOTICES. All notices, requests, demands or other communications which
are required or may be given pursuant to the terms of this Agreement shall be in
writing and shall be deemed to have been duly given upon receipt, if delivered
by hand, by telecopy or telegram, or three days after deposit in the United
States mail, postage prepaid, addressed to a party as follows:
<TABLE>
<S> <C>
IF TO Foundation Health Corporation
FHC: 3400 Data Drive
Rancho Cordova, CA 95670
Attention: Patricia A. Burgess, Esq.
With a Pillsbury Madison & Sutro LLP
copy to: 235 Montgomery Street
San Francisco, CA 94104
Attention: Linda C. Williams, Esq.
IF TO THE At the address indicated below
EXECUTIVE:
</TABLE>
or to such other address as any party may designate for itself by notice given
as provided in this Agreement, except that notices of change of address shall
only be effective upon receipt.
8. TERMINATION. This Agreement shall be terminated and shall be of no
further force and effect upon any termination of the Reorganization Agreement.
9. COUNTERPARTS. This Agreement shall be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one instrument.
10. BINDING AGREEMENT. This Agreement will inure to the benefit of and be
binding upon and enforceable against the parties and their successors and
assigns, including administrators, executors, representatives, heirs, legatees
and devisees of Executive and any pledgee holding Restricted Securities as
collateral, but excluding any purchaser of any Restricted Securities sold on a
public market.
11. WAIVER. No waiver by any party hereto of any condition or of any
breach of any provision of this Agreement shall be effective unless in writing
and signed by each party hereto.
12. GOVERNING LAW. This Agreement shall be governed and construed, and
enforced in accordance with the laws of the State of Delaware as applied to
contracts entered into solely between residents of, and to be performed entirely
in, such state.
C-3
<PAGE>
13. ATTORNEYS' FEES. In the event of any legal action or proceeding to
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
14. EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
15. THIRD PARTY RELIANCE. Counsel to and accountants for the parties shall
be entitled to rely upon this Affiliate Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
FOUNDATION HEALTH CORPORATION
By
--------------------------------------
Title
--------------------------------------
EXECUTIVE
--------------------------------------
--------------------------------------
(Printed Name)
Address
-------------------------------------------------------------------------------
--------------------------------------
--------------------------------------
Phone
--------------------------------------
C-4
<PAGE>
ANNEX 2
DELAWARE GENERAL CORPORATION LAW
SECTION 262
APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to SectionSection 251, 252, 254, 257, 258, 263 or 264 of this
title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as provided in
subsection (f) or (g) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
2-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation
who has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it appears
on the records of the corporation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the notice, demand
in writing from the surviving or resulting corporation the appraisal of his
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after
2-2
<PAGE>
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
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(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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<PAGE>
ANNEX 3
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
Section 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES;
CORPORATE PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of shareholders to
act upon the reorganization summarizes this section and Sections 1301, 1302,
1303 and 1304; provided, however, that this provision does not apply to any
shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of shares described
in subparagraph (A) or (B) if demands for payment are filed with respect to
5 percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
Section 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS;
DEMAND FOR PURCHASE; TIME; CONTENTS
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this
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<PAGE>
section, a statement of the price determined by the corporation to represent the
fair market value of the dissenting shares, and a brief description of the
procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes an
offer by the corporation to purchase at the price stated any dissenting shares
as defined in subdivision (b) of Section 1300, unless they lose their status as
dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
Section 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT;
UNCERTIFICATED SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
Section 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR
MARKET VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
Section 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR
FAIR MARKET VALUE;
LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF ISSUES; APPOINTMENT OF
APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after
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<PAGE>
the date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
Section 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
Section 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS;
INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
Section 1307. DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
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Section 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION;
WITHDRAWAL OF DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
Section 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Section 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
Section 1311. EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
Section 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR
RESCIND MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger,
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<PAGE>
subdivision (a) shall not apply to any shareholder of such party who has not
demanded payment of cash for such shareholder's shares pursuant to this chapter;
but if the shareholder institutes any action to attack the validity of the
reorganization or short-form merger or to have the reorganization or short-form
merger set aside or rescinded, the shareholder shall not thereafter have any
right to demand payment of cash for the shareholder's shares pursuant to this
chapter. The court in any action attacking the validity of the reorganization or
short-form merger or to have the reorganization or short-form merger set aside
or rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination by
the court that clearly no other remedy will adequately protect the complaining
shareholder or the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits the Registrant's
board of directors to indemnify any person against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any threatened, pending or
completed action, suit or proceeding in which such person is made a party by
reason of his being or having been a director, officer, employee or agent of the
Registrant, in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act"). The
statute provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors, or
otherwise.
The Registrant's Restated Certificate of Incorporation provides for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by law. In addition, the Registrant has entered into
separate indemnification agreements with its directors and officers that will
require the Registrant, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors or
officers to the fullest extent not prohibited by law. The Registrant has
obtained directors and officers' liability insurance that may cover, among other
things, liabilities under the federal securities laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
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<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of January 9, 1996 by and between
Foundation Health Corporation and Managed Health Network, Inc., and the other parties
signatory thereto (incorporated by reference to Annex 1 to the Proxy
Statement/Prospectus filed as a part of this Registration Statement). (Schedules
omitted. The Registrant agrees to furnish a copy of any schedule to the Commission upon
request).
3.1 (1) Restated Certificate of Incorporation of Foundation Health Corporation.
3.2 (3) Amended and Restated Bylaws of Foundation Health Corporation.
4.1 (6) Specimen of Foundation Health Corporation Common Stock certificate with Rights Legend.
4.2 (6) Form of Rights Certificate (incorporated by reference to Foundation Health Corporation's
Form 8-A dated September 27, 1991).
4.3 (9) Form of Indenture.
4.4 (9) Form of Senior Notes.
4.5 (18) 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation, as amended.
5.1 Opinion of Pillsbury Madison & Sutro LLP as to the securities to be issued.
10.3 (16) Executive Incentive Plan of Foundation Health Corporation.
10.20 (2) Lease Agreement between HAS-First Associates and Foundation Health Corporation dated
August 1, 1988 and form of amendment thereto.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
10.38 (2) Stock Purchase and Asset Sale Agreement dated November 1, 1989 between Foundation Health
Corporation and Foundation Health Federal Services, Inc. and amendment thereto.
<C> <S>
10.39 (2) Form of Indemnification Agreement.
10.53 (1) Employee Stock Purchase Plan.
10.61 (3) United States Government DoD Contract No. UDA 903-91-C-0155 between DoD and Foundation
Health Federal Services, Inc. dated June 7, 1991.
10.62 (4) Asset Purchase Agreement dated July 3, 1991 between Foundation Health Preferred
Administrators and Preferred Administrators, Inc.
10.63 (4) Asset Purchase Agreement dated December 1, 1991 among Foundation Health Pharmaceutical
Services, Inc., Apollo Billing service, and as to certain parts thereof, Anthony Ponzo,
Patricia Ponzo and Robert Rhoads.
10.64 (3) Agreement and Plan of Reorganization among Foundation Health Corporation, FH Acquisition
Corporation and National Health Care Systems, Inc.
10.65 (4) Stock Purchase Agreement dated February 14, 1991 between the Company and Western
Universal Corporation.
10.67 (5) Stock Purchase Agreement between Foundation Health Corporation, American Travelers
Corporation and American Travelers Life Insurance Company dated March 31, 1992.
10.68 (5) Stock and Asset Purchase Agreement among Foundation Health Corporation, Thomas R. and
Linda S. Leonard and Bayport Leasing Company dated as of May 18, 1992.
10.69 (5) Stock Purchase Agreement among Foundation Health Corporation, Deborah S. Greenfield and
James Thompson dated as of May 15, 1992.
10.70 (6) Stock Purchase Agreement among Foundation Health Corporation and the holders of common
stock of Allstate Optical Services, Inc. dated as of June 8, 1992.
10.71 (12) Agreement and Plan of Reorganization among Foundation Health Corporation, FHC Acquisition
Corporation, Occupational Health Services, Inc. and the OHS shareholders dated July 31,
1992.
10.72 (6) Agreement and Plan of Reorganization dated as of July 14, 1992, by and among Foundation
Health Corporation, Century MediCorp, Inc. and FH Acquisition Corporation.
10.73 (7) Century MediCorp, Inc. 1983 Incentive Stock Option Plan.
10.74 (7) Century MediCorp, Inc. 1988 Nonstatutory Stock Option Plan.
10.75 (7) Century MediCorp, Inc. 1989 Nonstatutory Stock Option Plan.
10.76 (7) Century MediCorp, Inc. 1991 Nonstatutory Stock Option Plan.
10.79 (9) Agreement and Plan of Reorganization among Foundation Health Corporation, FHC Acquisition
Corporation and Business Insurance Corporation dated April 10, 1993.
10.80 (10) 1989 Stock Plan of Business Insurance Corporation.
10.81 (11) 1992 Nonstatutory Stock Option Plan of Foundation Health Corporation.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
10.82 (13) MDA 903-91-C-0155 Modification for Implementation of BRAC expansion sites in Louisiana
and Texas.
<C> <S>
10.83 (14) Employment Agreement between Foundation Health Corporation and Daniel D. Crowley dated
April 30, 1994.
10.85 (14) Employment Agreement between Foundation Health Corporation and Jeffrey L. Elder dated
April 22, 1994.
10.86 (14) Employment Agreement between Foundation Health Corporation and Steven D. Tough dated
April 22, 1994.
10.87 (14) Employment Agreement between Foundation Health Corporation and Kirk A. Benson dated April
22, 1994.
10.88 (14) Employment Agreement between Foundation Health Corporation and Allen J. Marabito dated
April 22, 1994.
10.89 (14) Agreement and Plan of Reorganization dated as of May 24, 1994 among Foundation Health
Corporation, FHC Acquisition Subsidiary, Southern Colorado Health Plan, Inc., the
stockholders of Southern Colorado Health Plan, Inc. and Southern Colorado Health
Management, Inc.
10.90 (14) Agreement and Plan of Reorganization dated as of May 2, 1994 among Foundation Health
Corporation, The Noetics Group, Reviewco and the other parties signatory thereto.
10.91 (15) Agreement and Plan of Reorganization dated as of June 27, 1994 by and among Foundation
Health Corporation, CareFlorida Health Systems, Inc. and the other parties signatory
thereto.
10.92 (16) Agreement and Plan of Merger dated as of July 28, 1994 between Foundation Health
Corporation and Intergroup Healthcare Corporation.
10.93 (16) Agreement and Plan of Merger dated as of July 28, 1994 between Foundation Health
Corporation and Thomas-Davis Medical Centers, P.C.
10.96 (13) Foundation Health Corporation Directors' Retirement Plan.
10.97 (17) $300 million Revolving Credit Agreement dated as of December 5, 1994 among Foundation
Health Corporation, as Borrower, Citicorp USA, Inc., as Administrative Agent, Wells
Fargo Bank, N.A. and NationsBank of Texas, N.A., as Co-Agents and Citicorp Securities,
Inc., as Arranger, and the Other Banks and Financial Institutions Party thereto.
10.98 (18) Participation Agreement dated as of May 25, 1995 among Foundation Health Medical
Services, as Construction Agent and Lessee, Foundation Health Corporation, as Guarantor,
First Security Bank of Utah, N.A., as Owner Trustee, Sumitomo Bank Leasing and Finance,
Inc., The Bank of Nova Scotia and NationsBank of Texas, N.A., as Holders and NationsBank
of Texas, N.A., as Administrative Agent for the Lenders; and Guaranty Agreement dated of
May 25, 1995 by Foundation Health Corporation for the benefit of First Security Bank of
Utah, N.A.
10.99 (18) Foundation Health Corporation Deferred Compensation Plan, as amended and restated.
10.100 (18) Foundation Health Corporation Supplemental Executive Retirement Plan, as amended and
restated.
10.101 (18) Foundation Health Corporation Executive Retiree Medical Plan, as amended and restated.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
10.102 (18) Foundation Health Corporation 1990 Stock Option Plan, as amended and restated effective
April 20, 1994.
<C> <S>
10.101 (18) Foundation Health Corporation Profit Sharing and 401(k) Plan (as amended and restated
effective January 1, 1994).
11.0 (18) Computation of Earnings per Share.
21.0 (18) Subsidiaries of Foundation Health Corporation.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Stevenson, Jones & Holmaas, P.C.
23.4 Consent of Ernst & Young LLP.
23.5 Consent of KPMG Peat Marwick LLP.
23.6 Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-7).
</TABLE>
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(1)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-38867).
(2)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-34963).
(3)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-42690).
(4)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-45513).
(5)
Incorporated by reference to the Exhibits to Registrant's Form 10-Q for the
quarter ended March 31, 1992 filed on May 14, 1992.
(6)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-51648).
(7)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-53468).
(8)
Incorporated by reference to the Exhibits to Registrant's Registration Form
8-K filed on October 30, 1992.
(9)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-3 (File No. 33-61684).
(10)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-67072).
(11)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-48561).
(12)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-51992).
(13)
Incorporated by reference to the Exhibits to Registrant's Form 10-K for the
year ended June 30, 1994 filed on September 24, 1994.
II-4
<PAGE>
(14)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-80432).
(15)
Incorporated by reference to the Exhibits to Registrant's current report on
Form 8-K filed on June 28, 1994.
(16)
Incorporated by reference to the Exhibits to Registrant's current report on
Form 8-K filed on August 9, 1994.
(17)
Incorporated by reference to the Exhibits to Registrant's quarterly report
on Form 10-Q for the quarter ended December 31, 1994 filed on February 14,
1995.
(18)
Incorporated by reference to the Exhibits to Registrant's annual report on
Form 10-K for the year ended June 30, 1995 filed on September 27, 1995.
(b) Financial Statement Schedules of FHC.
The following financial statement schedules of FHC and its subsidiaries are
incorporated by reference to Schedules to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1995, and should be read in conjunction with
the Consolidated Financial Statements of FHC also incorporated by reference
herein:
<TABLE>
<CAPTION>
SCHEDULE PAGE
- --------------------- -----
<S> <C> <C>
Article 5, Schedule I Condensed Financial Information of Registrant............................. S-1
Article 5, Schedule V Supplemental Information Concerning Property-Casualty Insurance
Operations............................................................... S-4
Section 403.04.b Reconciliation of Beginning and Ending Class Reserves and Exhibit of
Deficiencies (Redundancies).............................................. S-5
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the FHC Consolidated Financial Statements.
ITEM 22. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes: (i) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement: (A) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (B) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement (notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement); and (C) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement (provided,
however, that clauses (A) and (B) above do not apply if the registration
statement is on Form S-3 or Form S-8, and the information required to be
included in a post-effective amendment by those clauses is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement); (ii) 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
II-5
<PAGE>
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and (iii) 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.
(2) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
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.
(3) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(4) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the 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 registrant 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 whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(6) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(7) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (6) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes 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
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rancho Cordova, State of
California, on January 29, 1996.
FOUNDATION HEALTH CORPORATION
By /s/ DANIEL D. CROWLEY
--------------------------------------
Title President, and Chief Executive
Officer
- --------------------------------------------------------------------------------
and Chairman of the Board
- --------------------------------------------------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Daniel D. Crowley, Allen J. Marabito and Patricia
A. Burgess, and each of them, his true and lawful attorneys-in-fact and agents,
each with full power of substation and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments,
including post-effective amendments, to this Registration Statement, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or
their substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------- ------------------------------------- ---------------------
<C> <S> <C>
Director, President, and Chief
/s/DANIEL D. CROWLEY Executive Officer (Principal
Daniel D. Crowley Executive Officer) and Chairman of January 29, 1996
the Board
/s/DAVID A. BOGGS
David A. Boggs Director January 29, 1996
Director, Senior Vice President --
/s/JEFFREY L. ELDER Chief Financial Officer (Principal January 29, 1996
Jeffrey L. Elder Financial and Accounting Officer)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------- ------------------------------------- ---------------------
<C> <S> <C>
/s/EARL B. FOWLER
Earl B. Fowler Director January 29, 1996
/s/RICHARD W. HANSELMAN
Richard W. Hanselman Director January 29, 1996
/s/ROSS D. HENDERSON, M.D.
Ross D. Henderson Director January 29, 1996
/s/FRANK A. OLSON
Frank A. Olson Director January 29, 1996
/s/RICHARD J. STEGEMEIER
Richard J. Stegemeier Director January 29, 1996
/s/STEVEN D. TOUGH
Steven D. Tough Director January 29, 1996
/s/RAYMOND S. TROUBH
Raymond S. Troubh Director January 29, 1996
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------- -------------
<C> <S> <C>
2.1 Agreement and Plan of Reorganization, dated as of January 9, 1996 by and
between Foundation Health Corporation and Managed Health Network, Inc., and
the other parties signatory thereto (incorporated by reference to Annex 1
to the Proxy Statement/Prospectus filed as a part of this Registration
Statement). (Schedules omitted. The Registrant agrees to furnish a copy of
any schedule to the Commission upon request). .............................
3.1 (1) Restated Certificate of Incorporation of Foundation Health Corporation. ....
3.2 (3) Amended and Restated Bylaws of Foundation Health Corporation. ..............
4.1 (6) Specimen of Foundation Health Corporation Common Stock certificate with
Rights Legend. ............................................................
4.2 (6) Form of Rights Certificate (incorporated by reference to Foundation Health
Corporation's Form 8-A dated September 27, 1991). .........................
4.3 (9) Form of Indenture. .........................................................
4.4 (9) Form of Senior Notes. ......................................................
4.5 (18) 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation, as
amended. ..................................................................
5.1 Opinion of Pillsbury Madison & Sutro LLP as to the securities to be
issued. ...................................................................
10.3 (16) Executive Incentive Plan of Foundation Health Corporation. .................
10.20 (2) Lease Agreement between HAS-First Associates and Foundation Health
Corporation dated August 1, 1988 and form of amendment thereto. ...........
10.38 (2) Stock Purchase and Asset Sale Agreement dated November 1, 1989 between
Foundation Health Corporation and Foundation Health Federal Services, Inc.
and amendment thereto. ....................................................
10.39 (2) Form of Indemnification Agreement. .........................................
10.53 (1) Employee Stock Purchase Plan. ..............................................
10.61 (3) United States Government DoD Contract No. UDA 903-91-C-0155 between DoD and
Foundation Health Federal Services, Inc. dated June 7, 1991. ..............
10.62 (4) Asset Purchase Agreement dated July 3, 1991 between Foundation Health
Preferred Administrators and Preferred Administrators, Inc. ...............
10.63 (4) Asset Purchase Agreement dated December 1, 1991 among Foundation Health
Pharmaceutical Services, Inc., Apollo Billing service, and as to certain
parts thereof, Anthony Ponzo, Patricia Ponzo and Robert Rhoads. ...........
10.64 (3) Agreement and Plan of Reorganization among Foundation Health Corporation, FH
Acquisition Corporation and National Health Care Systems, Inc. ............
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------- -------------
10.65 (4) Stock Purchase Agreement dated February 14, 1991 between the Company and
Western Universal Corporation. ............................................
<C> <S> <C>
10.67 (5) Stock Purchase Agreement between Foundation Health Corporation, American
Travelers Corporation and American Travelers Life Insurance Company dated
March 31, 1992. ...........................................................
10.68 (5) Stock and Asset Purchase Agreement among Foundation Health Corporation,
Thomas R. and Linda S. Leonard and Bayport Leasing Company dated as of May
18, 1992. .................................................................
10.69 (5) Stock Purchase Agreement among Foundation Health Corporation, Deborah S.
Greenfield and James Thompson dated as of May 15, 1992. ...................
10.70 (6) Stock Purchase Agreement among Foundation Health Corporation and the holders
of common stock of Allstate Optical Services, Inc. dated as of June 8,
1992. .....................................................................
10.71 (12) Agreement and Plan of Reorganization among Foundation Health Corporation,
FHC Acquisition Corporation, Occupational Health Services, Inc. and the OHS
shareholders dated July 31, 1992. .........................................
10.72 (6) Agreement and Plan of Reorganization dated as of July 14, 1992, by and among
Foundation Health Corporation, Century MediCorp, Inc. and FH Acquisition
Corporation. ..............................................................
10.73 (7) Century MediCorp, Inc. 1983 Incentive Stock Option Plan. ...................
10.74 (7) Century MediCorp, Inc. 1988 Nonstatutory Stock Option Plan. ................
10.75 (7) Century MediCorp, Inc. 1989 Nonstatutory Stock Option Plan. ................
10.76 (7) Century MediCorp, Inc. 1991 Nonstatutory Stock Option Plan. ................
10.79 (9) Agreement and Plan of Reorganization among Foundation Health Corporation,
FHC Acquisition Corporation and Business Insurance Corporation dated April
10, 1993. .................................................................
10.80 (10) 1989 Stock Plan of Business Insurance Corporation. .........................
10.81 (11) 1992 Nonstatutory Stock Option Plan of Foundation Health Corporation. ......
10.82 (13) MDA 903-91-C-0155 Modification for Implementation of BRAC expansion sites in
Louisiana and Texas. ......................................................
10.83 (14) Employment Agreement between Foundation Health Corporation and Daniel D.
Crowley dated April 30, 1994. .............................................
10.85 (14) Employment Agreement between Foundation Health Corporation and Jeffrey L.
Elder dated April 22, 1994. ...............................................
10.86 (14) Employment Agreement between Foundation Health Corporation and Steven D.
Tough dated April 22, 1994. ...............................................
10.87 (14) Employment Agreement between Foundation Health Corporation and Kirk A.
Benson dated April 22, 1994. ..............................................
10.88 (14) Employment Agreement between Foundation Health Corporation and Allen J.
Marabito dated April 22, 1994. ............................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------- -------------
10.89 (14) Agreement and Plan of Reorganization dated as of May 24, 1994 among
Foundation Health Corporation, FHC Acquisition Subsidiary, Southern
Colorado Health Plan, Inc., the stockholders of Southern Colorado Health
Plan, Inc. and Southern Colorado Health Management, Inc. ..................
<C> <S> <C>
10.90 (14) Agreement and Plan of Reorganization dated as of May 2, 1994 among
Foundation Health Corporation, The Noetics Group, Reviewco and the other
parties signatory thereto. ................................................
10.91 (15) Agreement and Plan of Reorganization dated as of June 27, 1994 by and among
Foundation Health Corporation, CareFlorida Health Systems, Inc. and the
other parties signatory thereto. ..........................................
10.92 (16) Agreement and Plan of Merger dated as of July 28, 1994 between Foundation
Health Corporation and Intergroup Healthcare Corporation. .................
10.93 (16) Agreement and Plan of Merger dated as of July 28, 1994 between Foundation
Health Corporation and Thomas-Davis Medical Centers, P.C. .................
10.96 (13) Foundation Health Corporation Directors' Retirement Plan. ..................
10.97 (17) $300 million Revolving Credit Agreement dated as of December 5, 1994 among
Foundation Health Corporation, as Borrower, Citicorp USA, Inc., as
Administrative Agent, Wells Fargo Bank, N.A. and NationsBank of Texas,
N.A., as Co-Agents and Citicorp Securities, Inc., as Arranger, and the
Other Banks and Financial Institutions Party thereto. .....................
10.98 (18) Participation Agreement dated as of May 25, 1995 among Foundation Health
Medical Services, as Construction Agent and Lessee, Foundation Health
Corporation, as Guarantor, First Security Bank of Utah, N.A., as Owner
Trustee, Sumitomo Bank Leasing and Finance, Inc., The Bank of Nova Scotia
and NationsBank of Texas, N.A., as Holders and NationsBank of Texas, N.A.,
as Administrative Agent for the Lenders; and Guaranty Agreement dated of
May 25, 1995 by Foundation Health Corporation for the benefit of First
Security Bank of Utah, N.A. ...............................................
10.99 (18) Foundation Health Corporation Deferred Compensation Plan, as amended and
restated. .................................................................
10.100 (18) Foundation Health Corporation Supplemental Executive Retirement Plan, as
amended and restated. .....................................................
10.101 (18) Foundation Health Corporation Executive Retiree Medical Plan, as amended and
restated. .................................................................
10.102 (18) Foundation Health Corporation 1990 Stock Option Plan, as amended and
restated effective April 20, 1994. ........................................
10.101 (18) Foundation Health Corporation Profit Sharing and 401(k) Plan (as amended and
restated effective January 1, 1994). ......................................
11.0 (18) Computation of Earnings per Share. .........................................
21.0 (18) Subsidiaries of Foundation Health Corporation. .............................
23.1 Consent of Deloitte & Touche LLP. ..........................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------- -------------
23.2 Consent of Coopers & Lybrand L.L.P. ........................................
<C> <S> <C>
23.3 Consent of Stevenson, Jones & Holmaas, P.C. ................................
23.4 Consent of Ernst & Young LLP. ..............................................
23.5 Consent of KPMG Peat Marwick LLP. ..........................................
23.6 Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1)..........
24.1 Power of Attorney (included on page II-7). .................................
</TABLE>
- ------------------------
(1)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-38867).
(2)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-34963).
(3)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-42690).
(4)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-45513).
(5)
Incorporated by reference to the Exhibits to Registrant's Form 10-Q for the
quarter ended March 31, 1992 filed on May 14, 1992.
(6)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-51648).
(7)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-53468).
(8)
Incorporated by reference to the Exhibits to Registrant's Registration Form
8-K filed on October 30, 1992.
(9)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-3 (File No. 33-61684).
(10)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-67072).
(11)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-48561).
(12)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-51992).
(13)
Incorporated by reference to the Exhibits to Registrant's Form 10-K for the
year ended June 30, 1994 filed on September 24, 1994.
(14)
Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-80432).
(15)
Incorporated by reference to the Exhibits to Registrant's current report on
Form 8-K filed on June 28, 1994.
(16)
Incorporated by reference to the Exhibits to Registrant's current report on
Form 8-K filed on August 9, 1994.
(17)
Incorporated by reference to the Exhibits to Registrant's quarterly report
on Form 10-Q for the quarter ended December 31, 1994 filed on February 14,
1995.
(18)
Incorporated by reference to the Exhibits to Registrant's annual report on
Form 10-K for the year ended June 30, 1995 filed on September 27, 1995.
<PAGE>
EXHIBIT 5.1
LAW OFFICES OF
PILLSBURY MADISON & SUTRO LLP
POST OFFICE BOX 7880
SAN FRANCISCO, CALIFORNIA 94120
TELEPHONE (415) 983-1000
FACSIMILE (415) 983-1200
January 29, 1996
Foundation Health Corporation
3400 Data Drive
Rancho Cordova, CA 95670
Ladies and Gentlemen:
With reference to the Registration Statement on Form S-4 (the "Registration
Statement") to be filed by Foundation Health Corporation, a Delaware corporation
("FHC"), with the Securities and Exchange Commission in connection with the
registration under the Securities Act of 1933, as amended, of up to 1,145,348
shares of FHC's Common Stock, par value $.01 per share ("FHC Common Stock"),
including the associated Rights to Purchase Series A Participating Preferred
Stock ("FHC Rights"), which may be issued in connection with the transactions
contemplated by the Agreement and Plan of Reorganization dated as of January 9,
1996 by and between FHC and Managed Health Network, Inc., a Delaware corporation
(the "Agreement"):
We are of the opinion that the above-referenced shares of FHC Common Stock
(including the associated FHC Rights) have been duly authorized and, when issued
in accordance with the Agreements, will be legally issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
PILLSBURY MADISON & SUTRO LLP
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Foundation Health Corporation on Form S-4 of our report dated July 25, 1995,
appearing in the Annual Report on Form 10-K of Foundation Health Corporation for
the year ended June 30, 1995 and to the reference to us under the heading
"Experts" in the Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Sacramento, California
January 26, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
of Foundation Health Corporation on Form S-4 of our report dated February 28,
1994 on our audits of the consolidated financial statements of CareFlorida
Health Systems, Inc. as of December 31, 1993 and 1992 and for the years then
ended, which report is included in the Annual Report on Form 10-K of Foundation
Health Corporation for the fiscal year ended June 30, 1995. We also consent to
the reference to our Firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Miami, Florida
January 26, 1996
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Foundation Health Corporation on Form S-4 of our report dated April 27, 1994,
on our audits of the consolidated financial statements of Thomas-Davis Medical
Centers, P.C., as of December 31, 1993 and 1992 and the years then ended, which
report is included in the Annual Report on Form 10-K of Foundation Health
Corporation for the fiscal year ended June 30, 1995. We also consent to the
reference to our Firm under the caption "Experts" in the prospectus, which is
part of this Registration Statement.
STEVENSON, JONES & HOLMAAS, P.C.
Tucson, Arizona
January 26, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in this
Registration Statement Form S-4 and related Prospectus of Foundation Health
Corporation and to the incorporation by reference therein of our report dated
February 16, 1994, except Note 17 as to which the date is March 18, 1994, with
respect to the consolidated financial statements of Intergroup Healthcare
Corporation for the years ended December 31, 1993 and 1992, appearing in the
Annual Report on Form 10-K of Foundation Health Corporation for the year ended
June 30, 1995 filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Tucson, Arizona
January 25, 1996
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Managed Health Network, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" and "Selected Consolidated Financial Data
of MHN" in the registration statement on Form S-4 of Foundation Health
Corporation.
Our report dated March 10, 1995, contains an explanatory paragraph stating
the Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," in 1993.
KPMG Peat Marwick LLP
Los Angeles, California
January 29, 1996
