<PAGE>
REGISTRATION NO. 33-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
VALUE HEALTH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7839 06-1194838
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
22 WATERVILLE ROAD
AVON, CONNECTICUT 06001
(203) 678-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PAUL M. FINIGAN, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
22 WATERVILLE ROAD
AVON, CONNECTICUT 06001
(203) 678-3418
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH COPIES TO:
SEAN P. GRIFFITHS, ESQ. E. GERALD RIESENBACH, ESQ.
GIBSON, DUNN & CRUTCHER COZEN AND O'CONNOR
200 PARK AVENUE 1900 MARKET STREET
NEW YORK, NEW YORK 10166 PHILADELPHIA, PENNSYLVANIA 19103
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AND THE
EFFECTIVE DATE OF THE PROPOSED MERGER (THE "MERGER") OF DIAGNOSTEK, INC.
("DIAGNOSTEK") WITH A SUBSIDIARY OF THE REGISTRANT, AS DESCRIBED IN THE
AGREEMENT AND PLAN OF MERGER, DATED AS OF MARCH 27, 1995, AS AMENDED AS OF
JUNE 4, 1995, ATTACHED AS ANNEX A TO THE PROXY STATEMENT-PROSPECTUS FORMING A
PART OF THIS REGISTRATION STATEMENT.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===============================================================================================
PROPOSED
MAXIMUM PROPOSED
TITLE OF EACH CLASS OF OFFERING MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO PRICE PER AGGREGATE ADDITIONAL
REGISTERED(1) BE REGISTERED SHARE OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, without
par value.............. 13,387,413(2)(3) $17.4375(4) $469,232,174.20(2) $50,131.00(4)(5)
===============================================================================================
</TABLE>
- -------------------------------------------------------------------------------
(1) This registration statement relates to securities of the registrant
issuable to holders of common stock of Diagnostek, in connection with the
Merger.
(2) Based on the maximum number of shares of common stock of Diagnostek that
will be outstanding immediately prior to the Merger (26,909,372 shares).
(3) Each share of Common Stock includes a Right to purchase one one-thousandth
of a share of Series A Junior Participating Preferred Stock pursuant to
the Rights Agreement between Value Health and Mellon Bank, as Rights
Agent.
(4) Pursuant to Rule 457(f)(1), the registration fee was computed on the basis
of the market value of the Diagnostek common stock to be exchanged in the
Merger, computed in accordance with Rule 457(c). On June 21, 1995, the
average of the high and low prices per share of such stock quoted on the
New York Stock Exchange was $17.4375.
(5) Pursuant to the initial filing on April 13, 1995 by Value Health of the
preliminary proxy materials under the Securities Exchange Act of 1934 with
respect to the Merger, Value Health paid a registration fee of
$111,673.90. At the proposed maximum offering price per share of $17.4375,
the amount of the additional registration fee is $50,131.00.
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, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
VALUE HEALTH, INC.
CROSS-REFERENCE SHEET
BETWEEN
ITEMS IN FORM S-4 AND LOCATION IN PROSPECTUS
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
-------------------------------- ----------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Front Cover of Prospectus...................... Facing Page; Cross-Reference Sheet; Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information.......................... Summary; The Merger; Incorporation of
Documents by Reference; Risk Factors
4. Terms of the Transaction........................ Summary; The Value Health Special Meeting;
The Diagnostek Special Meeting; The Merger;
The Merger Agreement; Comparative Per Share
Prices; Comparison of Stockholder Rights
5. Pro Forma Financial Information................. Summary; Combined Pro Forma Condensed
Financial Statements (Unaudited); Notes to
Pro Forma Combined Condensed Financial
Statements (Unaudited)
6. Material Contacts with the Company Being
Acquired....................................... Summary; The Merger; The Merger Agreement
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters................................... *
8. Interests of Named Experts and Counsel.......... Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants..... Available Information; Incorporation of
Documents by Reference; Summary; The Merger;
Capitalization; Description of the VH Capital
Stock
11. Incorporation of Certain Information by
Reference...................................... Incorporation of Documents by Reference
12. Information with Respect to S-2 or S-3
Registrants.................................... *
13. Incorporation of Certain Information by
Reference...................................... *
14. Information with Respect to Registrants Other
Than S-2 or S-3 Registrants.................... *
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies....... Incorporation of Documents by Reference;
Summary; The Merger; Capitalization
16. Information with Respect to S-2 or S-3
Companies...................................... *
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies........................... *
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to be Solicited............. Incorporation of Certain Documents by
Reference; Summary; The Value Health Special
Meeting; The Diagnostek Special Meeting; The
Merger; Beneficial Ownership of Diagnostek
Common Stock
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited or in an
Exchange Offer................................. *
</TABLE>
- -------
*Not applicable or answer negative upon the date of filing of this
registration statement.
<PAGE>
VALUE HEALTH, INC.
22 WATERVILLE ROAD
AVON, CONNECTICUT 06001
June , 1995
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders of
Value Health, Inc. ("Value Health") to be held at 10:00 a.m. on , July
, 1995, at the Avon Old Farms Hotel, Routes 10 & 44, Avon, Connecticut 06001.
At this important meeting, you will be asked to approve the issuance of Value
Health common stock in connection with an Agreement and Plan of Merger, dated
as of March 27, 1995, as amended on June 4, 1995 (the "Merger Agreement"),
among Value Health, VHI Merger-Sub. Corp., a wholly owned subsidiary of Value
Health ("Sub"), and Diagnostek, Inc. ("Diagnostek"). Pursuant to the terms of
the Merger Agreement, Sub will be merged with and into Diagnostek (the
"Merger"), and Diagnostek will become a wholly owned subsidiary of Value
Health.
Pursuant to the Merger, each outstanding share of Diagnostek common stock
will be converted into and represent the right to receive 0.4975 shares of
Value Health common stock (the "Exchange Ratio"). The proposed Merger is
described in the accompanying Joint Proxy Statement-Prospectus, the forepart of
which includes a summary of the terms of the Merger and certain other
information relating to the proposed transaction.
Montgomery Securities ("Montgomery") was retained by Value Health to render a
fairness opinion to the Value Health Board of Directors in connection with the
Merger. As discussed in the accompanying Proxy Statement-Prospectus, Montgomery
has delivered to the Value Health Board of Directors its written opinion, dated
June 8, 1995, that the consideration to be paid by Value Health pursuant to the
Merger was fair, from a financial point of view, to Value Health, as of the
date of such opinion. A copy of the opinion of Montgomery is attached as Annex
B to the accompanying Proxy Statement-Prospectus, and you are urged to read it
in its entirety.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE
BEST INTERESTS OF, VALUE HEALTH AND ITS STOCKHOLDERS. YOUR BOARD OF DIRECTORS
HAS UNANIMOUSLY APPROVED THE TERMS OF THE MERGER AND RECOMMENDS THAT
STOCKHOLDERS VOTE TO APPROVE THE ISSUANCE OF VALUE HEALTH COMMON STOCK PURSUANT
TO THE MERGER AGREEMENT.
It is important that your shares be represented at the Special Meeting,
regardless of the number you hold. Therefore, please sign, date and return your
proxy card as soon as possible, whether or not you plan to attend the Special
Meeting. This will not prevent you from voting your shares in person if you
subsequently choose to attend the Special Meeting.
Sincerely,
Robert E. Patricelli
Chairman of the Board
and Chief Executive Officer
<PAGE>
VALUE HEALTH, INC.
22 WATERVILLE ROAD
AVON, CONNECTICUT 06001
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY , 1995
----------------
To the Stockholders of Value Health, Inc.:
A Special Meeting of Stockholders of Value Health, Inc., a Delaware
corporation ("Value Health"), will be held at the Avon Old Farms Hotel, Routes
10 & 44, Avon, Connecticut 06001 at 10:00 a.m. on , July , 1995
for the following purposes:
l. To approve the issuance of Value Health common stock in connection
with an Agreement and Plan of Merger, dated as of March 27, 1995, as
amended on June 4, 1995 (the "Merger Agreement"), among Value Health, VHI
Merger-Sub. Corp., a wholly owned subsidiary of Value Health ("Sub"), and
Diagnostek, Inc. ("Diagnostek"), pursuant to which (i) Sub will be merged
into Diagnostek (the "Merger") and Diagnostek will become a wholly owned
subsidiary of Value Health, and (ii) each outstanding share of Diagnostek
common stock, $0.01 par value per share (other than shares owned by
Diagnostek, Value Health or any of their respective subsidiaries, all of
which will be canceled), will be converted into and represent the right to
receive 0.4975 shares of Value Health common stock, without par value. A
copy of the Merger Agreement is attached as Annex A to the Joint Proxy
Statement-Prospectus accompanying this Notice.
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on June 16, 1995 as
the record date for the determination of the holders of Value Health's common
stock entitled to notice of, and to vote at, the meeting. Accordingly, only
holders of record of Value Health common stock at the close of business on such
date will be entitled to notice of and to vote at the Special Meeting and any
adjournment or postponement thereof. The affirmative vote of a majority of
votes cast by the holders of the outstanding shares of Value Health common
stock entitled to vote thereon, at a meeting at which a quorum is present, is
necessary for the approval of the issuance of the Value Health common stock.
The Merger and other related matters are more fully described in the
accompanying Joint Proxy Statement-Prospectus, including the annexes thereto,
which form a part of this Notice.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER
ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS
RETURNED A PROXY.
By Order of the Board of Directors
Paul M. Finigan
Secretary
Dated: June , 1995
<PAGE>
DIAGNOSTEK, INC.
4500 ALEXANDER BLVD. NE
ALBUQUERQUE, NEW MEXICO 87107
June , 1995
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders of
Diagnostek, Inc. ("Diagnostek") to be held at 10:00 a.m. on , July ,
1995, at The Penn Club of New York, 30 West 44th Street, New York, New York
10036.
At this important meeting, you will be asked to consider and vote upon the
adoption of an Agreement and Plan of Merger, dated as of March 27, 1995, as
amended on June 4, 1995 (the "Merger Agreement"), among Value Health, Inc.
("Value Health"), VHI Merger-Sub. Corp., a wholly owned subsidiary of Value
Health ("Sub"), and Diagnostek. Pursuant to the terms of the Merger Agreement,
Sub will be merged with and into Diagnostek (the "Merger"), and Diagnostek will
become a wholly owned subsidiary of Value Health.
Pursuant to the Merger, each outstanding share of Diagnostek common stock
will be converted into and represent the right to receive 0.4975 shares of
Value Health common stock (the "Exchange Ratio"). The proposed Merger is
described in the accompanying Joint Proxy Statement-Prospectus, the forepart of
which includes a summary of the terms of the Merger and certain other
information relating to the proposed transaction.
Lazard Freres & Co. LLC ("Lazard") was retained by Diagnostek to act as its
independent financial advisor in connection with the Merger. As discussed in
the accompanying Proxy Statement-Prospectus, Lazard has delivered to the
Diagnostek Board of Directors its written opinion, dated June 8, 1995, that,
based upon and subject to various considerations set forth in such opinion, as
of such date, the Exchange Ratio was fair to the holders of Diagnostek Common
Stock from a financial point of view. A copy of the opinion of Lazard is
attached as Annex C to the accompanying Proxy Statement-Prospectus, and you are
urged to read it in its entirety.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AND THE TRANSACTIONS
CONTEMPLATED THEREBY ARE IN THE BEST INTERESTS OF DIAGNOSTEK AND ITS
STOCKHOLDERS. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TERMS OF THE
MERGER AND RECOMMENDS THAT STOCKHOLDERS VOTE TO APPROVE THE MERGER.
YOU SHOULD NOT RETURN CERTIFICATES FOR DIAGNOSTEK COMMON STOCK WITH THE
ENCLOSED PROXY. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES UNTIL YOU HAVE
RECEIVED A TRANSMITTAL LETTER FROM THE EXCHANGE AGENT.
It is important that your shares be represented at the Special Meeting,
regardless of the number you hold. Therefore, please sign, date and return your
proxy card as soon as possible, whether or not you plan to attend the Special
Meeting. This will not prevent you from voting your shares in person if you
subsequently choose to attend the Special Meeting.
Sincerely,
Nunzio P. DeSantis
Chairman of the Board
and Chief Executive Officer
<PAGE>
DIAGNOSTEK, INC.
4500 ALEXANDER BLVD. NE
ALBUQUERQUE, NEW MEXICO 87107
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY , 1995
----------------
To the Stockholders of Diagnostek, Inc.:
A Special Meeting of Stockholders of Diagnostek, Inc., a Delaware corporation
("Diagnostek"), will be held at The Penn Club of New York, 30 West 44th Street,
New York, New York 10036 at 10:00 a.m. on , July , 1995 for the
following purposes:
l. To approve and adopt the Agreement and Plan of Merger, dated as of
March 27, 1995, as amended on June 4, 1995 (the "Merger Agreement"), among
Value Health, Inc. ("Value Health"), VHI Merger-Sub. Corp., a wholly owned
subsidiary of Value Health ("Sub"), and Diagnostek, pursuant to which (i)
Sub will be merged into Diagnostek (the "Merger") and Diagnostek will
become a wholly owned subsidiary of Value Health, and (ii) each outstanding
share of Diagnostek common stock, $0.01 par value per share (other than
shares owned by Diagnostek, Value Health or any of their respective
subsidiaries, all of which will be canceled), will be converted into and
represent the right to receive 0.4975 shares of Value Health common stock,
without par value. A copy of the Merger Agreement is attached as Annex A to
the Joint Proxy Statement-Prospectus accompanying this Notice.
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on June 16, 1995 as
the record date for the determination of the holders of Diagnostek's common
stock entitled to notice of, and to vote at, the meeting. Accordingly, only
holders of record of Diagnostek common stock at the close of business on such
date will be entitled to notice of and to vote at the Special Meeting and any
adjournment or postponement thereof. The affirmative vote of the holders of a
majority of the outstanding shares of Diagnostek common stock entitled to vote
thereon, at a meeting at which a quorum is present, is necessary for the
approval of the Merger Agreement. The Merger and other related matters are more
fully described in the accompanying Joint Proxy Statement-Prospectus, including
the annexes thereto, which form a part of this Notice. Under the General
Corporation Law of the State of Delaware, holders of Diagnostek common stock
are not entitled to any appraisal rights with respect to the Merger.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER
ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS
RETURNED A PROXY.
STOCKHOLDERS SHOULD NOT RETURN CERTIFICATES FOR DIAGNOSTEK COMMON STOCK WITH
THE ENCLOSED PROXY. STOCKHOLDERS SHOULD NOT FORWARD THEIR STOCK CERTIFICATES
UNTIL THEY HAVE RECEIVED A TRANSMITTAL LETTER FROM THE EXCHANGE AGENT.
By Order of the Board of Directors
Courtlandt G. Miller
Secretary
Dated: June , 1995
<PAGE>
Value Health, Inc. Diagnostek, Inc.
22 Waterville Road 4500 Alexander Blvd. NE
Avon, Connecticut 06001 Albuquerque, New Mexico 87107
(203) 678-3400 (505) 345-1000
DIAGNOSTEK, INC.
PROXY STATEMENT
---------------
VALUE HEALTH, INC.
PROXY STATEMENT-PROSPECTUS
This Joint Proxy Statement-Prospectus (the "Proxy Statement-Prospectus") is
being furnished to the holders of common stock, without par value (the "VH
Common Stock"), of Value Health, Inc., a Delaware corporation ("Value
Health"), in connection with the solicitation of proxies by the Value Health
Board of Directors for use at a Special Meeting of Stockholders of Value
Health to be held at the Avon Old Farms Hotel, Routes 10 & 44, Avon,
Connecticut 06001, on , July , 1995, at 10:00 a.m., and at any
and all adjournments or postponements thereof (the "Value Health Special
Meeting").
This Proxy Statement-Prospectus is also being furnished to the holders of
common stock, par value $0.01 per share (the "Diagnostek Common Stock"), of
Diagnostek, Inc., a Delaware corporation ("Diagnostek"), in connection with
the solicitation of proxies by the Diagnostek Board of Directors for use at a
Special Meeting of Stockholders of Diagnostek to be held at The Penn Club of
New York, 30 West 44th Street, New York, New York 10036 on , July ,
1995, at 10:00 a.m., and at any and all adjournments or postponements thereof
(the "Diagnostek Special Meeting").
This Proxy Statement-Prospectus relates to the proposed merger (the
"Merger") into Diagnostek of VHI Merger-Sub. Corp., a wholly owned subsidiary
of Value Health ("Sub"), pursuant to an Agreement and Plan of Merger, dated as
of March 27, 1995, as amended on June 4, 1995 (the "Merger Agreement"), among
Value Health, Sub and Diagnostek. Upon consummation of the Merger, Diagnostek
will become a wholly owned subsidiary of Value Health. In the Merger, each
outstanding share of Diagnostek Common Stock (other than shares owned by
Diagnostek, Value Health or any of their respective subsidiaries, all of which
will be canceled) will be converted into and represent the right to receive
0.4975 shares of VH Common Stock, and cash in lieu of fractional shares of VH
Common Stock. Consummation of the Merger is subject to various conditions,
including the approval of a majority of the outstanding shares of Diagnostek
Common Stock at the Diagnostek Special Meeting and the approval of the
issuance of shares of VH Common Stock in connection with the Merger by a
majority of the shares present at the Value Health Special Meeting.
This Proxy Statement-Prospectus also constitutes the Prospectus of Value
Health with respect to up to 13,387,413 shares of VH Common Stock to be issued
in connection with the Merger. VH Common Stock is traded on the New York Stock
Exchange, Inc. (the "NYSE") under the symbol "VH." On June , 1995, the
closing sales price for VH Common Stock as reported on the NYSE Composite Tape
was $ per share.
The Boards of Directors of Value Health, Sub, and Diagnostek, and the holder
of all the outstanding capital stock of Sub have approved the Merger
Agreement. THE VALUE HEALTH BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF VH COMMON STOCK VOTE FOR THE ISSUANCE OF THE VH COMMON STOCK
PURSUANT TO THE TERMS OF THE MERGER AGREEMENT. THE DIAGNOSTEK BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF DIAGNOSTEK COMMON STOCK VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. See "THE MERGER--Interests
of Certain Persons in the Merger."
Proxies for the Value Health Special Meeting may be revoked, subject to the
procedures described herein, at any time up to and including the date of the
Value Health Special Meeting. See "THE VALUE HEALTH SPECIAL MEETING--Record
Date; Voting Rights; Proxies." Proxies for the Diagnostek Special Meeting may
be revoked, subject to the procedures described herein, at any time up to and
including the date of the Diagnostek Special Meeting. See "THE DIAGNOSTEK
SPECIAL MEETING--Record Date; Voting Rights; Proxies."
SEE "RISK FACTORS" ON PAGE 14 OF THIS PROXY STATEMENT-PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE EVALUATED IN CONNECTION WITH THE
MERGER.
All information contained in this Proxy Statement-Prospectus with respect
to Value Health and Sub has been provided by Value Health. All information
contained in this Proxy Statement-Prospectus with respect to Diagnostek has
been provided by Diagnostek.
This Proxy Statement-Prospectus and the accompanying forms of proxy are
first being mailed to stockholders of Value Health and Diagnostek on or about
June , 1995.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT-PROSPECTUS IS JUNE , 1995.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT-PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS
PROXY STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION, TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS NOR THE ISSUANCE OR
SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
SINCE THE DATE HEREOF OR INCORPORATED BY REFERENCE HEREIN SINCE THE DATE
HEREOF.
AVAILABLE INFORMATION
Value Health and Diagnostek are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and may be
available at the following Regional Offices of the Commission: Chicago Regional
Office, CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60621; and New York Regional Office, Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such materials can be obtained at prescribed
rates from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. In addition, material filed by
Value Health and Diagnostek can be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005, on which the shares of VH Common Stock
and Diagnostek Common Stock are listed.
This Proxy Statement-Prospectus does not contain all the information set
forth in the Registration Statement on Form S-4 and exhibits relating thereto,
including any amendments (the "Registration Statement"), of which this Proxy
Statement-Prospectus is a part, and which Value Health has filed with the
Commission under the Securities Act of 1933, as amended (the "Securities Act").
Reference is made to such Registration Statement for further information with
respect to Value Health and the securities of Value Health offered hereby.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission or attached as an annex hereto.
2
<PAGE>
INCORPORATION OF DOCUMENTS BY REFERENCE
Value Health hereby incorporates by reference into this Proxy Statement-
Prospectus the following documents previously filed with the Commission
pursuant to the Exchange Act:
1. Value Health's Annual Report on Form 10-K for the year ended December
31, 1994;
2. The descriptions of VH Common Stock set forth in Value Health's
Registration Statements pursuant to Section 12 of the Exchange Act, and any
amendment or report filed for the purpose of updating any such description;
3. Value Health's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995; and
4. Value Health's Current Reports on Form 8-K filed April 10, 1995 and
June 8, 1995.
Diagnostek hereby incorporates by reference into this Proxy Statement-
Prospectus the following documents previously filed with the Commission
pursuant to the Exchange Act:
1. Diagnostek's Annual Report on Form 10-K for the year ended March 31,
1995;
2. The description of the Diagnostek Common Stock contained in
Diagnostek's Registration Statement pursuant to Section 12 of the Exchange
Act, and any amendment or report filed for the purpose of updating any such
description; and
3. Diagnostek's Current Reports on Form 8-K filed April 3, 1995 and June
8, 1995.
In addition, all reports and other documents filed by Value Health and
Diagnostek pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date hereof and prior to the Value Health Special Meeting and
the Diagnostek Special Meeting shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such reports and
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein 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 that also is
incorporated or deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Proxy Statement-Prospectus.
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR ORAL
REQUEST FROM ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY
STATEMENT-PROSPECTUS IS DELIVERED, IN THE CASE OF DOCUMENTS RELATING TO VALUE
HEALTH, FROM VALUE HEALTH, INC., 22 WATERVILLE ROAD, AVON, CONNECTICUT 06001,
ATTENTION: SECRETARY (TEL. (203) 678-3400), OR, IN THE CASE OF DOCUMENTS
RELATING TO DIAGNOSTEK, FROM DIAGNOSTEK, INC., 4500 ALEXANDER BOULEVARD, N.E.,
ALBUQUERQUE, NEW MEXICO 87107, ATTENTION: SECRETARY (TEL. (505) 345-1000). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
JULY , 1995.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... 2
INCORPORATION OF DOCUMENTS BY REFERENCE.................................... 3
SUMMARY.................................................................... 6
The Companies............................................................ 6
The Special Meetings..................................................... 8
Recommendation of the Value Health Board of Directors.................... 9
Recommendation of the Diagnostek Board of Directors...................... 9
The Merger............................................................... 9
Opinions of Financial Advisors........................................... 10
Interests of Certain Persons in the Merger............................... 10
Certain Federal Income Tax Consequences.................................. 11
The VH Common Stock...................................................... 11
Comparative Rights of Stockholders....................................... 11
Comparative Per Share Prices............................................. 11
Surrender of Stock Certificates.......................................... 12
Risk Factors............................................................. 12
Selected Historical and Pro Forma Combined Financial Data................ 12
RISK FACTORS............................................................... 14
Impact of Healthcare Costs; Certain Contracts............................ 14
Competition.............................................................. 14
Integration of the Combined Companies; Significant Uncertainties......... 14
Government Regulation.................................................... 15
Fixed Exchange Ratio; Effect on the Consideration to be Received by the
Holders of Diagnostek Common Stock in the Merger........................ 15
Potential Legal Liability................................................ 16
Reliance on Data Processing.............................................. 16
Existing Diagnostek Litigation........................................... 16
Litigation with Respect to the Merger.................................... 16
Possible Future Acquisitions............................................. 17
THE VALUE HEALTH SPECIAL MEETING........................................... 18
Purpose of the Value Health Special Meeting.............................. 18
Record Date; Voting Rights; Proxies...................................... 18
Solicitation of Proxies.................................................. 18
Quorum................................................................... 19
Required Vote............................................................ 19
THE DIAGNOSTEK SPECIAL MEETING............................................. 19
Purpose of the Diagnostek Special Meeting................................ 19
Record Date; Voting Rights; Proxies...................................... 19
Solicitation of Proxies.................................................. 20
Quorum................................................................... 20
Required Vote............................................................ 20
THE MERGER................................................................. 21
General.................................................................. 21
Effective Date........................................................... 21
Conversion of Shares; Procedures for Exchange of Certificates............ 21
Background of the Merger................................................. 22
Recommendation of the Value Health Board of Directors; Reasons for the
Merger.................................................................. 25
Recommendation of the Diagnostek Board of Directors; Reasons for the
Merger.................................................................. 26
Interests of Certain Persons in the Merger............................... 27
Opinion of Value Health's Financial Advisor.............................. 28
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Opinion of Diagnostek's Financial Advisor................................. 33
Certain Federal Income Tax Consequences................................... 37
Anticipated Accounting Treatment.......................................... 38
Certain Legal Matters..................................................... 39
Federal Securities Law Consequences....................................... 39
Stock Exchange Listing.................................................... 40
Appraisal Rights.......................................................... 40
Effect of the Termination Fee............................................. 40
Existing Diagnostek Litigation............................................ 40
THE MERGER AGREEMENT........................................................ 42
The Merger................................................................ 42
Effective Date............................................................ 42
Terms of the Merger....................................................... 42
Fractional Shares......................................................... 42
Surrender and Payment..................................................... 43
Stock Options............................................................. 44
Conditions to Consummation of the Merger.................................. 44
Representations and Warranties............................................ 45
Conduct of Business Pending the Merger.................................... 46
Covenants................................................................. 48
Effect on Employee Benefit Plans.......................................... 49
No Solicitation........................................................... 49
Indemnification........................................................... 50
Termination; Fees and Expenses............................................ 50
Amendment; Waiver......................................................... 51
Litigation with Respect to the Merger..................................... 51
Merger-Related Expense.................................................... 52
COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICY............................ 53
CAPITALIZATION.............................................................. 54
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)............... 55
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)................................................................ 62
DESCRIPTION OF THE VH CAPITAL STOCK......................................... 65
General................................................................... 65
Common Stock.............................................................. 65
Rights Plan............................................................... 65
Preferred Stock........................................................... 67
COMPARISON OF STOCKHOLDER RIGHTS............................................ 67
BENEFICIAL OWNERSHIP OF DIAGNOSTEK COMMON STOCK............................. 68
OTHER MATTERS............................................................... 69
LEGAL MATTERS............................................................... 69
EXPERTS..................................................................... 69
STOCKHOLDER PROPOSALS....................................................... 70
ANNEX A--Merger Agreement
ANNEX B--Opinion of Montgomery Securities
ANNEX C--Opinion of Lazard Freres & Co. LLC
</TABLE>
5
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement-Prospectus, including the Annexes hereto. This summary
does not contain a complete statement of all material information relating to
the Merger Agreement and the Merger and is subject to, and is qualified in its
entirety by, the more detailed information and financial statements contained
or incorporated by reference in this Proxy Statement-Prospectus. Stockholders
of Value Health and Diagnostek should read carefully this Proxy Statement-
Prospectus in its entirety. Certain capitalized terms used in this summary are
defined elsewhere in this Proxy Statement-Prospectus.
THE COMPANIES
Value Health. Value Health, Inc. ("Value Health") provides specialty managed
health care benefit programs and health care information services. Value
Health's specialty managed health care benefit programs are designed to manage
costs and maintain quality in selected health care sectors that are of
particular concern to employers due to their size, rapid cost escalation and
potential for overutilization. These areas include prescription drugs, mental
health and substance abuse, and workers' compensation. Value Health's health
care information services are based upon the use of clinical and data analysis
to guide health care decision-making. These products include clinically-based
precertification and claims review, provider profiling, claims cost analysis,
evaluation and management of health benefit providers, disease management and
health policy and management consulting.
Through its ValueRx, Inc. subsidiary ("ValueRx"), Value Health provides
managed prescription drug benefit plans, integrated mail order pharmacy
programs, prescription drug utilization review and drug formulary services.
ValueRx also offers outpatient prescription drug plans which incorporate
benefit plan design services, a network of retail pharmacies, clinically-based
utilization review, claims processing, a mail service prescription option and
member prescription drug support services.
Value Health's Value Behavioral Health, Inc. subsidiary ("VBH") offers a
variety of services in the area of mental health, substance abuse and employee
assistance programs. VBH offers specially designed mental health and substance
abuse programs which incorporate preferred provider networks, clinically-based
utilization review and case management, benefit design, member support and
claims administration services. Value Health's principal customers for its
managed care mental health and substance abuse programs are large self-insured
employers who contract with VBH to provide such programs on a "carved out"
basis separate from the balance of the customer's health programs.
Through its Value Health Insurance Services Group ("ISG"), Value Health
provides managed workers' compensation and group health services. ISG offers
network-based cost management and treatment strategies for medical and
indemnity coverages and work-related injuries. Programs include comprehensive
utilization management, claims administration, disability management and health
care data analysis.
Value Health's Value Health Sciences, Inc. subsidiary ("VHS") offers
clinically-based prior authorization services and medical claims and provider
profiling review software. VHS is developing disease management capabilities
that integrate the clinical delivery of healthcare with expert decision
support, national guidelines, expert judgment and advanced case management
techniques. Disease management programs under development are tailored to meet
the specific needs of employers, managed care organizations and provider
groups.
Value Health, through its Lewin-VHI, Inc. subsidiary ("Lewin"), provides data
analysis and health policy and management consulting services to public sector
organizations, health care insurers and health care providers. Economic
research and analysis, strategic planning, merger and acquisition support,
market
6
<PAGE>
analysis, capitation rate setting, network contracting and evaluation of new
medical technologies are among the management consulting services provided by
Lewin.
On May 1, 1994, Value Health and Pfizer Inc. ("Pfizer") entered into a joint
venture partnership to develop specialty disease management programs, with
committed capital of up to $50 million by each partner. Value Health also
entered into a multi-year contract with Pfizer to develop value-added programs
designed to improve physician and patient use of Pfizer prescription and
medical device products. Further, several Pfizer drug products will receive
assured positions on Value Health's prescription drug formularies in return for
rebate arrangements.
As used in this Proxy Statement-Prospectus, the term "Value Health" refers to
Value Health, Inc. and its subsidiaries, unless the context otherwise requires.
The principal executive offices of Value Health are located at 22 Waterville
Road, Avon, Connecticut 06001; its telephone number is (203) 678-3400.
Sub. VHI Merger-Sub. Corp. ("Sub"), a wholly owned subsidiary of Value
Health, is a newly formed Delaware corporation created for the sole purpose of
consummating the transactions contemplated by the Merger Agreement. Sub has not
conducted any activities other than those incident to its formation, its
execution of the Merger Agreement and its participation in the preparation of
this Proxy Statement-Prospectus. As a result of the Merger, Sub will be merged
with and into Diagnostek, with Diagnostek being the surviving corporation (the
"Surviving Corporation"). The principal executive offices of Sub are located at
22 Waterville Road, Avon, Connecticut 06001; its telephone number is (203) 678-
3400.
Diagnostek. Diagnostek, Inc. ("Diagnostek"), together with its subsidiaries,
is a provider of integrated pharmacy management services designed to contain
the costs of dispensing pharmaceuticals. Diagnostek dispenses prescription
drugs, primarily by mail and retail channels, to beneficiaries of health
benefit plans and provides contract pharmacy management services to hospitals,
managed care providers and other institutions. Diagnostek markets point-of-
service integrated pharmacy benefit management programs through its RxChoice(C)
product line to corporations, labor unions, governmental entities and other
benefit plan sponsors, including health maintenance and preferred provider
organizations ("HMOs" and "PPOs"). The RxChoice(C) product is designed to
provide patient freedom-of-choice while achieving quality therapeutic care in
the most cost-effective manner. RxChoice(C) integrates the mail/retail
distribution of pharmaceuticals with clinical services provided by Diagnostek's
dedicated clinical pharmacy professionals.
Through its Health Care Services, Inc. subsidiary ("HCS"), Diagnostek manages
its integrated pharmacy service business. HCS processes prescription claims and
maintains a nationwide network of independent retail pharmacies to dispense
prescription medications. As one of the nation's largest for-profit providers
of prescription drugs by mail, HCS primarily dispenses long-term maintenance
medications; those pharmaceuticals that must be taken by patients on an ongoing
basis for treatment of chronic disorders.
Diagnostek's managed care business provides contract pharmacy management
services to health care provider organizations through Diagnostek's HPI Health
Care Services, Inc. subsidiary ("HPI") and specialty pharmacy services
primarily to individual customers through its Diagnostek Pharmacy, Inc.
subsidiary ("DPI"). HPI provides contract pharmacy services to hospitals, HMOs,
long-term care facilities and other health provider institutions. Through its
CapRx(C) product line, HPI relieves hospital administrators of daily
responsibility for pharmacy operations and provides customers with a more
efficient process for dispensing, administering and controlling
pharmaceuticals, while ensuring compliance with applicable regulations and
standards. DPI, through its 1993 acquisition of selected assets and selected
contract rights of Chronitech Health Services, Inc., provides specialty
pharmacy, homecare medication and infusion services to the chronic and disease
state market, including the HIV and AIDS population. Diagnostek also markets a
variety of specialized services including pharmacy staffing, inventory
management, therapeutic administration, infusion services, nursing services,
durable medical equipment sales, pharmaceutical and therapeutic education
courses for physicians and nurses, and drug utilization evaluation and review
studies.
7
<PAGE>
Diagnostek, through its original medical imaging business, also operates a
stand-alone out-patient medical diagnostic imaging center which accounts for
less than 1% of Diagnostek's consolidated revenues for the fiscal year ended
March 31, 1995.
As used in this Proxy Statement-Prospectus, the term "Diagnostek" refers to
Diagnostek, Inc. and its subsidiaries, unless the context otherwise requires.
The principal executive offices of Diagnostek are located at 4500 Alexander
Blvd. NE, Albuquerque, New Mexico 87107; its telephone number is (505) 345-
1000.
THE SPECIAL MEETINGS
Time, Place and Date. A Special Meeting of the stockholders of Value Health
will be held at the Avon Old Farms Hotel, Routes 10 & 44, Avon, Connecticut
06001, on , July , 1995, at 10:00 a.m. (including any and all
adjournments or postponements thereof, the "Value Health Special Meeting").
A Special Meeting of the stockholders of Diagnostek will be held at The Penn
Club of New York, 30 West 44th Street, New York, New York 10036 , on
, July , 1995, at 10:00 a.m. (including any and all adjournments
or postponements thereof, the "Diagnostek Special Meeting").
Purpose of the Special Meetings. At the Value Health Special Meeting, holders
of VH Common Stock will consider and vote upon the issuance of shares of VH
Common Stock pursuant to the Merger Agreement (the "Value Health Share
Proposal"). Stockholders of Value Health will also consider and vote upon any
other matter that may properly come before the meeting. Although Delaware law
and the Certificate of Incorporation of Value Health do not require Value
Health to obtain stockholder approval of the Merger, due to the number of
shares of VH Common Stock to be issued in the Merger, the NYSE requires Value
Health to obtain stockholder approval of the issuance of such shares.
At the Diagnostek Special Meeting, holders of Diagnostek Common Stock will
consider and vote upon a proposal to approve and adopt the Merger Agreement, a
copy of which is attached as Annex A to this Proxy Statement-Prospectus,
providing for the Merger of Sub into Diagnostek. As a result of the Merger,
Diagnostek will become a wholly owned subsidiary of Value Health. In the
Merger, each outstanding share of Diagnostek Common Stock (other than shares
owned by Diagnostek, Value Health or any of their respective subsidiaries, all
of which will be canceled) will be converted into and represent the right to
receive 0.4975 shares (the "Exchange Ratio") of VH Common Stock. Stockholders
of Diagnostek will also consider and vote upon any other matter that may
properly come before the meeting.
Votes Required; Record Date. The Value Health Share Proposal will require
approval by the affirmative vote of a majority of votes cast by the holders of
the outstanding shares of VH Common Stock entitled to vote thereon, at a
meeting at which a quorum is present. Holders of VH Common Stock are entitled
to one vote per share. Only holders of VH Common Stock at the close of business
on June 16, 1995 (the "Value Health Record Date") will be entitled to notice of
and to vote at the Value Health Special Meeting. As of June 16, 1995, the
directors and executive officers of Value Health and their affiliates owned an
aggregate of 9,746,648 shares (23.9%) of the VH Common Stock; such persons have
informed Value Health of their intention to vote their shares of VH Common
Stock in favor of the Value Health Share Proposal. See "THE VALUE HEALTH
SPECIAL MEETING."
The Merger will require approval and adoption of the Merger Agreement by the
affirmative vote of the holders of a majority of the outstanding shares of
Diagnostek Common Stock entitled to vote thereon. Holders of Diagnostek Common
Stock are entitled to one vote per share. Only holders of Diagnostek Common
Stock at the close of business on June 16, 1995 (the "Diagnostek Record Date")
will be entitled to notice of and to vote at the Diagnostek Special Meeting. As
of June 16, 1995, the directors and executive officers of Diagnostek owned an
aggregate of 1,178,843 shares (4.9%) of the Diagnostek Common Stock; such
persons have informed Diagnostek of their intention to vote their shares of
Diagnostek Common Stock in favor of the Merger Agreement and the Merger. See
"THE DIAGNOSTEK SPECIAL MEETING."
8
<PAGE>
RECOMMENDATION OF THE VALUE HEALTH BOARD OF DIRECTORS
The Value Health Board of Directors has unanimously determined that the
Merger is fair to, and in the best interests of, its stockholders and has
approved the Merger Agreement and related matters. The Value Health Board of
Directors unanimously recommends that its stockholders approve the Value Health
Share Proposal. See "THE MERGER--Background of the Merger," "--Recommendation
of the Value Health Board of Directors; Reasons for the Merger" and "--
Interests of Certain Persons in the Merger."
RECOMMENDATION OF THE DIAGNOSTEK BOARD OF DIRECTORS
The Diagnostek Board of Directors has unanimously determined that the Merger
is in the best interests of its stockholders and has approved the Merger
Agreement and related matters. The Diagnostek Board of Directors unanimously
recommends that its stockholders approve and adopt the Merger Agreement. See
"THE MERGER--Background of the Merger," "--Recommendation of the Diagnostek
Board of Directors; Reasons for the Merger" and "--Interests of Certain Persons
in the Merger."
THE MERGER
Merger Consideration. On the effective date of the Merger (the "Effective
Date"), each outstanding share of Diagnostek Common Stock (other than shares
owned by Diagnostek, Value Health or any of their respective subsidiaries, all
of which will be canceled) will be automatically converted into and represent
the right to receive 0.4975 shares of VH Common Stock, and cash in lieu of
fractional shares of VH Common Stock. No fractional shares will be issued. Upon
consummation of the Merger, Sub will be merged with and into Diagnostek and
Diagnostek, as the surviving corporation in the Merger, will become a wholly
owned subsidiary of Value Health. See "THE MERGER AGREEMENT--Terms of the
Merger."
Conditions to the Merger; Termination. The obligations of Value Health and
Diagnostek to consummate the Merger are subject to various conditions,
including, but not limited to: (i) obtaining requisite stockholder and
governmental approvals; (ii) the absence of any preliminary or permanent
injunction or other order by any federal or state court which prevents the
consummation of the Merger; (iii) approval for listing on the NYSE, subject to
official notice of issuance, of the VH Common Stock to be issued in connection
with the Merger; (iv) receipt of opinions of counsel at the closing of the
Merger in respect of certain federal income tax consequences of the Merger; (v)
receipt of accountants' letters to the effect that the Merger qualifies for
pooling of interests accounting treatment; and (vi) receipt of requisite third
party consents. See "THE MERGER AGREEMENT--Conditions to Consummation of the
Merger."
The Merger Agreement may be terminated at any time prior to the Effective
Date, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of Diagnostek: (i) by mutual consent of the
Boards of Directors of Value Health and Diagnostek; (ii) by either Value Health
or Diagnostek if the Merger has not been consummated on or before September 15,
1995; (iii) by Diagnostek if any of the conditions specified in Sections 9.1
and 9.2 of the Merger Agreement has not been met or waived at such time as such
condition is no longer capable of satisfaction; (iv) by Value Health if any of
the conditions specified in Sections 9.1 and 9.3 of the Merger Agreement has
not been met or waived at such time as such condition is no longer capable of
satisfaction; (v) by Value Health if (A) any person commences a tender offer or
exchange offer for 25% or more of the outstanding shares of Diagnostek Common
Stock and the Diagnostek Board of Directors has not recommended against such
offer or has taken no position with respect to such offer, (B) Diagnostek has
authorized, recommended or proposed an agreement with any person to merge, sell
25% or more of Diagnostek's consolidated assets or issue 25% or more of its
voting stock, (C) any person has acquired beneficial ownership of 25% or more
of the outstanding Diagnostek Common Stock or (D) the holders of Diagnostek
Common Stock have not approved the Merger following a public announcement of a
proposal to engage in a transaction described in (A), (B) or (C) above or the
Diagnostek Board of Directors has withdrawn or modified its recommendation that
the holders of Diagnostek Common
9
<PAGE>
Stock approve the Merger Agreement; or (vi) by Diagnostek (A) if its Board of
Directors in the exercise of its fiduciary duties accepts an alternative
acquisition proposal, or (B) upon the occurrence of an event specified in
(v)(C) above. See "THE MERGER AGREEMENT--Termination; Fees and Expenses."
Upon the termination of the Merger Agreement by Value Health pursuant to (v)
above, or by Diagnostek pursuant to (vi) above or following the occurrence of
an event specified in (v)(D) above, Diagnostek is obligated to pay Value Health
a fee of $15 million. The termination fee could have the effect of discouraging
a third party from pursuing an acquisition transaction involving Diagnostek.
See "THE MERGER--Effect of the Termination Fee."
Listing. It is a condition to the Merger that the shares of VH Common Stock
to be issued in the Merger be authorized for listing on the NYSE, subject to
official notice of issuance.
Governmental Approvals Required. Certain aspects of the Merger will require
notifications to, and/or approvals from, certain federal and state authorities,
including approval under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"). Value Health and Diagnostek have each filed a
Notification and Report Form for review under the HSR Act and on May 3, 1995
received early termination of the waiting period under the HSR Act. See "THE
MERGER--Certain Legal Matters."
Anticipated Accounting Treatment. The Merger is expected to qualify as a
pooling of interests for accounting and financial reporting purposes. The
receipt of letters from Coopers & Lybrand L.L.P. and KPMG Peat Marwick LLP, the
respective independent accountants of Value Health and Diagnostek, confirming
that the Merger will qualify for pooling of interests accounting is a condition
to consummation of the Merger.
Appraisal Rights. Under Delaware law, neither the holders of VH Common Stock
nor the holders of Diagnostek Common Stock are entitled to any appraisal rights
in connection with the Merger. See "THE MERGER--Appraisal Rights."
OPINIONS OF FINANCIAL ADVISORS
Montgomery Securities ("Montgomery") has delivered its written opinion to the
Value Health Board of Directors, dated June 8, 1995, to the effect that the
consideration to be paid by Value Health pursuant to the Merger was fair to
Value Health from a financial point of view, as of the date of such opinion. A
copy of the opinion of Montgomery dated June 8, 1995, which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached as Annex B to this Proxy Statement-Prospectus and is incorporated
herein by reference. Stockholders of Value Health are urged to read the opinion
carefully and in its entirety. See "THE MERGER--Opinion of Value Health's
Financial Advisor."
Lazard Freres & Co. LLC ("Lazard") has delivered its written opinion, dated
June 8, 1995, to the Diagnostek Board of Directors to the effect that the
Exchange Ratio was fair to the holders of Diagnostek Common Stock from a
financial point of view as of such date. A copy of the opinion of Lazard, which
sets forth the assumptions made, matters considered and limits on the review
undertaken, is attached as Annex C to this Proxy Statement-Prospectus and is
incorporated herein by reference. Stockholders of Diagnostek are urged to read
the opinion carefully and in its entirety. See "THE MERGER--Opinion of
Diagnostek's Financial Advisor."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Diagnostek Board of Directors with
respect to the Merger Agreement and the transactions contemplated thereby,
stockholders should be aware that certain members of Diagnostek's management
(some of whom are members of the Diagnostek Board of Directors) and the
10
<PAGE>
members of the Diagnostek Board of Directors have certain interests in the
Merger that are in addition to the interests of stockholders of Diagnostek
generally. These interests arise from, among other things, certain employee
benefit plans, indemnification and insurance arrangements and other matters
which Value Health will assume or has agreed to provide after the Merger. In
addition, Mr. DeSantis, the Chairman of the Board and Chief Executive Officer
of Diagnostek, has agreed (i) to a consulting arrangement to render consulting
services to Diagnostek and its affiliates pursuant to which Mr. DeSantis will
receive among other things an annual consulting fee of $120,000 for five years
and (ii) not to compete with Diagnostek or Value Health in return for a $3.5
million payment. Nine officers, including Mr. DeSantis and one other director,
will also be entitled under existing employment agreements to certain payments
in the event of termination of their employment following a change of control
such as the Merger. See "THE MERGER--Interests of Certain Persons in the
Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned upon the delivery of opinions of
counsel dated as of the Effective Date to the effect that the Merger will
constitute a "reorganization" within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"). Except as more fully described
under "THE MERGER--Certain Federal Income Tax Consequences," no gain or loss
will be recognized by Diagnostek stockholders upon the receipt in the Merger of
VH Common Stock (and cash in lieu of fractional shares) in exchange for their
shares of Diagnostek Common Stock except with respect to cash received in lieu
of fractional shares and no gain or loss will be recognized by Value Health,
Diagnostek or Sub in connection with the Merger. See "THE MERGER--Certain
Federal Income Tax Consequences."
THE VH COMMON STOCK
There are 100,000,000 shares of VH Common Stock authorized, of which, as of
the Value Health Record Date, there were 40,802,114 shares outstanding, and an
additional 4,336,298 shares issuable upon exercise of all outstanding options
exercisable for VH Common Stock. It is anticipated that on the Effective Date,
approximately 12,068,229 shares of VH Common Stock will be issued to the
holders of Diagnostek Common Stock, and an additional 1,319,184 shares of VH
Common Stock will be issuable upon the exercise of options and warrants which
were previously exercisable for Diagnostek Common Stock. At the Effective Date,
such shares are anticipated to represent approximately 22.9% of the outstanding
VH Common Stock, assuming the exercise of all outstanding options exercisable
for VH Common Stock and all options and warrants originally exercisable for
Diagnostek Common Stock. The VH Common Stock trades on the NYSE under the
symbol "VH." See "DESCRIPTION OF THE VH CAPITAL STOCK."
COMPARATIVE RIGHTS OF STOCKHOLDERS
The rights of stockholders of Diagnostek currently are governed by Delaware
law, Diagnostek's Certificate of Incorporation, as amended, and Diagnostek's
By-laws. Upon consummation of the Merger, stockholders of Diagnostek will
become stockholders of Value Health, which is also a Delaware corporation,
and their rights as stockholders of Value Health will be governed by Delaware
law, Value Health's Certificate of Incorporation and Value Health's Amended and
Restated By-laws. For a comparison of the rights of stockholders of Diagnostek
and the rights of stockholders of Value Health, see "COMPARISON OF STOCKHOLDER
RIGHTS."
COMPARATIVE PER SHARE PRICES
On March 24, 1995, the last sales prices of VH Common Stock and Diagnostek
Common Stock as reported on the NYSE Composite Tape were $34 1/4 per share and
$18 1/2 per share, respectively. The public
11
<PAGE>
announcement of the original Agreement and Plan of Merger occurred prior to the
opening of trading on March 27, 1995. On June , 1995, the trading day
immediately prior to the date of this Proxy Statement-Prospectus, the last
sales prices of VH Common Stock and Diagnostek Common Stock as reported on the
NYSE Composite Tape were $ per share and $ per share, respectively. See
"COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICY."
SURRENDER OF STOCK CERTIFICATES
As soon as practicable after the Effective Date, Mellon Securities Transfer
Services, or another person designated by Value Health and reasonably
acceptable to Diagnostek, in its capacity as exchange agent for the Merger (the
"Exchange Agent"), will send a transmittal letter to each holder of Diagnostek
Common Stock. The transmittal letter will contain instructions with respect to
the surrender of certificates representing Diagnostek Common Stock to be
exchanged for VH Common Stock. See "THE MERGER--Conversion of Shares;
Procedures for Exchange of Certificates."
DIAGNOSTEK STOCKHOLDERS SHOULD NOT FORWARD CERTIFICATES FOR DIAGNOSTEK COMMON
STOCK TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS.
DIAGNOSTEK STOCKHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED
PROXY.
RISK FACTORS
In considering whether to vote for the Value Health Share Proposal or to
adopt and approve the Merger Agreement, stockholders of Value Health and
Diagnostek should consider carefully the information set forth in "RISK
FACTORS."
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following table presents selected historical financial data of Value
Health and Diagnostek, and selected pro forma combined financial data after
giving effect to the Merger under the pooling of interests method of
accounting. Value Health's historical financial data have been derived from its
audited and unaudited consolidated financial statements previously filed with
the Commission. Diagnostek's fiscal year ends on March 31. Diagnostek's
historical financial data have been recast to conform to Value Health's fiscal
year which ends on December 31. Diagnostek's historical financial data for each
of the periods presented have been derived from its audited and unaudited
consolidated financial statements previously filed with the Commission.
Diagnostek's historical financial data for each of the annual periods presented
have been derived by adding the unaudited quarterly financial information for
the three months ended March 31 for each such annual period to the unaudited
quarterly financial information for the nine months ended December 31 for each
such annual period. Certain audited and unaudited financial statements of Value
Health and Diagnostek have not been incorporated by reference herein. See
"INCORPORATION OF DOCUMENTS BY REFERENCE."
The selected pro forma combined financial data have been derived from, or
prepared on a basis consistent with, the unaudited pro forma combined condensed
financial statements included herein. These data are presented for illustrative
purposes only and, therefore, are not necessarily indicative of the operating
results or financial position that would have occurred or that might have been
achieved had the Merger occurred as of an earlier date, nor are they
necessarily indicative of operating results or financial position that may
occur in the future. Further, the pro forma combined financial data excludes
the transaction costs of the Merger, and the potential cost savings that may be
achieved, and merger-related expenses (see note 4 to the pro forma combined
condensed financial statements included herein) that are expected to be
incurred in connection with the integration of Value Health's and Diagnostek's
business operations.
12
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE THREE
MONTHS ENDED MARCH 31, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
----------- ----------- ---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
VALUE HEALTH, INC.--
HISTORICAL:
Total revenues......... $ 276,104 $ 216,350 $ 976,403 $ 689,455 $365,643 $195,592 $123,680
Earnings from
continuing operations. 16,575 10,777 49,621 6,998 19,360 10,292 2,498
Earnings from
continuing operations
per common share...... $ 0.40 $ 0.26 $ 1.19 $ 0.17 $ 0.53 $ 0.34 $ 0.10
Dividends declared per
common share.......... -- -- -- -- -- -- --
Total assets........... 555,550 463,671 537,115 482,423 365,752 144,767 64,186
Long-term liabilities
and redeemable
preferred stock....... 8,887 7,697 6,046 7,596 6,118 2,960 9,520
Stockholders' equity... 410,328 331,493 391,618 317,517 292,790 107,749 35,302
Book value per common
share................. $ 10.08 $ 8.39 $ 9.68 $ 8.07 $ 7.58 $ 3.43 $ 1.50
DIAGNOSTEK, INC.--
HISTORICAL(1):
Total revenues......... $ 177,248 $ 162,326 $ 660,523 $ 436,588 $368,481 $293,269 $222,613
Earnings from
continuing operations. (2,680) (3,764) 9,900 7,932 7,359 11,159 7,128
Earnings from
continuing operations
per common share...... $ (0.11) $ (0.15) $ 0.39 $ 0.33 $ 0.30 $ 0.54 $ 0.36
Dividends declared per
common share.......... -- -- -- -- -- -- --
Total assets........... 266,450 241,403 252,936 224,738 225,306 211,650 116,172
Long-term liabilities.. 13,020 15,130 13,622 14,976 21,186 27,104 40,051
Stockholders' equity... 184,048 167,634 184,628 177,023 160,940 152,285 52,859
Book value per common
share................. $ 7.59 $ 7.01 $ 7.63 $ 7.36 $ 6.87 $ 6.54 $ 2.83
PRO FORMA COMBINED:
Total revenues......... $ 444,113 $ 373,074 $1,605,926 $1,112,343 $730,624 $488,861 $346,293
Earnings from
continuing operations. 13,895 7,013 59,521 14,930 26,719 21,451 9,626
Earnings from
continuing operations
per common share...... $ 0.26 $ 0.13 $ 1.10 $ 0.29 $ 0.55 $ 0.53 $ 0.27
Dividends declared per
common share.......... -- -- -- -- -- -- --
Total assets........... 822,000 705,074 790,051 707,161 591,058 356,417 180,358
Long-term liabilities
and redeemable
preferred stock....... 21,907 22,827 19,668 22,572 27,304 30,064 49,571
Stockholders' equity... 594,376 499,127 576,246 494,540 453,730 260,034 88,161
Book value per common
share................. $ 11.26 $ 9.71 $ 10.98 $ 9.64 $ 9.03 $ 6.04 $ 2.68
DIAGNOSTEK, INC.
PRO FORMA EQUIVALENTS:
Earnings from
continuing operations
per common share(2)... $ 0.13 $ 0.06 $ 0.55 $ 0.14 $ 0.27 $ 0.26 $ 0.13
Dividends per common
share................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Book value per common
share(3).............. $ 5.60 $ 4.83 $ 5.46 $ 4.80 $ 4.49 $ 3.01 $ 1.34
</TABLE>
- --------
(1) Diagnostek's fiscal year ends on March 31. Diagnostek's historical
financial data have been recast to conform to Value Health's fiscal year
which ends on December 31. Diagnostek's historical financial data for each
of the periods presented have been derived from its audited and unaudited
consolidated financial statements previously filed with the Commission.
Diagnostek's historical financial data for each of the annual periods
presented have been derived by adding the unaudited quarterly financial
information for the three months ended March 31 for each such annual period
to the unaudited quarterly financial information for the nine months ended
December 31 for each such annual period. Certain audited and unaudited
financial statements of Value Health and Diagnostek have not been
incorporated by reference herein. See "INCORPORATION OF DOCUMENTS BY
REFERENCE."
(2) The Diagnostek pro forma equivalent earnings from continuing operations per
common share was derived by multiplying the pro forma combined earnings
from continuing operations per common share by the Exchange Ratio.
(3) The Diagnostek pro forma equivalent book value per common share was derived
by multiplying the pro forma combined book value per common share by the
Exchange Ratio.
THE ABOVE INFORMATION SHOULD BE READ IN CONJUNCTION WITH VALUE HEALTH'S AND
DIAGNOSTEK'S HISTORICAL AND PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
AND NOTES THERETO, EITHER INCORPORATED BY REFERENCE OR INCLUDED HEREIN. SEE
"PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)."
13
<PAGE>
RISK FACTORS
Holders of VH Common Stock in voting on the Value Health Share Proposal, and
holders of Diagnostek Common Stock in voting on the Merger Agreement, should
consider carefully all of the information contained in this Proxy Statement-
Prospectus including the Annexes hereto, and the following:
IMPACT OF HEALTHCARE COSTS; CERTAIN CONTRACTS
Under certain of its specialty benefit plan contracts, Value Health agrees to
arrange and pay for providing mental health and prescription drug services to
plan beneficiaries for a fixed amount regardless of the cost to Value Health of
providing such services. In addition, other agreements (where the claims are
paid by plan sponsors or their insurers and Value Health receives an
administrative fee) include provisions whereby Value Health's fee is adjusted
depending upon performance as measured against targeted criteria. In certain
circumstances, Diagnostek has similar arrangements with respect to its
prescription drug services. Value Health and Diagnostek use various mechanisms
to predict and reduce their financial risks under such agreements. There can be
no assurance, however, that, in the future, increases in health care costs or
higher than anticipated utilization rates, significant aspects of which are
outside the control of Value Health and Diagnostek, will not cause expenses
associated with such agreements to exceed revenues or projected targets and
have a material adverse effect on the results of operations or financial
condition of Value Health or Diagnostek.
Each of Value Health and Diagnostek has arrangements with certain
pharmaceutical manufacturers whereby they receive payments based upon the
volume of pharmaceuticals purchased from the manufacturers and to the extent
that there is a change in such arrangements, such change could have a material
adverse effect on each company's operating margin.
Value Health's and Diagnostek's integrated pharmacy service contracts
typically have initial terms of one to three years. In the case of Diagnostek,
the loss of certain major integrated pharmacy service customers could have a
material adverse effect on Diagnostek's results of operations. Diagnostek's
managed care pharmacy contracts typically have initial terms of three years. In
September 1994, Diagnostek's contracts with CIGNA Corporation ("CIGNA"), which
generated revenues of $80.7 million for the fiscal year ended March 31, 1994,
were terminated in advance of previously contracted dates. See "--Existing
Diagnostek Litigation."
COMPETITION
Value Health and Diagnostek face intense competition from many group
insurance companies, HMOs, PPOs, third-party administrators and other specialty
managed health care companies. Many of the companies with which Value Health
and Diagnostek compete are significantly larger and have greater financial
resources than Value Health and Diagnostek, including several drug
manufacturers which have recently acquired large pharmacy benefits management
companies. There can be no assurance that either Value Health or Diagnostek
will continue to maintain its existing performance or be successful with any
new products or in any new geographical markets it may enter.
INTEGRATION OF THE COMBINED COMPANIES; SIGNIFICANT UNCERTAINTIES
The managements of Value Health and Diagnostek are performing an ongoing
evaluation regarding the nature and scope of their operations and various
short- and long-term strategic considerations in the process of assessing
whether, and to what extent, integration, consolidation or other modification
of the two separate businesses is appropriate following the Merger. Many
operational and strategic decisions with respect to the combined companies have
not yet been made. Significant uncertainties and risks relating to the Merger
and the integration of the companies' operations may exist. The timing and
manner of the implementation of
14
<PAGE>
decisions made with respect to the ongoing business of the combined companies
following the Merger will materially affect the operations of the combined
companies. Restructuring and integrating the pharmacy benefit management
operations of Value Health and Diagnostek will require the dedication of
significant management resources and could distract attention from the day-to-
day operations of the separate businesses. Given the range of potential
outcomes arising from such decisions and the interrelationships among decisions
to be made, it is difficult to quantify with precision the impact of such
decisions on the results of operations and financial condition of the combined
companies. For a discussion of merger-related charges associated with such
decisions, see "THE MERGER AGREEMENT--Merger-Related Expense."
GOVERNMENT REGULATION
Value Health and Diagnostek are required to comply with extensive state and
federal regulations and to receive regulatory approval or licenses in order to
conduct certain specialty benefit programs, utilization review services and the
practice of pharmacy and dispensing of prescription drugs.
Certain states and the federal government have enacted laws and regulations
that apply to Value Health's and Diagnostek's mail order pharmacy services.
Such laws and regulations typically require registration and, in certain
instances, may result in economic disincentives for benefit sponsors' use of
prescription drug mail order services such as those offered by Value Health and
Diagnostek. The application of these laws and regulations to out-of-state mail
pharmacy services is unclear in some jurisdictions and questions could arise
with respect to compliance by Value Health and Diagnostek with such laws and
regulations.
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
governs aspects of the relationship between employer sponsored health benefit
plans and providers of administrative services to such plans through a series
of complex statutes and regulations that are subject to periodic interpretation
by the Internal Revenue Service and the Department of Labor. ERISA imposes
certain requirements on the manner in which Value Health and Diagnostek do
business with employers who provide self-insured benefit plans. Ongoing
enforcement activities of the Department of Labor may result in additional
limitations on how Value Health and Diagnostek serve self-insured employer
accounts.
The regulation of managed health care continues to evolve, and Value Health
and Diagnostek cannot predict the focus of future regulations. In general,
regulation of managed care companies is increasing. For instance, many states
have either adopted, or are now considering adoption of, additional laws and
regulations relating to utilization review, and federal programs addressing
control of health care costs are routinely proposed. Expansion of Value
Health's or Diagnostek's business to additional geographic markets or product
lines may subject them to additional state and federal regulations.
FIXED EXCHANGE RATIO; EFFECT ON THE CONSIDERATION TO BE RECEIVED BY THE HOLDERS
OF DIAGNOSTEK COMMON STOCK IN THE MERGER
The relative stock prices of the VH Common Stock and the Diagnostek Common
Stock at the Effective Date may vary significantly from the prices as of the
date of the Merger Agreement, the date hereof or the date on which the special
meetings are held. These variances may be due to changes in the business,
operations and prospects of Value Health or Diagnostek, market assessments of
the likelihood that the Merger will be consummated and the timing thereof, the
effect of any conditions or restrictions imposed on or proposed with respect to
the combined companies by regulatory agencies in connection with or following
consummation of the Merger, general market and economic conditions, and other
factors. The Exchange Ratio is fixed and will not be adjusted based on changes
in the relative stock prices of the VH Common Stock and the Diagnostek Common
Stock. Thus, the dollar value of the VH Common Stock to be received by the
holders of Diagnostek Common Stock will not be determined until the Effective
Date, and may be substantially more or less than the value of the VH Common
Stock as of the date of the Merger Agreement, the date hereof or the date on
which the special meetings are held.
15
<PAGE>
POTENTIAL LEGAL LIABILITY
Value Health, through its utilization review services, makes determinations
and/or recommendations regarding benefit plan coverage based upon judgments of
medical necessity, and could share in potential liabilities for adverse medical
consequences. Value Health could also become subject to claims for the costs of
services denied and claims, such as malpractice, arising from the acts or
omissions of health care professionals participating in Value Health's
preferred provider networks. Although neither Value Health nor Diagnostek
believes it is engaged in the practice of medicine and neither has been a party
to any such litigation which is material, there can be no assurance that Value
Health's or Diagnostek's procedures for limiting liability have been or will be
effective, or that Value Health and Diagnostek will not be subject to
litigation that may adversely affect Value Health's results of operations
following consummation of the Merger.
RELIANCE ON DATA PROCESSING
Certain aspects of the business of Value Health and Diagnostek are dependent
upon their ability to store, retrieve, process and manage data and to maintain
and upgrade their data processing capabilities. Interruption of data processing
capabilities for any extended length of time, loss of stored data, programming
errors or other computer problems could have a material adverse effect on the
business of Value Health following consummation of the Merger.
EXISTING DIAGNOSTEK LITIGATION
On July 11, 1994, a purported shareholder class action was filed against
Diagnostek and various of its officers and directors. The action is pending in
the United States District Court for the District of New Mexico. The plaintiffs
have asserted violations of the Exchange Act and common law, on account of the
alleged artificial inflation in the market price of Diagnostek Common Stock by
reason of various alleged misrepresentations and omissions. The plaintiffs have
also alleged that the defendants concealed from the public the circumstances
leading to the termination of CIGNA's contractual relationships with
Diagnostek. The plaintiffs recently have expanded the allegations in the
complaint to assert that Diagnostek misrepresented the anticipated revenues
from a CHAMPUS contract with the Department of Defense and to extend the class
period from July 6, 1994 to March 24, 1995. Although Diagnostek has denied any
liability and is vigorously defending the litigation, Diagnostek has not
established a reserve with respect to such litigation and there can be no
assurance that the outcome of this litigation will not materially adversely
affect Value Health's results of operations following consummation of the
Merger. See "THE MERGER--Existing Diagnostek Litigation."
LITIGATION WITH RESPECT TO THE MERGER
Promptly after the announcement of the execution of the Merger Agreement, 11
stockholder class action suits were filed in the Court of Chancery of the State
of Delaware against Diagnostek and its directors (Nunzio P. DeSantis,
Courtlandt G. Miller, David Devereaux, Julius Golden, Miles Stuchin and E.
Gerald Riesenbach) asserting that the value of the consideration to be received
by Diagnostek stockholders is unfair and grossly inadequate and that the
directors of Diagnostek breached their fiduciary duties to Diagnostek
stockholders by failing to take steps to maximize stockholder value. The suits
seek, among other things, to enjoin the Merger, to compel the directors of
Diagnostek to reconsider the Exchange Ratio and to recover unspecified damages.
Diagnostek and the individual defendants intend to vigorously defend these
claims based upon their belief that the actions of Diagnostek and its directors
in connection with the Merger Agreement were appropriately taken under
applicable law and that the Merger is fair to and in the best interests of
Diagnostek's stockholders. Value Health has been named as a defendant in
certain of these actions for allegedly aiding and abetting in the alleged
breaches of fiduciary duty by the Diagnostek directors. Value Health believes
that the allegations that it aided and abetted an alleged breach of fiduciary
duty are without merit and intends to defend such claims vigorously. The
plaintiffs have served a document production request
16
<PAGE>
upon the defendants, to which the defendants have submitted written responses.
Diagnostek has filed an answer denying the principal allegations of the
complaint. Value Health expects also to file an answer denying the complaint's
principal allegations. As of June 22, 1995, no further action has been taken by
either the plaintiffs or the defendants, although counsel representing the
plaintiffs have suggested that the actions be consolidated and captioned
"In Re: Diagnostek, Inc. Shareholders Litigation."
-----------------------------------------------
POSSIBLE FUTURE ACQUISITIONS
Value Health has in the past made a number of acquisitions and may in the
future make additional acquisitions which could result in changes in Value
Health's business. Under applicable law and regulations, in many circumstances,
approval by Value Health stockholders of any such acquisitions may not be
required. Value Health may pay for such acquisitions in cash or by issuing
equity or debt securities. The issuance of equity to effect or finance such
acquisitions would have the effect of reducing the percentage ownership of
Value Health held by each pre-acquisition stockholder and the incurrence of
indebtedness in connection with such acquisitions could adversely affect the
liquidity, results of operations and financial condition of Value Health. For
example, Value Health has issued an aggregate of 12,152,155 shares of VH Common
Stock in the last two years in connection with three acquisitions. These shares
represent an aggregate purchase price of approximately $425 million for such
acquisitions.
17
<PAGE>
THE VALUE HEALTH SPECIAL MEETING
PURPOSE OF THE VALUE HEALTH SPECIAL MEETING
At the Value Health Special Meeting, holders of VH Common Stock will consider
and vote upon the Value Health Share Proposal to approve the issuance of shares
of VH Common Stock pursuant to the Merger Agreement. Value Health stockholders
will also consider and vote upon such other matters as may properly be brought
before the meeting. Although Delaware law and the Certificate of Incorporation
of Value Health do not require Value Health to obtain stockholder approval of
the Merger because Diagnostek is merging with a subsidiary of Value Health,
rather than Value Health itself, due to the number of shares of VH Common Stock
to be issued in the Merger, the NYSE requires Value Health to obtain
stockholder approval of the issuance of such shares. Stockholder approval of
the Value Health Share Proposal will constitute the approval required by the
NYSE for the issuance of the VH Common Stock in connection with the Merger.
THE VALUE HEALTH BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE VALUE HEALTH SHARE PROPOSAL IN CONNECTION WITH THE MERGER AND
RECOMMENDS A VOTE FOR THE VALUE HEALTH SHARE PROPOSAL.
RECORD DATE; VOTING RIGHTS; PROXIES
The Value Health Board of Directors has fixed the close of business on June
16, 1995 as the Value Health Record Date for determining holders entitled to
notice of and to vote at the Value Health Special Meeting.
As of the Value Health Record Date there were 40,802,114 shares of VH Common
Stock issued and outstanding, each of which entitles the holder thereof to one
vote. All shares of VH Common Stock represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE
INDICATED, SUCH SHARES OF VH COMMON STOCK WILL BE VOTED IN FAVOR OF THE VALUE
HEALTH SHARE PROPOSAL. Value Health does not know of any matters other than as
described in the Notice of Special Meeting that are to come before the Value
Health Special Meeting. If any other matter or matters are properly presented
for action at the Value Health Special Meeting, the persons named in the
enclosed form of proxy and acting thereunder will have the discretion to vote
on such matters in accordance with their best judgment, unless such
authorization is withheld. A stockholder who has given a proxy may revoke it at
any time prior to its exercise by giving written notice thereof to the
Secretary of Value Health by signing and returning a later dated proxy, or by
voting in person at the Value Health Special Meeting; however, mere attendance
at the Value Health Special Meeting will not in and of itself have the effect
of revoking the proxy.
Votes cast by proxy or in person at the Value Health Special Meeting will be
tabulated by the election inspectors appointed for the meeting, who will
determine whether or not a quorum is present. Where, as to any matter submitted
to the stockholders for a vote, proxies are marked as abstentions (or
stockholders appear in person but abstain from voting), such abstentions will
be treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as unvoted for purposes of determining
the approval of any matter submitted to the stockholders for a vote. If a
broker indicates on the proxy that it does not have discretionary authority as
to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
SOLICITATION OF PROXIES
Value Health will bear its own cost of solicitation of proxies. In addition
to the use of the mails, proxies may be solicited by the directors and officers
of Value Health by personal interview, telephone or telegram. Such directors
and officers will not receive additional compensation for such solicitation but
may be reimbursed for out-of-pocket expenses incurred in connection therewith.
In addition, Georgeson & Company
18
<PAGE>
Inc. has been engaged by Value Health to act as proxy solicitors and will
receive a fee of $4,000, plus expenses. Arrangements may also be made with
brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of shares of VH Common Stock
held of record by such persons, in which case Value Health will reimburse such
brokerage firms, custodians, nominees and fiduciaries for reasonable out-of-
pocket expenses incurred by them in connection therewith.
QUORUM
The presence in person or by properly executed proxy of holders of a majority
of all of the shares of VH Common Stock entitled to vote is necessary to
constitute a quorum at the Value Health Special Meeting.
REQUIRED VOTE
The approval of the Value Health Share Proposal requires the affirmative vote
of a majority of the votes cast on such proposal by the holders of the
outstanding shares of VH Common Stock as of the Value Health Record Date. As of
June 16, 1995, the directors and executive officers of Value Health and their
affiliates owned an aggregate of 9,746,648 shares (23.9%) of VH Common Stock;
such persons have informed Value Health of their intention to vote their shares
in favor of the Value Health Share Proposal.
THE MATTERS TO BE CONSIDERED AT THE VALUE HEALTH SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF VALUE HEALTH. ACCORDINGLY, STOCKHOLDERS ARE
URGED TO READ AND CONSIDER CAREFULLY THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT-PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
THE DIAGNOSTEK SPECIAL MEETING
PURPOSE OF THE DIAGNOSTEK SPECIAL MEETING
At the Diagnostek Special Meeting, holders of Diagnostek Common Stock will
consider and vote upon a proposal to approve and adopt the Merger Agreement and
such other matters as may properly be brought before the meeting.
THE DIAGNOSTEK BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
RECORD DATE; VOTING RIGHTS; PROXIES
The Diagnostek Board of Directors has fixed the close of business on June 16,
1995 as the Diagnostek Record Date for determining holders entitled to notice
of and to vote at the Diagnostek Special Meeting.
As of the Diagnostek Record Date, there were 24,272,246 shares of Diagnostek
Common Stock issued and outstanding, each of which entitles the holder thereof
to one vote. All shares of Diagnostek Common Stock represented by properly
executed proxies will, unless such proxies have been previously revoked, be
voted in accordance with the instructions indicated in such proxies. IF NO
INSTRUCTIONS ARE INDICATED, SUCH SHARES OF DIAGNOSTEK COMMON STOCK WILL BE
VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. Diagnostek does not
know of any matters other than as described in the Notice of Special Meeting
that are to come before the Diagnostek Special Meeting. If any other matter or
matters are properly presented for action at the Diagnostek Special Meeting,
the persons named in the enclosed form of proxy and acting thereunder will have
the discretion to vote on such matters in accordance with their best judgment,
unless such authorization is withheld. A stockholder who has given a proxy may
revoke it at any time prior to its exercise by giving written notice thereof to
the Secretary of Diagnostek, by signing and returning a later dated
19
<PAGE>
proxy, or by voting in person at the Diagnostek Special Meeting; however, mere
attendance at the Diagnostek Special Meeting will not in and of itself have the
effect of revoking the proxy.
Votes cast by proxy or in person at the Diagnostek Special Meeting will be
tabulated by the election inspectors appointed for the meeting who will
determine whether or not a quorum is present. Where, as to any matter submitted
to the stockholders for a vote, proxies are marked as abstentions (or
stockholders appear in person but abstain from voting), such abstentions will
be treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as unvoted for purposes of determining
the approval of any matter submitted to the stockholders for a vote. If a
broker indicates on the proxy that it does not have discretionary authority as
to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
Therefore, such abstentions and broker no-votes have the same effect as a vote
cast against the Merger Agreement.
SOLICITATION OF PROXIES
Diagnostek will bear its own cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by the directors and officers of
Diagnostek by personal interview, telephone or telegram. Such directors and
officers will not receive additional compensation for such solicitation but may
be reimbursed for out-of-pocket expenses incurred in connection therewith. In
addition, Morrow & Co., Inc. has been engaged by Diagnostek to act as proxy
solicitors and will receive a fee of $5,000, plus expenses. Arrangements may
also be made with brokerage firms and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of
shares of Diagnostek Common Stock held of record by such persons, in which case
Diagnostek will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in
connection therewith.
QUORUM
The presence in person or by properly executed proxy of holders of a majority
of the issued and outstanding shares of Diagnostek Common Stock entitled to
vote is necessary to constitute a quorum at the Diagnostek Special Meeting.
REQUIRED VOTE
The approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of Diagnostek Common Stock as
of the Diagnostek Record Date. As of June 16, 1995, the directors and executive
officers of Diagnostek owned an aggregate of 1,178,843 shares (4.9%) of the
Diagnostek Common Stock; such persons have informed Diagnostek of their
intention to vote their shares of Diagnostek Common Stock in favor of the
Merger Agreement and the Merger.
THE MATTERS TO BE CONSIDERED AT THE DIAGNOSTEK SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF DIAGNOSTEK. ACCORDINGLY, STOCKHOLDERS ARE
URGED TO READ AND CONSIDER CAREFULLY THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT-PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
20
<PAGE>
THE MERGER
GENERAL
The Merger Agreement provides that the Merger will be consummated if the
approvals of the Diagnostek and Value Health stockholders required therefor are
obtained and all other conditions to the Merger are satisfied or waived. Upon
consummation of the Merger, Sub will be merged with and into Diagnostek, and
Diagnostek will become a wholly owned subsidiary of Value Health.
Upon consummation of the Merger, each outstanding share of Diagnostek Common
Stock (other than shares owned by Diagnostek, Value Health or any of their
respective subsidiaries, all of which will be canceled) will be automatically
converted (subject to provisions with respect to fractional shares) into the
right to receive 0.4975 shares of VH Common Stock.
Based upon the capitalization of Value Health and Diagnostek as of June 16,
1995, the stockholders of Diagnostek will own approximately 22.9% of the
outstanding VH Common Stock at the Effective Date. Such percentage could change
depending on the number of shares of VH Common Stock outstanding at the
Effective Date and the number of shares of Diagnostek Common Stock issued prior
to the Effective Date upon exercise of outstanding Diagnostek stock options or
warrants.
EFFECTIVE DATE
The Effective Date of the Merger will occur upon the filing of a Certificate
of Merger with the Secretary of State of the State of Delaware (the
"Certificate of Merger") or at such later time as is specified on such
certificate. The filing of the Certificate of Merger will occur as soon as
practicable after the satisfaction of the conditions set forth in the Merger
Agreement. The Merger Agreement may be terminated by either party if the Merger
has not been consummated on or before September 15, 1995 and under certain
other conditions. See "THE MERGER AGREEMENT--Conditions to Consummation of the
Merger" and "--Termination; Fees and Expenses."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion, at the Exchange Ratio, of Diagnostek Common Stock into the
right to receive VH Common Stock will occur automatically at the Effective
Date.
As soon as practicable after the Effective Date, a transmittal letter will be
mailed by the Exchange Agent to each stockholder of Diagnostek informing such
stockholder of the procedures to follow in forwarding his or her certificates
for Diagnostek Common Stock to the Exchange Agent. Upon receipt of such
certificates, the Exchange Agent will deliver full shares of VH Common Stock to
such stockholder and cash in lieu of fractional shares pursuant to the terms of
the Merger Agreement and in accordance with the transmittal letter, together
with any dividends or other distributions to which such stockholder is
entitled. For a description of how the amount of cash in lieu of fractional
shares will be determined, see "THE MERGER AGREEMENT--Fractional Shares."
If any issuance of shares of VH Common Stock in exchange for shares of
Diagnostek Common Stock is to be made to a person other than the holder of
Diagnostek Common Stock in whose name the certificate is registered at the
Effective Date, it will be a condition of such exchange that the certificate so
surrendered be properly endorsed or otherwise in proper form for transfer and
that the holder of Diagnostek Common Stock requesting such issuance either pay
any transfer or other tax required or establish to the satisfaction of Value
Health that such tax has been paid or is not payable.
After the Effective Date, there will be no further transfers of Diagnostek
Common Stock on the stock transfer books of Diagnostek. If a certificate
representing Diagnostek Common Stock is presented for transfer,
21
<PAGE>
it will be canceled and a certificate representing the appropriate number of
full shares of VH Common Stock and cash in lieu of fractional shares and any
dividends and distributions will be issued in exchange therefor, without
interest.
After the Effective Date and until surrendered, shares of Diagnostek Common
Stock will be deemed for all corporate purposes, other than the payment of
dividends and distributions, to evidence ownership of the number of full shares
of VH Common Stock into which such shares of Diagnostek Common Stock were
converted on the Effective Date. No dividends or other distributions, if any,
payable to holders of VH Common Stock will be paid to the holders of any
certificates for shares of Diagnostek Common Stock until such certificates are
surrendered. Upon surrender of such certificates, all such declared dividends
and distributions payable after the Effective Date will be paid to the holder
of record of the full shares of VH Common Stock represented by the certificate
issued in exchange therefor, without interest.
HOLDERS OF DIAGNOSTEK COMMON STOCK SHOULD NOT FORWARD STOCK CERTIFICATES TO
THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. HOLDERS OF
DIAGNOSTEK COMMON STOCK SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED
PROXY.
BACKGROUND OF THE MERGER
As a result of changes occurring in the pharmacy benefit marketplace,
Diagnostek, in early 1994, began discussions with Lazard for the purpose of
organizing meetings with pharmaceutical manufacturers in an effort to develop
commercial and perhaps financial relationships. In March 1994, Diagnostek
executed an engagement letter for Lazard to act as its financial advisor in
connection with the possible sale of Diagnostek. In light of the rapidly
changing marketplace for the manufacture and distribution of prescription drugs
and provision of pharmacy benefits, Lazard was directed to explore alliances
with pharmaceutical manufacturers, as well as business combinations generally.
On January 11, 1995, the President and Vice President-Corporate Development
of Value Health met with the President of Diagnostek and representatives of
Lazard and Montgomery to discuss a possible business combination. The parties
discussed the operations of the companies, the potential benefits that could
result from the combination of the companies and the benefit of such a
combination to the Diagnostek stockholders. Also on January 11, 1995, Value
Health entered into a Confidentiality Agreement with Lazard, on behalf of
Diagnostek, facilitating the exchange of information by the companies.
At a meeting of the Value Health Board of Directors on February 2, 1995,
senior management of Value Health advised the Value Health Board of Directors
of its discussions with Diagnostek. The Value Health Board of Directors
directed senior management to conduct a due diligence review and to begin
negotiations with Diagnostek. On February 2, 1995, the Vice President-Corporate
Development of Value Health met with representatives of Lazard to continue
discussions regarding Value Health's interest in a possible business
combination with Diagnostek. On February 6, 7 and 13, 1995, Value Health
representatives met with representatives of Lazard and management of Diagnostek
in Albuquerque, New Mexico. At such meetings and subsequent thereto, certain
general information concerning the business of Diagnostek and Value Health was
exchanged. A series of preliminary discussions among representatives of
Diagnostek and Value Health ensued regarding such information and the general
terms of a business combination.
On February 14, 1995, the Diagnostek Board of Directors held a meeting at
which the Chief Executive Officer of Diagnostek advised the Board that
Diagnostek had held preliminary discussions with Value Health concerning a
possible business combination anticipated to be in the form of a stock-for-
stock, tax-free exchange. The Diagnostek Board of Directors determined that
based on preliminary due diligence, and subject to the negotiation of a
mutually-acceptable exchange ratio and other terms of a definitive merger
agreement, it would be in the best interests of the Diagnostek stockholders to
continue discussions with Value Health with respect to a possible business
combination. On February 23, 1995, Diagnostek executed a
22
<PAGE>
confidentiality agreement with Value Health. Diagnostek and Value Health then
delivered more detailed information to each other and continued their
respective due diligence reviews. After a preliminary review of such
information, the parties began to discuss more specific terms for the possible
merger of a wholly-owned subsidiary of Value Health with and into Diagnostek.
Diagnostek's agreement with Lazard provided that, if requested by Diagnostek,
Lazard would render, in accordance with its customary practice, a fairness
opinion in connection with a sale of Diagnostek. Pursuant to a letter agreement
dated March 13, 1995, Montgomery was retained to render a fairness opinion to
the Value Health Board of Directors in connection with a proposed merger.
On March 10, 1995, the Diagnostek Board of Directors held a meeting at which
the Board authorized its Chairman of the Board and Chief Executive Officer to
have discussions with the Chairman of the Board and Chief Executive Officer of
Value Health, relating to an exchange ratio to be used in a possible
transaction. These officers met on March 12, 1995 to discuss, among other
things, the exchange ratio. The respective representatives and advisors of
Diagnostek and Value Health then held numerous meetings and telephone
conversations to discuss further the terms of the transaction while Value
Health and Diagnostek each continued to review the detailed information
provided by the other. During such process, the Diagnostek Board of Directors
was kept informed, on a regular and informal basis, of the negotiations. The
Diagnostek Board of Directors considered various issues, including, general
strategy, concerns related to minimum and maximum price provisions, financial
and other conditions to the consummation of the transaction, representations
and warranties of Diagnostek and Value Health, Value Health's request to be
granted a stock option for 19.9% of the outstanding Diagnostek Common Stock
exercisable under certain circumstances in the event of a termination of the
transaction, termination provisions and the fee payable to Value Health on
termination and provisions limiting the ability of Diagnostek to consider other
offers. As a result of these discussions with the Diagnostek Board of
Directors, Diagnostek's representatives and advisors negotiated for numerous
modifications of these provisions which are included in the Merger Agreement.
As a result of discussions between Diagnostek and Value Health, on March 15,
1995, Diagnostek and Value Health reached a tentative understanding that,
subject to negotiation of a mutually agreeable definitive merger agreement, the
exchange ratio would be 0.5616 shares of VH Common Stock for each outstanding
share of Diagnostek Common Stock. Thereafter, in the course of the further
negotiations of the definitive merger agreement, Diagnostek informed Value
Health that Diagnostek was not willing to have included in the definitive
agreement a condition to Value Health's obligation to close, which had been
requested by Value Health, to the effect that Diagnostek's earnings for the
fiscal quarter and fiscal year ending March 31, 1995 must be at or above a
specified level. Diagnostek suggested that, in lieu of such a condition, Value
Health conduct additional due diligence to satisfy itself about Diagnostek's
forecast of earnings for such periods. Value Health agreed to pursue that
course. After the additional due diligence, Value Health expressed concern
about Diagnostek's ability to achieve the forecasted results and requested that
the exchange ratio be reduced to 0.5478. Discussion of the exchange ratio
continued through March 22, 1995 at which time Value Health and Diagnostek
reached an understanding that the exchange ratio would be 0.55, subject to
reaching a final definitive agreement on the terms of the Merger.
Special meetings of the Diagnostek Board of Directors were held on March 10,
12, 15 and 23 at which presentations were made or discussions were held by
Diagnostek's senior management and legal and, at certain of such meetings,
financial advisors regarding the then-current terms of a definitive merger
agreement and the agreements with Mr. DeSantis. After the meetings of the
Diagnostek Board of Directors on such dates, further negotiations were
conducted. The original Agreement and Plan of Merger was approved, subject to
the satisfactory resolution of certain terms, by the Diagnostek Board of
Directors on March 23, 1995. The original Agreement and Plan of Merger was
executed by Diagnostek on March 27, 1995.
Special meetings of the Value Health Board of Directors were held on March 9,
17 and 22, 1995, at which presentations were made by Value Health's senior
management and legal and financial advisors regarding the then-current terms of
a definitive merger agreement and the agreements with Mr. DeSantis. The
original Agreement and Plan of Merger was approved, subject to the satisfactory
resolution of certain
23
<PAGE>
terms, by the Value Health Board of Directors on March 22, 1995. Negotiations
continued through March 26, 1995 to resolve such terms and to finalize the
original Agreement and Plan of Merger which was executed by Value Health on
March 27, 1995.
On May 16, 1995, Diagnostek informed Value Health that it anticipated that
its results of operations for the fiscal quarter ended March 31, 1995 would be
lower than expected based on Diagnostek's preliminary analysis of its three
year contract with the State of New Jersey (the "New Jersey Contract") under
which Diagnostek provides 24-hour unit dosage. Service under the New Jersey
Contract began on February 1, 1995, and Diagnostek incurred approximately $3.0
million of unanticipated start up costs and expenses and anticipated additional
losses on the contract in future periods. As a result of this information,
Value Health reviewed Diagnostek's forecasts for the balance of calendar year
1995 and the anticipated operations relating to the New Jersey Contract.
Diagnostek conducted additional analysis of the New Jersey Contract and
informed Value Health that it was planning to record a reserve for anticipated
losses in excess of $9.0 million for the balance of the three year term of the
contract. In response to this information and as a result of Value Health's
review, Value Health determined that a reduction in the exchange ratio for the
Merger was appropriate and that, absent such a reduction, Value Health would
assert that it had the right to terminate the original Agreement and Plan of
Merger.
On May 27, 1995, the Diagnostek Board of Directors met to consider Value
Health's position. Although the Diagnostek Board of Directors did not agree
that Value Health had a right to terminate the original Agreement and Plan of
Merger, it decided that, given the uncertainty concerning such issue, it was in
the best interest of Diagnostek and its stockholders to seek a negotiated
resolution with Value Health. From May 28 through May 30, 1995, Diagnostek's
counsel had various meetings and telephone conversations with the Chairman,
President and counsel of Value Health in which discussions were held relating
to a reduction in the exchange ratio that would be acceptable to both
companies.
On May 30, 1995, Value Health indicated that it would be willing to go
forward with the Merger if the exchange ratio was reduced to 0.4975, subject to
the receipt of a fairness opinion from Montgomery. On the same date, the
Diagnostek Board of Directors, subject to the receipt of a fairness opinion
from Lazard, agreed to a revised exchange ratio of 0.4975 provided Value Health
agreed to delete one of the conditions precedent to its obligation to
consummate the Merger. This condition precedent required that all
representations and warranties of Diagnostek be true at the Effective Date.
Value Health agreed to limit such condition precedent to the representations
and warranties relating to capitalization, subsidiaries, authority,
Diagnostek's 1995 financial statements and the inapplicability of certain
provisions of Delaware law relating to takeovers. See "THE MERGER AGREEMENT--
Conditions to Consummation of the Merger."
A special meeting of the Value Health Board of Directors was held on June 1,
1995, at which discussions were held with Value Health's senior management and
legal and financial advisors regarding the revised exchange ratio and a
definitive amendment to the original Agreement and Plan of Merger (the
"Amendment"). The Amendment was approved, subject to satisfactory resolution of
certain terms, by the Value Health Board of Directors at such special meeting.
A special meeting of the Diagnostek Board of Directors was held on June 2,
1995, at which discussions were held with Diagnostek's senior management and
legal advisors regarding the revised exchange ratio and the Amendment. The
Amendment was approved, subject to satisfactory resolution of certain terms, by
the Diagnostek Board of Directors at such special meeting.
Negotiations continued through June 3, 1995 to resolve the terms of and to
finalize the Amendment. The Amendment was executed by Value Health, Sub and
Diagnostek effective as of June 4, 1995.
Prior to the initial contact by Value Health, Lazard had contacted
approximately 40 companies in Western Europe, Japan and the United States in
order to find a possible business combination involving Diagnostek. To the
extent certain of such companies expressed an interest in such a business
combination, Lazard required such companies to execute confidentiality
agreements for the benefit of Diagnostek and such
24
<PAGE>
companies were furnished a confidential memorandum that contained a description
of Diagnostek's business, the outlook for such business and historical and
three-year projected financial results for Diagnostek. Although preliminary
discussions were held with a few companies concerning a possible business
combination or strategic alliance, no offer was received. In addition,
Diagnostek or Lazard was approached by a few parties concerning a possible
acquisition of Diagnostek's contract pharmacy management business, although no
offer was received and discussions did not progress beyond a preliminary stage
as such parties were either not interested or were interested in other business
opportunities.
The terms of the Merger Agreement are the result of arm's-length negotiations
between senior management of Diagnostek, with the counsel of its advisors
(including Lazard), and senior management of Value Health, with the counsel of
its advisors (including Montgomery).
RECOMMENDATION OF THE VALUE HEALTH BOARD OF DIRECTORS; REASONS FOR THE MERGER
THE VALUE HEALTH BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE
MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, VALUE HEALTH AND ITS
STOCKHOLDERS AND HAS APPROVED THE MERGER AGREEMENT. THE VALUE HEALTH BOARD OF
DIRECTORS RECOMMENDS THAT VALUE HEALTH'S STOCKHOLDERS VOTE FOR THE VALUE HEALTH
SHARE PROPOSAL.
The Value Health Board of Directors concluded that the Merger is in the best
interests of Value Health and its stockholders because, among other reasons,
the Merger would (i) create synergies resulting from a combination of
Diagnostek and Value Health into the largest independent pharmacy benefit
manager and (ii) enhance its ability to compete with pharmaceutical
manufacturer-owned pharmacy benefit managers.
The Value Health Board of Directors concluded that the Merger would create
synergies in part because of its belief that: (i) Diagnostek's mail order
business complements Value Health's retail pharmacy business, (ii) Value Health
will be able to realize cost savings by combining the two companies and
eliminating duplicative functions (including the elimination of the costs of
one company's overhead, compliance with public company reporting obligations
and duplicative information services systems), (iii) Value Health will have the
opportunity to cross-sell its products and services to Diagnostek's existing
customers and (iv) the increase in covered lives may permit Value Health to
negotiate more favorable formulary arrangements with pharmaceutical
manufacturers.
In reaching its conclusions that the Merger is fair to, and in the best
interests of, Value Health and its stockholders, the Value Health Board of
Directors also considered, among other things, the following factors: (i) its
knowledge of the business, operations, properties, assets, financial condition,
operating results and prospects of Value Health and Diagnostek; (ii) current
industry, economic and market conditions; (iii) presentations by Value Health's
management and by Montgomery, Value Health's financial advisor, with respect to
Diagnostek and Value Health; (iv) the opinion of Montgomery as to the fairness,
from a financial point of view, of the consideration to be paid by Value Health
pursuant to the Merger (see "THE MERGER--Opinion of Value Health's Financial
Advisor"); (v) the terms of the Merger Agreement, which were the product of
arms' length negotiations (see "THE MERGER AGREEMENT"); (vi) the structure and
accounting treatment of the transaction; and (vii) the opportunity for Value
Health stockholders to have an ownership interest in the largest independent
pharmacy benefit manager. The Value Health Board of Directors also considered
such negative factors as (i) the existing Diagnostek litigation, (ii) the
effect of the termination of the CIGNA contracts on Diagnostek, (iii)
Diagnostek's lower than expected results of operations for the fiscal quarter
ended March 31, 1995 and (iv) the New Jersey Contract. See "THE MERGER--
Existing Diagnostek Litigation."
In view of the variety of factors considered in connection with its
evaluation of the Merger, the Value Health Board of Directors did not find it
practicable to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination.
25
<PAGE>
RECOMMENDATION OF THE DIAGNOSTEK BOARD OF DIRECTORS; REASONS FOR THE MERGER
THE DIAGNOSTEK BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
IS IN THE BEST INTERESTS OF DIAGNOSTEK AND ITS STOCKHOLDERS AND HAS APPROVED
THE MERGER AGREEMENT. THE DIAGNOSTEK BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS OF DIAGNOSTEK VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
As described under "THE MERGER--Background of the Merger," the Diagnostek
Board of Directors met on March 10, 12, 15 and 23, 1995 and considered
presentations from or discussions with, and reviewed the terms of the Merger
Agreement and the agreements involving Mr. DeSantis with, Diagnostek's officers
involved in the negotiations, and its legal and, at certain of such meetings,
financial advisors. In reaching its conclusion that the consummation of the
Merger is in the best interests of Diagnostek and its stockholders, the
directors considered, among other things: (i) the consideration to be received
by the Diagnostek stockholders, including the Exchange Ratio which represented
a premium of 22.2% over the unaffected market price of the Diagnostek Common
Stock (i.e., the price prior to speculation of a possible combination) on
December 27, 1994 of $15.75; (ii) the increased competition in Diagnostek's
existing business and the diversified nature of Value Health's business; (iii)
the financial condition, results of operations and cash flows of each of
Diagnostek and Value Health on a historical, as well as a prospective basis;
(iv) synergies that could result from combining Diagnostek and Value Health
into the largest independent pharmacy benefit manager and its ability to
compete with the manufacturer-owned pharmacy benefit managers, including the
elimination of duplicative services and functions, the ability to improve
pricing as a result of larger volumes of pharmaceutical purchases from specific
manufacturers, the elimination of inefficient and duplicative mail service
facilities and the elimination of duplicative investments in computer hardware
and software; (v) earnings per share and book value per share of Diagnostek and
Value Health; (vi) the presentation of Lazard; (vii) that the receipt of the VH
Common Stock would not be taxable for federal income tax purposes and the
transaction would be accounted for as a pooling of interests; (viii) Value
Health's position as a leader in managed health care; (ix) the results of
efforts of Lazard to locate a possible alternative business combination for
Diagnostek; (x) the possible limitation on the growth potential of the market
value of the Diagnostek Common Stock if it were to remain independent as a
result of a number of factors, including the increasingly competitive pharmacy
benefit manager market which results in declining prices and increasing
customer service demands, the difficulties of maintaining price concessions
without expanding purchasing leverage (particularly in relation to
pharmaceutical manufacturer owned pharmacy benefit managers), the potential
inability of Diagnostek to expand its market share fast enough to offset the
required investment in technology in an effort to continually reduce costs and
the difficulties Diagnostek would face in attempting to diversify its business
so as not to be totally dependent on the pharmaceutical business; and (xi) the
recommendation of management. The Diagnostek Board of Directors also considered
agreements between Value Health and Mr. DeSantis, the nonsolicitation covenant
set forth in the Merger Agreement and the provision of the Merger Agreement
requiring Diagnostek to pay $15 million to Value Health in the event of
termination of the Merger Agreement under certain circumstances. In considering
the Value Health transaction, the Diagnostek Board of Directors discussed the
effect of managed care on the mental health business of Value Health and the
concerns about the cost of providing services in the healthcare field while
pricing for those services continues to be under pressure.
As described under "THE MERGER--Background of the Merger," the Diagnostek
Board of Directors met on May 27, 1995 and considered Value Health's position
relating to the Merger. The Diagnostek Board of Directors met on May 30 and
June 2, 1995 to consider the revised exchange ratio proposed by Value Health.
At the meetings, the Diagnostek Board of Directors determined that for the
reasons stated in the preceding paragraph, the consummation of the Merger was
still in the best interest of the Diagnostek stockholders. The Diagnostek Board
of Directors also considered, among other things: (i) Diagnostek's prospects
for the 1995 calendar year, including the New Jersey Contract, (ii) the
likelihood that litigation would ensue if the original Agreement and Plan of
Merger was terminated, the cost and time that would be involved in such
litigation and the uncertainty of the outcome of such litigation, (iii) the
effect on Diagnostek's
26
<PAGE>
relationship with its customers and suppliers if the Merger Agreement was
terminated and (iv) the benefit derived from the revision described above to
one of the conditions precedent to Value Health's obligation to consummate the
Merger.
In view of the wide variety of factors considered in connection with its
evaluation of the terms of the Merger, the Diagnostek Board of Directors did
not find it practicable to, and did not, quantify or otherwise attempt to
assign relative weight to the specific factors considered in reaching its
determinations.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Diagnostek Board of Directors with
respect to the Merger, holders of Diagnostek Common Stock should be aware that
certain members of Diagnostek's management (some of whom are members of the
Diagnostek Board of Directors) and the members of the Diagnostek Board of
Directors have certain interests in the Merger, in addition to those of the
stockholders generally. The Diagnostek Board of Directors was aware of these
interests when it considered and approved the Merger and the Merger Agreement.
Mr. DeSantis has entered into a Consulting Agreement dated as of March 27,
1995, as amended on June 4, 1995 (the "Consulting Agreement"), to provide
consulting services to Diagnostek and its affiliates, effective only upon
consummation of the Merger. Under the Consulting Agreement, Mr. DeSantis will
provide consulting services for a five year term commencing on the Effective
Date in return for a $120,000 per year consulting fee and the continued payment
of premiums for certain split dollar life insurance policies at the levels that
Diagnostek had previously been funding but not to exceed $327,000 per year.
Diagnostek has the right to receive from the proceeds of such policies the full
amount of the premiums paid by Diagnostek. In the event that the Merger is
consummated, Mr. DeSantis will also receive an option to purchase up to 350,000
shares of VH Common Stock with an exercise price equal to the closing price of
the VH Common Stock on the NYSE on the Effective Date. The option will vest and
become exercisable in five equal annual installments commencing on January 1,
1996.
Value Health and Diagnostek also entered into an Agreement Not to Compete
with Mr. DeSantis, dated as of March 27, 1995, as amended on June 4, 1995 (the
"Agreement Not to Compete"), effective only upon consummation of the Merger.
Under the Agreement Not to Compete, Mr. DeSantis has, for a ten-year period
commencing on the Effective Date, agreed, among other things, (i) not to
compete with any of the businesses engaged in by Value Health or Diagnostek as
of the date of the Merger Agreement and (ii) that he will not solicit, or
otherwise intentionally interfere with, Value Health's or Diagnostek's
employees or customers. Diagnostek will pay Mr. DeSantis $3.5 million in return
for his covenants payable on January 1, 1996.
The Consulting Agreement provides that if Mr. DeSantis is required to pay any
excise taxes, an additional payment would be made to Mr. DeSantis such that the
amount he receives after payment of such excise taxes plus any interest or
penalties thereon (and any excise and income tax payable in respect of such
additional amount) would equal the amount he was to have received under the
Consulting Agreement, the Agreement Not to Compete and his existing employment
agreement before the imposition of the excise tax.
Pursuant to the Merger Agreement, following consummation of the Merger, Value
Health will, or will cause Diagnostek to, honor in accordance with their terms,
all employment, severance, consulting and other compensation contracts between
Diagnostek or any of its subsidiaries and any current or former director,
officer or employee thereof, and all provisions for vested benefits or other
vested amounts earned or accrued through the Effective Date under Diagnostek's
benefit and stock option plans. Pursuant to the terms of Diagnostek's stock
option plans, members of Diagnostek's management and the Diagnostek Board of
Directors who hold options for Diagnostek Common Stock issued under or
incorporating the terms of such plans will have the vesting of all of their
options automatically accelerated following a change of control such
27
<PAGE>
as the Merger. Nine officers (including two directors) of Diagnostek are
covered by existing individual employment agreements which provide for payments
in the event of termination of employment following a change of control such as
the Merger. Upon such an event, Mr. DeSantis would be entitled to receive an
amount equal to three times his average includible compensation for the prior
five years (approximately $2.1 million). One of the other officers who is also
a director would be entitled to receive an amount equal to two times the
payments and benefits specified in such officer's employment agreement
(approximately $690,000) and Diagnostek would be required to deposit an amount
intended to provide for premiums under certain split dollar life insurance
policies, which Diagnostek estimates to be approximately $1.2 million.
Diagnostek has the right to receive from the proceeds of such policies the full
amount of the premiums paid by Diagnostek. Each of the other seven officers
would be entitled to receive an amount equal to either one-half, one or two
times the payments and benefits specified in such officer's employment
agreement. See "THE MERGER AGREEMENT--Effect on Employee Benefit Plans."
The Merger Agreement provides that, from and after the Effective Date, Value
Health will, and will cause the Surviving Corporation to, indemnify, defend and
hold harmless the present and former directors and officers of Diagnostek
against all losses, expenses, claims, damages, liabilities or amounts that are
paid in settlement of, with the approval of Value Health and the Surviving
Corporation, or otherwise in connection with any claim, action, suit,
proceeding or investigation, based in whole or in part on the fact that such
person is or was a director or officer of Diagnostek and arising out of actions
or omissions occurring at or prior to the Effective Date (including, without
limitation, the transactions contemplated by the Merger Agreement), in each
case to the fullest extent permitted under the Delaware General Corporation Law
(the "DGCL") (and shall pay expenses in advance of the final disposition of any
such action or proceeding to each indemnified party to the fullest extent
permitted under the DGCL, upon receipt from the indemnified party to whom
expenses are advanced of the undertaking to repay such advances contemplated by
Section 145(e) of the DGCL). The Certificate of Incorporation of the Surviving
Corporation will contain the provision with respect to indemnification set
forth in Diagnostek's Certificate of Incorporation, as amended, on the date of
the Merger Agreement, which provision will not be amended, repealed or
otherwise modified for a period of six years after the Effective Date in any
manner that would adversely affect the rights thereunder of the individuals who
at the Effective Date were directors or officers of Diagnostek in respect of
actions or omissions occurring at or prior to the Effective Date (including,
without limitation, the transactions contemplated by the Merger Agreement),
unless such modification is required by law. The Merger Agreement provides
that, with respect to matters occurring prior to the Effective Date, Value
Health will use its reasonable best efforts to cause to be maintained in effect
the current policies of directors' and officers' liability insurance policies
maintained by Diagnostek for not less than three years after the Effective
Date; provided, however, that (i) Value Health may substitute therefor policies
of substantially similar coverage containing substantially similar terms and
conditions for the indemnified parties to the extent reasonably available and
(ii) Value Health shall not be required to pay an annual premium for such
insurance in excess of 150% of the last annual premium paid prior to March 27,
1995, but in such case shall purchase as much coverage as possible for such
amount.
Value Health has agreed that, until October 15, 1995, each of the directors
of Diagnostek may remain as a director of the Surviving Corporation. From and
after the time of the Merger, the Board of Directors of the Surviving
Corporation will also include other persons, the identity and number of which
will be designated by Value Health. Value Health also agreed that if Value
Health determined to terminate certain named executives of Diagnostek, the
effective date of such termination would not be earlier than October 15, 1995
and that the compensation payable to such executives from the date of such
determination through October 15, 1995 would be credited against the severance
payable to such person.
OPINION OF VALUE HEALTH'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated March 13, 1995 (the "Engagement
Letter") between Value Health and Montgomery, Value Health retained Montgomery
to render an opinion with respect to the fairness from a financial point of
view to the Value Health stockholders of the consideration to be paid by
28
<PAGE>
Value Health in connection with the possible acquisition of Diagnostek.
Montgomery is a nationally recognized firm and, as part of its investment
banking activities, is regularly engaged in the valuation of businesses and
their securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. Value Health selected Montgomery as its financial advisor or on the
basis of its experience and expertise in transactions similar to the Merger and
its reputation in the health care and investment communities.
At the March 17, 1995 meeting of the Value Health Board of Directors,
Montgomery delivered its oral opinion, subsequently confirmed in writing as of
March 27, 1995, that the consideration initially agreed to be paid by Value
Health in the Merger (reflecting the exchange ratio contained in the original
Agreement and Plan of Merger) was fair to Value Health from a financial point
of view, as of such date. Subsequently, at the June 1, 1995 meeting of the
Value Health Board of Directors, Montgomery delivered a second oral opinion,
subsequently confirmed in writing as of June 8, 1995, that the consideration to
be paid by Value Health in the Merger was fair to Value Health from a financial
point of view, as of such date. The opinion of Montgomery dated March 27, 1995
is substantially similar to the opinion dated June 8, 1995, except that the
earlier opinion used the exchange ratio contained in the original Agreement and
Plan of Merger and the later opinion used the Exchange Ratio. All references
below to Montgomery's opinion refer to its written opinion as of June 8, 1995,
unless otherwise indicated. No limitations were imposed by Value Health on
Montgomery with respect to the investigations made or procedures followed in
rendering its opinion. THE FULL TEXT OF MONTGOMERY'S WRITTEN OPINION TO THE
VALUE HEALTH BOARD OF DIRECTORS IS ATTACHED HERETO AS ANNEX B AND IS
INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ CAREFULLY AND IN ITS
ENTIRETY IN CONNECTION WITH THIS PROXY STATEMENT-PROSPECTUS. THE FOLLOWING
SUMMARY OF MONTGOMERY'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF THE OPINION. MONTGOMERY'S OPINION IS ADDRESSED TO THE VALUE
HEALTH BOARD OF DIRECTORS ONLY AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
VALUE HEALTH OR DIAGNOSTEK STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE
AT THE SPECIAL MEETING. IN FURNISHING ITS OPINION, MONTGOMERY DID NOT ADMIT
THAT IT IS AN EXPERT WITHIN THE MEANING OF THE TERM "EXPERT" AS USED IN THE
SECURITIES ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
In connection with its opinion, Montgomery, among other things: (i) reviewed
certain publicly available financial and other data with respect to Value
Health and Diagnostek including the consolidated financial statements for
recent years and interim periods to March 31, 1995 and certain other relevant
financial and operating data relating to Value Health and Diagnostek made
available to Montgomery from published sources and from the internal records of
Value Health and Diagnostek; (ii) reviewed the draft of the Merger Agreement
provided to Montgomery by Value Health; (iii) reviewed certain historical
market prices and trading volumes of the VH Common Stock as reported by or on
the Nasdaq National Market and the NYSE and of the Diagnostek Common Stock as
reported on the NYSE; (iv) compared Value Health and Diagnostek from a
financial point of view with certain other companies in the health care
industry that Montgomery deemed to be relevant; (v) considered the financial
terms, to the extent publicly available, of selected recent business
combinations of companies in the health care industry that Montgomery deemed to
be comparable, in whole or in part, to the Merger; (vi) reviewed and discussed
with representatives of the management of Value Health and Diagnostek certain
information of a business and financial nature regarding Value Health and
Diagnostek, furnished to Montgomery by Value Health and Diagnostek, including
financial forecasts and related assumptions of Value Health and Diagnostek;
(vii) made inquiries regarding and discussed the Merger and the Merger
Agreement and other matters related thereto with Value Health's counsel; and
(viii) performed such other analyses and examinations as Montgomery deemed
appropriate.
In connection with its review, Montgomery did not independently verify any of
the foregoing information, and relied on such information and assumed such
information was complete and accurate in all material respects. With respect to
the financial forecasts for Value Health and Diagnostek provided to Montgomery
by their respective managements, Montgomery assumed for purposes of its opinion
that they were reasonably prepared on bases reflecting the best available
estimates and judgments of their respective managements at the time of
preparation as to the future financial performance of Value Health and
29
<PAGE>
Diagnostek and that they provided a reasonable basis upon which Montgomery
could form its opinion. With respect to the financial forecasts of Diagnostek
provided to Montgomery by Diagnostek management, for purposes of its opinion
Montgomery adjusted such forecasts to reflect more conservative assumptions
than those made by Diagnostek's management regarding growth in revenues and
results of operations. Montgomery also assumed that there were no material
changes in Value Health's or Diagnostek's assets, financial condition, results
of operations, business or prospects since the respective dates of the last
financial statements made available to Montgomery. Montgomery relied on advice
of counsel and independent accountants to Value Health as to all legal and
financial reporting matters with respect to Value Health, the Merger and the
Merger Agreement, including the legal status and financial reporting of
litigation involving Diagnostek. In addition, Montgomery did not make an
independent evaluation, appraisal or physical inspection of the assets or
liabilities (contingent or otherwise) of Value Health or Diagnostek, nor was
Montgomery furnished with any such appraisals. Further, Montgomery's opinion
was based on economic, monetary and market conditions existing as of June 8,
1995.
In connection with its June 8, 1995 opinion, Montgomery revised the analyses
made in connection with Montgomery's presentation to the Value Health Board of
Directors on March 17, 1995 and the delivery of its opinion dated March 27,
1995. Set forth below is a brief summary of the revised analyses prepared by
Montgomery in connection with its June 8, 1995 opinion. These revised analyses
prepared by Montgomery were not delivered to the Value Health Board of
Directors.
Analysis of Selected Comparable Publicly Traded Companies. Montgomery
compared certain financial information of Diagnostek to the corresponding
publicly available financial information of certain other pharmacy benefit
management ("PBM") companies. Montgomery calculated multiples for such
companies of aggregate value (defined for this purpose as total market
capitalization plus long-term debt minus cash and cash equivalents) to latest
12 months ("LTM") revenues, aggregate value to LTM earnings before interest and
taxes ("EBIT") and aggregate value to formulary lives. In addition, Montgomery
calculated multiples for such companies of current stock price to calendar
years 1995 and 1996 projected earnings per share ("EPS"), calculated ratios for
such companies of the calendar year 1995 projected price/earnings ratio to the
secular growth rate, and compared certain other operating data.
Montgomery reviewed the financial information of five publicly traded PBM
companies which Montgomery deemed to be reasonably similar to Diagnostek:
Caremark International Inc., Express Scripts, Inc., Pharmacy Management
Services, Inc., SysteMed, Inc. and Value Health (collectively, the "PBM
Comparable Companies"). The calculations for the PBM Comparable Companies
produced the following results: (i) the ratio of aggregate value to LTM
revenues yielded a range of 0.6 to 1.2, with an average of 1.1; (ii) the ratio
of aggregate value to LTM EBIT yielded a range of 8.9 to 19.8, with an average
of 15.2; (iii) the ratio of aggregate value to formulary lives yielded a range
of 29.4 to 140.1, with an average of 127.0; (iv) the ratio of current stock
price to projected calendar year 1995 EPS yielded a range of 16.1 to 26.0, with
an average of 21.8; (v) the ratio of current stock price to projected calendar
year 1996 EPS yielded a range of 13.2 to 19.7, with an average of 16.7; and
(vi) the ratio of the price/earnings ratio set forth in (iv) above (expressed
as a percentage) to secular growth rate yielded a range of 59.1% to 103.4% with
an average of 73.3%. Using this analysis, Montgomery determined that the
implied per share Diagnostek valuation (before any acquisition premium) based
upon the averages listed above ranged from $17.59 per share (based upon the
ratio of current stock price to projected 1996 EPS) to $31.74 per share (based
upon the ratio of aggregate value to LTM revenues), as compared to the assumed
$17.04 per share value of VH Common Stock to be paid in the Merger (based on
the $34.25 market price of VH Common Stock on March 24, 1995).
No company utilized in the above analysis as a comparison is identical to
Diagnostek. Accordingly, an analysis of the results of the foregoing is not
purely mathematical. Rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of Diagnostek
and the PBM Comparable Companies and other factors that could affect the public
trading value of the PBM Comparable Companies or any company to which they are
being compared.
30
<PAGE>
Analysis of Comparable PBM and HMO Acquisition Transactions. Montgomery also
reviewed the financial terms of four PBM company acquisitions and seven health
maintenance organization ("HMO") acquisitions which Montgomery deemed to be
similar to the Merger. Montgomery's PBM review included the following
transactions: Pharmacy Management Services, Inc.'s acquisition by Beverly
Enterprises, Inc., PCS Health Systems, Inc.'s (a division of McKesson
Corporation) acquisition by Eli Lily & Company, Inc., Diversified
Pharmaceutical Services, Inc.'s (a division of United HealthCare Corporation)
acquisition by SmithKline Beecham PLC and Medco Containment Services, Inc.'s
acquisition by Merck & Co., Inc. Montgomery's HMO review included the following
transactions: Gencare Health Systems' acquisition by United HealthCare
Corporation, CareNetwork, Inc.'s acquisition by Humana Inc., Intergroup
Healthcare Corp. and Thomas Davies Medical Center's acquisition by Foundation
Health Corp., Takecare Inc.'s acquisition by FHP Corp., Ramsay HMO's
acquisition by United HealthCare Corporation, HMO America's acquisition by
United HealthCare Corporation and Century MediCorp Inc.'s acquisition by
Foundation Health Corp.
For the comparable PBM and HMO acquisitions, Montgomery calculated, among
other things, the ratio of the equity and aggregate values of the consideration
paid in the transaction to LTM revenues, EBIT and formulary lives (PBM only).
The calculation for the comparable PBM acquisitions produced the following
results: (i) the ratios of aggregate value to LTM revenues ranged from 1.3 to
20.0, with an average of 1.7; (ii) the ratios of aggregate value to LTM EBIT
ranged from 20.1 to 92.5, with an average of 22.4; and (iii) the ratios of
aggregate value to formulary lives ranged from 79.9 to 164.3, with an average
of 121.6. In addition, the ratios of the equity value of the comparable PBM
acquisitions to LTM net income were calculated, with a range from 23.3 to 42.3
and an average of 32.8.
For the comparable HMO acquisitions, the calculations produced the following
results: (i) the ratios of aggregate value to LTM revenues ranged from 0.7 to
1.9, with an average of 1.2; (ii) the ratios of aggregate value to LTM EBIT
ranged from 15.0 to 23.4, with an average of 19.1; and (iii) the ratios of
equity value to LTM net income ranged from 27.1 to 58.6, with an average of
35.9.
Montgomery also analyzed the premiums paid in eight selected health care
acquisitions (including some of the transactions listed above), calculating the
premium paid in each transaction over the market price of the target's stock on
the date one day, one week and four weeks prior to the announcement of the
acquisition. These calculations produced the following results: (i) the premium
paid over the market price one day prior ranged from 20.3% to 132.1%, with an
average of 54.7%; (ii) the premium paid over the market price one week prior
ranged from 16.2% to 149.3%, with an average of 66.4%; and (iii) the premium
paid over the market price four weeks prior ranged from 21.9% to 127.8%, with
an average of 76.1%. This compared with one day, one week and four weeks prior
premiums (discounts) of (7.9%), (12.6%) and 9.0%, respectively, in the Merger
(assuming a per share value of $17.04 per Diagnostek share).
Using the average figures used in the above analyses, Montgomery determined
that the implied per share Diagnostek valuation ranged from a low of $23.55
(aggregate value to LTM EBIT in the comparable HMO acquisitions) to a high of
$48.67 (aggregate value to LTM revenues in the comparable PBM acquisitions), as
compared to the $17.04 per share value of the consideration to be paid in the
Merger.
No other company or transaction used in the above analysis as a comparison is
identical to Diagnostek or the Merger. Accordingly, an analysis of the results
of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which Diagnostek and the Merger are being
compared.
Discounted Cash Flow Analysis. Montgomery performed a discounted cash flow
analysis of the projected cash flow of Diagnostek through calendar year 2000.
Key assumptions in the discounted cash flow analysis included: (i) discount
rates of 15.0% to 20.0%; (ii) terminal multiples of projected EBIT of 9.0x to
13.0x; (iii) base revenues for Diagnostek of $655 million in 1994 increasing to
an estimated $1,386 million in calendar year 2000; and (iv) EBIT of $26 million
in calendar year 1994 increasing to an estimated $78 million in calendar year
2000. Utilizing these projections and assumptions, Montgomery determined that
the implied
31
<PAGE>
Diagnostek valuation ranged from a low of $15.24 per share (based upon a
terminal multiple of 2000 EBIT of 9x and a discount rate of 20.0%) to a high of
$24.49 per share (based upon a terminal multiple of 2000 EBIT of 13x and a
discount rate of 15.0%), as compared to the $17.04 per share valuation of the
consideration to be paid in the Merger.
Dilution Analysis. Using estimates for Value Health and Diagnostek prepared
by Value Health and Diagnostek managements, respectively, Montgomery compared
the estimated calendar year 1995 and 1996 EPS of the VH Common Stock on a
stand-alone basis to the estimated calendar year 1995 and 1996 EPS of the
common stock of the pro forma combined companies. Based on such analysis, the
proposed transaction would be accretive to Value Health's EPS by 0.6% in 1995
(excluding for valuation purposes the one-time charges taken in the first
quarter of calendar year 1995 relating to the New Jersey Contract) and dilutive
to Value Health's EPS by 1.1% in 1996, prior to any projected cost savings. If
projected pre-tax cost savings of $1.5 million in l995 and $8.75 million in
1996 are considered, the proposed transaction would be accretive to Value
Health's EPS by 2.3% in 1995 and 4.0% in 1996.
Contribution Analysis. Montgomery analyzed the contribution of each of Value
Health and Diagnostek to, among other things, the income statements of the pro
forma combined companies for the calendar year 1994 and projected for calendar
years 1995 and 1996. This analysis showed, among other things, that based on
pro forma combined income statements for Value Health and Diagnostek, Value
Health would have contributed 59.7%, 63.1% and 63.9% of the total revenues and
76.3%, 76.5% and 77.6% of the operating income, respectively, of the combined
companies in the periods described above. At the exchange ratio in the Merger
of 0.4975 shares of VH Common Stock per share of Diagnostek Common Stock, Value
Health stockholders would own 77.2% of the combined companies.
The summary set forth above does not purport to be a complete description of
the analyses performed by Montgomery. The preparation of a fairness opinion is
not necessarily susceptible to partial analysis or summary description.
Montgomery believes that its analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses and of the
factors considered, without considering all analyses and factors, would create
an incomplete view of the process underlying the analyses set forth in its
presentation to the Value Health Board of Directors. In addition, Montgomery
may have given various analyses more or less weight than other analyses, and
may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Montgomery's view of the
actual value of Value Health or the combined companies. The fact that any
specific analysis has been referred to in the summary above is not meant to
indicate that such analysis was given greater weight than any other analysis.
In performing its analyses, Montgomery made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Value Health or Diagnostek.
The analyses performed by Montgomery are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than those suggested by such analyses. Such analyses were prepared
solely as part of Montgomery's analysis of the fairness of the Merger in
connection with the delivery of Montgomery's opinion. The analyses do not
purport to be appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade at the present
time or at any time in the future. Montgomery used in its analyses various
projections of future performance prepared by the managements of Value Health
and Diagnostek. The projections are based on numerous variables and assumptions
which are inherently unpredictable and must be considered not certain of
occurrence as projected. Accordingly, actual results could vary significantly
from those set forth in such projections.
As noted under the caption "THE MERGER--Recommendation of the Value Health
Board of Directors; Reasons for the Merger," the fairness opinion of Montgomery
was only one of many factors considered by the Value Health Board of Directors
in determining to approve the Merger Agreement and to submit the Value Health
Share Proposal for the approval of the holders of the VH Common Stock.
Pursuant to the Engagement Letter, Value Health engaged Montgomery to render
an opinion with respect to the fairness of the consideration to be paid by
Value Health in connection with the possible
32
<PAGE>
acquisition of Diagnostek. Value Health has paid Montgomery $75,000 upon
execution of the Engagement Letter, and will be obligated to pay Montgomery
$75,000 upon the filing of this Proxy Statement-Prospectus and an additional
$600,000 upon the consummation of the Merger. Under the terms of Montgomery's
engagement, the payment of the majority of Montgomery's fees is contingent upon
consummation of the Merger. Value Health has also agreed to reimburse
Montgomery for its reasonable out-of-pocket expenses, including fees and
disbursements of counsel. Pursuant to a separate letter agreement, Value Health
has agreed to indemnify Montgomery, its affiliates, and their respective
partners, directors, officers, agents, consultants, employees and controlling
persons against certain liabilities, including liabilities under the federal
securities laws.
In the ordinary course of its business, Montgomery actively trades equity
securities of Value Health and Diagnostek for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. Certain partners of Montgomery also own shares of
the VH Common Stock and Diagnostek Common Stock.
OPINION OF DIAGNOSTEK'S FINANCIAL ADVISOR
Lazard has delivered to the Diagnostek Board of Directors the written opinion
of Lazard, dated June 8, 1995, to the effect that, based upon and subject to
various considerations set forth in such opinion, as of such date, the Exchange
Ratio was fair to the holders of Diagnostek Common Stock from a financial point
of view. No limitations were imposed by the Diagnostek Board of Directors upon
Lazard with respect to the investigations made or the procedures followed by
Lazard in rendering its opinion. Lazard previously delivered to the Diagnostek
Board of Directors the written opinion of Lazard, dated March 27, 1995, to the
effect that, based upon and subject to various considerations set forth in such
opinion, as of such date, the original exchange ratio of 0.55 was fair to the
holders of Diagnostek Common Stock from a financial point of view. The opinion
of Lazard dated March 27, 1995 is substantially similar to the opinion of
Lazard dated June 8, 1995, except that the earlier opinion used the original
exchange ratio and the later opinion used the Exchange Ratio. All references
below to Lazard's opinion refer to Lazard's opinion dated June 8, 1995, unless
otherwise indicated.
THE FULL TEXT OF THE OPINION OF LAZARD DATED JUNE 8, 1995, WHICH SETS FORTH
THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN,
IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT-PROSPECTUS AND IS INCORPORATED
HEREIN BY REFERENCE. DIAGNOSTEK STOCKHOLDERS ARE URGED TO READ SUCH OPINION
CAREFULLY AND IN ITS ENTIRETY. LAZARD'S OPINION IS DIRECTED ONLY TO THE
EXCHANGE RATIO AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY DIAGNOSTEK OR
VALUE HEALTH STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE. THE SUMMARY OF
THE OPINION OF LAZARD SET FORTH IN THIS PROXY STATEMENT-PROSPECTUS IS QUALIFIED
IN ITS ENTIRETY BY REFERENCES TO THE FULL TEXT OF SUCH OPINION. IN FURNISHING
ITS OPINION, LAZARD DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING OF
THE TERM "EXPERT" AS USED IN THE SECURITIES ACT AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER.
In arriving at its opinion, Lazard (i) analyzed certain historical business
and financial information relating to Diagnostek and Value Health; (ii)
reviewed various financial forecasts and other data provided to Lazard by
Diagnostek and Value Health relating to their respective businesses; (iii) held
discussions with members of the senior managements of Diagnostek and Value
Health with respect to the businesses and prospects of Diagnostek and Value
Health, respectively; (iv) reviewed public information with respect to certain
other companies in lines of businesses Lazard believed to be generally
comparable to the businesses of Diagnostek and Value Health; (v) reviewed the
financial terms of certain business combinations involving companies in lines
of businesses Lazard believed to be generally comparable to those of Diagnostek
and Value Health, and in other industries generally; (vi) reviewed the
historical stock prices and trading volumes of the Diagnostek Common Stock and
the VH Common Stock; and (vii) conducted such other financial studies, analyses
and investigations as Lazard deemed appropriate.
In connection with its review, Lazard relied upon the accuracy and
completeness of the financial and other information provided to it by
Diagnostek and Value Health and did not assume any responsibility for any
independent verification of such information or any independent valuation or
appraisal of any of the
33
<PAGE>
assets or liabilities of Diagnostek and Value Health, nor was Lazard provided
with any such appraisal. With respect to financial forecasts, Lazard assumed
that such financial forecasts were reasonably prepared on bases reflecting the
best currently available estimates and judgments of management of Diagnostek
and Value Health as to the future financial performance of Diagnostek and Value
Health, respectively. Lazard assumed no responsibility for and expressed no
view as to such forecasts or the assumptions on which they were based.
Lazard's opinion was necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to it as
of, the date of its opinion. The opinion did not address the underlying
business decision of Diagnostek to effect the Merger. Lazard expressed no
opinion as to what the value of the VH Common Stock actually will be when
issued to the holders of Diagnostek Common Stock upon consummation of the
Merger. Lazard assumed that the Merger would be consummated on the terms
described in the Merger Agreement, without any waiver of any material terms or
conditions by Diagnostek, and that obtaining the necessary regulatory approvals
for the Merger would not have an adverse effect on Diagnostek or Value Health.
In connection with the Lazard opinion dated June 8, 1995, Lazard performed
certain procedures, including each of the financial analyses described below,
to revise the analyses made in connection with Lazard's presentation to the
Diagnostek Board of Directors on March 23, 1995 and the delivery of its opinion
dated March 27, 1995, and reviewed with the managements of Diagnostek and Value
Health the financial information on which such analyses were based and other
factors, including the current financial results of such companies and the
future prospects for such companies. These revised analyses performed by Lazard
were not delivered to the Diagnostek Board of Directors.
Implied Future Share Price Analysis. Lazard performed an implied future share
price analysis of the Diagnostek Common Stock. Based on projections provided by
Diagnostek management for 1996 and 1997 (and extrapolations thereof for 1998
and 1999), Lazard calculated future shares prices (discounted at the estimated
equity cost of capital of 17.7%) ranging from $13.88 to $16.33 in 1996 at 17.0x
to 20.0x projected earnings, respectively, and $12.56 to $14.78 in 1999 at
17.0x to 20.0x projected earnings, respectively.
Discounted Cash Flow Analysis. Using an unleveraged discounted cash flow
("DCF") methodology, Lazard estimated the present value of future free cash
flows available to the debt and equity holders of Diagnostek if Diagnostek were
to perform on a stand-alone basis (without giving effect to the Merger) in
accordance with management forecasts and extrapolations thereof. Free cash flow
represents the amount of cash generated and available for principal, interest
and dividend payments after providing for ongoing business operations. Lazard
aggregated (x) the present value of the projected free cash flow over the nine-
year period from 1996 to 2004 with (y) the present value of the range of
terminal values described below. The range of terminal values was calculated by
applying multiples of 6.0x to 8.0x to Diagnostek's earnings before interest,
taxes, depreciation and amortization ("EBITDA"). This range of terminal values
represented Diagnostek's value beyond 2004. As part of the DCF analysis, Lazard
used discount rates of 15.0% to 17.5%. The DCF analysis resulted in an equity
value reference range for the Diagnostek Common Stock of $12.01 to $15.40 per
share.
Comparable Transactions Analysis. Lazard also reviewed the consideration paid
or proposed to be paid in other acquisitions of PBMs and drug distribution
companies. Specifically, Lazard reviewed the following acquiror/acquiree
transactions: Gehe AG/AAH plc (1995); Eli Lilly & Company, Inc./PCS Health
Systems, Inc. (McKesson Corporation) (1994); SmithKline Beecham plc/Diversified
Pharmaceutical Services, Inc. (United Healthcare Corporation) (1994); National
Intergroup, Inc./FoxMeyer Corporation (1994); Merck & Co., Inc./Medco
Containment Services, Inc. (1993); and Medco Containment Services,
Inc./Diagnostek (1992). The analysis considered the multiples of price per
share paid or proposed to be paid in each transaction to latest twelve-month
earnings per share (which ranged from 12.3x to 165.0x) and to book value (which
ranged from 1.7x to 181.3x); the multiples of transaction value to latest
twelve-month earnings before interest and taxes (which ranged from 8.4x to
95.6x), to latest twelve-month earnings before depreciation, interest and taxes
(which ranged from 6.0x to 70.6x) and to latest twelve-month sales (which
ranged from 0.1x to 34.6x); and the premium paid or proposed to be paid to the
acquiree's stock price 30 days prior to the
34
<PAGE>
transaction's announcement (which ranged from 12.6% to 29.8%). Applying the
multiples from such transactions to corresponding data for Diagnostek and the
Merger, Lazard calculated an equity value for the Diagnostek Common Stock of at
least $35.00 per share based on Diagnostek's fiscal 1995 results before special
charges. As part of Lazard's analysis and based on its familiarity with the PBM
industry, Lazard noted that, since the consummation of the above-described
transactions, pharmaceutical companies have been more focused on horizontal
mergers and unwilling, for the remaining independent PBMs, to pay the same or
similar multiples to those paid in such transactions or at least to pay such
multiples for small PBMs. In addition, regulatory concerns have limited
interest in PBM acquisitions. Accordingly, given such circumstances, Lazard
concluded that the equity value for the Diagnostek Common Stock derived from
the comparable transactions analysis was not attainable as of the date of its
opinion.
Comparable Public Company Analysis. Lazard compared certain publicly
available financial, operating and stock market performance data of selected
publicly traded companies in the pharmacy benefit management and institutional
pharmacy management industries with the financial, operating and stock market
performance of Diagnostek. The publicly traded companies reviewed by Lazard in
this analysis were, in the pharmacy benefit management industry, Caremark
International Inc., Express Scripts, Inc., SysteMed, Inc. and Value Health and,
in the institutional pharmacy industry, Chronimed Inc. and Omnicare, Inc.
Lazard examined, among other things, multiples of stock prices at June 7, 1995
to 1995 estimated earnings (which ranged from 17.6x to 93.8x); multiples of
such stock prices to book value per share (which ranged from 2.8x to 9.0x);
multiples of market capitalization to latest twelve-month EBITDA (which ranged
from 8.0x to 78.4x); and long-term growth rates (which ranged from 15.6% to
53.0%). The earnings estimates and growth rates were derived from published
research reports of certain analysts covering the selected companies. Lazard
then applied these multiples for the selected companies to corresponding data
for Diagnostek. The analysis resulted in an equity value reference range for
the Diagnostek Common Stock of $12.75 to $15.00 per share based on a multiple
range of 17.0x to 20.0x fiscal 1995 earnings before special charges. Because of
the differences between the comparable companies and Diagnostek, as described
below, Lazard did not consider the comparable company valuation to be as
relevant as certain of the other valuation methodologies described herein.
Leveraged Buyout Analysis. Lazard performed a leverage buyout ("LBO")
analysis of Diagnostek, utilizing projections provided by management of
Diagnostek for 1996 and 1997 and extrapolations thereafter and assuming a
leveraged capital structure (30.0% equity, 23.0% subordinated debt and 47.0%
senior debt). The analysis resulted in an EBITDA to interest coverage multiple
of 2.5x and a total indebtedness to EBITDA multiple of 3.9x, in each case for
fiscal 1996. Under the assumed LBO structure, within a four-year period 35.6%
of the indebtedness incurred as part of the LBO could be repaid and the LBO
equity holders would receive a return of 36.8% (based on an EBITDA exit
multiple of 6.0x). In such an LBO transaction, based on the foregoing
assumptions, the holders of Diagnostek Common Stock would be paid $11.74 per
share.
Pro Forma Merger Analysis. Lazard reviewed certain pro forma financial
effects on Value Health resulting from the Merger for the projected twelve-
month periods ended December 31, 1995 and 1996. The analysis was based upon
certain assumptions, including that the projections provided to Lazard by
Diagnostek and Value Health management were accurate. Lazard assumed pre-tax
synergies from the Merger of $20.1 million in 1995 and $29.8 million in 1996,
which were the amounts provided by management of Diagnostek. Lazard expressed
no view on whether these possible benefits could be realized. In addition,
Lazard assumed that the Merger would be accounted for under the pooling of
interests method of accounting. The financial analysis indicated that the
combined entity would have earnings per share of $1.98 in 1995 and $2.62 in
1996.
Has-Gets Analysis. Lazard compared the various characteristics, including
earnings, capitalization and cash flow data, of shares of Diagnostek Common
Stock with the characteristics of shares of VH Common Stock to be received by
holders of Diagnostek Common Stock in the Merger. Lazard noted that, based on
the $36.375 closing price of a share of VH Common Stock on June 7, 1995, the
Exchange Ratio results in a
35
<PAGE>
price per share of Diagnostek Common Stock of $18.10, a 14.9% premium over the
trading price of such shares 90 days preceding the original announcement of the
Merger. Under the has-gets analysis, Lazard noted that, based on 1995 earnings
estimates provided by management of Diagnostek and Value Health and the
synergies expected by management of Diagnostek to be realized in the Merger,
the current holders of Diagnostek Common Stock and of VH Common Stock would
experience accretion of 10.4% and 13.2%, respectively, in earnings per share.
Pro Forma Discounted Cash Flow Analysis. Using the DCF methodology described
above, Lazard calculated the DCF of the combined Diagnostek/Value Health
entity, giving effect to the Merger and various assumptions provided by the
management of Diagnostek and Value Health, including the synergies expected by
management of Diagnostek to be realized in the Merger. Applying a 14.0% to
16.0% discount rate and a 7.0x to 9.0x terminal multiple to the combined
entity's projected 1999 EBITDA, the analysis resulted in an equity value
reference range for the common stock of the combined entity of $37.66 to $48.57
per share. Lazard assumed lower discount rates and higher terminal multiples
for the combined entity than as described above for Diagnostek as a stand-alone
entity because the business operations of the combined companies will be more
diverse and Value Health has on a stand-alone basis experienced a higher
multiple and lower discount rate than Diagnostek.
Pro Forma Comparable Public Company Analysis. Comparing the available data
for the selected public companies described above (see "--Comparable Public
Company Analysis") to the corresponding data for the combined Diagnostek/Value
Health entity (giving effect to the Merger and certain other assumptions
relating thereto, including the synergies expected by Diagnostek management to
be realized in the Merger), Lazard calculated an equity value reference range
for the common stock of the combined entity of $41.58 to $45.54 per share based
on a multiple range of 21.0x to 23.0x calendar 1995 pro forma projected
earnings. Because of the differences between the comparable companies and the
combined Diagnostek/Value Health entity, as described below, Lazard did not
consider the pro forma comparable company valuation to be as relevant as
certain of the other valuation methodologies described herein.
Pro Forma Leveraged Buyout Analysis. Lazard performed an LBO analysis on the
combined Diagnostek/Value Health entity, utilizing projections provided by
management of Diagnostek and Value Health for 1996 and extrapolations
thereafter and assuming the leveraged capital structure described above under
"--Leveraged Buyout Analysis". This analysis resulted in an EBITDA to interest
coverage multiple of 2.5x and a total indebtedness to EBITDA multiple of 4.1x,
in each case for fiscal 1996. Under the assumed LBO structure, within a four-
year period 29.0% of the indebtedness incurred as part of the LBO could be
repaid and the LBO equity holders of the combined entity would receive a return
of 38.5% (based on an EBITDA exit multiple of 7.0x). In such an LBO
transaction, based on the foregoing assumptions, the holders of the common
stock for the combined entity would be paid $31.88 per share.
Lazard utilized the DCF, comparable transactions, comparable company and LBO
analyses described above in order to value Diagnostek. For the reasons noted
above, Lazard did not consider the comparable transactions and comparable
company analyses to be as relevant as the DCF and LBO valuations. The other
methodologies described above were used by Lazard to determine whether the
consideration proposed to be paid by Value Health for all the Diagnostek Common
Stock was fair to the holders of such Common Stock in light of Lazard's
valuation of Diagnostek. Lazard again considered the DCF and LBO analyses to be
most reliable methodologies, given the greater limitations involved in the
other methodologies, as described above. In utilizing management projections
provided by Diagnostek, Lazard performed certain sensitivity analyses against
such projections.
In arriving at its opinion, Lazard performed a variety of financial analyses,
the material portions of which are summarized above. The summary set forth
above does not purport to be a complete description of the analyses performed
by Lazard. In addition, Lazard believes that its analyses must be considered as
a whole and that selecting portions of such analyses and the factors considered
by it, without considering all of such analyses and factors, could create an
incomplete view of the process underlying its analyses set forth in the
opinion. The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial
36
<PAGE>
analysis or summary description. With regard to the comparable transaction
analysis and the comparable public company analyses summarized above, Lazard
selected comparable public companies on the basis of various factors, including
the size of the public company and similarity of the line of business; however,
no public company utilized as a comparison is identical to Diagnostek, Value
Health or the business segment for which a comparison is being made. In
particular, Lazard noted that there are only a few independent publicly-traded
PBMs in the industry following much consolidation. Two of these PBMs (Express
Scripts, Inc. and SysteMed, Inc.) are significantly smaller than Diagnostek,
and Caremark International Inc. has other significant businesses besides its
PBM. Additionally, Value Health participates in diversified managed care
businesses that are growing more rapidly than the PBM business. Accordingly, an
analysis of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
the acquisition or public trading value of the comparable companies to which
Diagnostek, Value Health or their respective business segments are being
compared.
In performing its analyses, Lazard made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond Diagnostek's or Value Health's control. Any
estimates contained in such analyses are not necessarily indicative of actual
past or future results or values, which may be significantly more or less than
such estimates. Estimates of values of companies or parts of companies do not
purport to be appraisals or necessarily to reflect the price at which such
companies or parts may actually be sold, and such estimates are inherently
subject to uncertainty.
Lazard is an internationally recognized investment banking firm that
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions. The Diagnostek Board of Directors
selected Lazard to act as its financial advisor on the basis of Lazard's
international reputation and Lazard's familiarity with Diagnostek. On May 1,
1995, Lazard statutorily converted from a limited partnership to a limited
liability company.
Lazard has in the past provided, and is currently providing, financial
advisory services to Pfizer Inc. ("Pfizer"). On May 1, 1994, Value Health and
Pfizer entered into a joint venture partnership to develop specialty disease
management programs. Value Health and Pfizer also have a contractual
arrangement to develop value-added programs designed to improve physician and
patient use of Pfizer prescription and medical device products. In addition,
several Pfizer drug products will receive assured positions on Value Health's
prescription drug formularies in return for rebate arrangements.
Pursuant to a letter agreement dated as of March 15, 1995, between Diagnostek
and Lazard, it was confirmed that Lazard had agreed to act as financial advisor
to Diagnostek in connection with the possible sale of Diagnostek. Diagnostek
has agreed to pay Lazard a cash fee equal to 0.7% of the aggregate
consideration paid or payable to Diagnostek or its securityholders in
connection with the Merger. Such fee is payable only upon the closing of the
Merger. Diagnostek has also agreed to reimburse Lazard for its reasonable out-
of-pocket expenses, including the reasonable fees and expenses of any legal
counsel, and to indemnify Lazard and certain related persons against certain
liabilities, including certain liabilities under the federal securities laws
relating to, or arising out of, its engagement.
As noted under the caption "THE MERGER--Recommendation of the Diagnostek
Board of Directors; Reasons for the Merger," the fairness opinion of Lazard was
only one of many factors considered by the Diagnostek Board of Directors in
determining to approve the Merger Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned on Value Health and Diagnostek
receiving opinions, prior to the Effective Date, from Gibson, Dunn & Crutcher,
counsel to Value Health, and Cozen and O'Connor, counsel to Diagnostek,
respectively, that the Merger will qualify for federal income tax purposes as a
tax-free reorganization within the meaning of Section 368(a) of the Code and,
accordingly, that no gain or loss will be recognized by holders of Diagnostek
Common Stock upon the conversion of shares of Diagnostek
37
<PAGE>
Common Stock into shares of VH Common Stock pursuant to the terms of the Merger
(except as discussed below with respect to cash, if any, received in lieu of
fractional share interests in VH Common Stock and with respect to certain real
property transfer taxes). E. Gerald Riesenbach, a member of Cozen and O'Connor,
has served as a director of Diagnostek since 1990.
In such event, the tax basis of the shares of VH Common Stock received by
holders of Diagnostek Common Stock on the conversion of Diagnostek Common Stock
pursuant to the Merger will be the same as the tax basis of the shares of
Diagnostek Common Stock converted (less any portion of such basis allocable to
any fractional share interest in any share of VH Common Stock for which cash is
received and with respect to certain real property transfer taxes, if any). The
holding period of the shares of VH Common Stock into which shares of Diagnostek
Common Stock are converted will include the period that such shares of
Diagnostek Common Stock were held by the holder, provided that such shares of
Diagnostek Common Stock were held as capital assets as of the Effective Date.
Cash received by a holder of Diagnostek Common Stock in lieu of any fractional
share interest in VH Common Stock will result in the recognition of gain or
loss for federal tax purposes, measured by the difference between the amount of
cash received and the portion of the basis of the share of Diagnostek Common
Stock allocable to such fractional share interest. Such gain or loss will be
capital gain or loss, provided that such share of Diagnostek Common Stock was
held as a capital asset as of the Effective Date, and will be long-term capital
gain or loss if such share of Diagnostek Common Stock has been held for more
than one year.
Certain states and localities impose a tax on certain transfers (which
include the Merger) of an interest in real property (including leases) located
therein. Any returns required to be filed in connection with such tax will be
filed by Diagnostek on behalf of the holders of Diagnostek Common Stock, and
Value Health will pay any tax due thereon. Any such payment should result in a
deemed payment by Value Health to the holders of Diagnostek Common Stock and a
deemed payment of tax by such holders. Each such holder will be required to
recognize any gain realized on the exchange of its shares of Diagnostek Common
Stock for VH Common Stock to the extent of its allocable portion of such deemed
payment. Such gain should be capital gain, provided that such shares of
Diagnostek Common Stock were held as a capital asset as of the Effective Date,
and will be long-term capital gain if such shares had been held for more than
one year. Although there is no direct authority on the issue, there is a
reasonable basis to conclude that any such deemed payment of tax should result
in an increase of equal amount in the adjusted tax basis of such holder's
shares of VH Common Stock received in the Merger.
Based upon the advice of their respective counsel, Diagnostek and Value
Health believe that no gain or loss will be recognized by Diagnostek, Value
Health or Sub as a result of the Merger.
THE DISCUSSION SET FORTH ABOVE OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER IS INCLUDED FOR GENERAL INFORMATION ONLY. IT DOES
NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE MERGER. IN ADDITION,
IT DOES NOT DISCUSS THE FEDERAL INCOME TAX CONSIDERATIONS THAT MAY BE RELEVANT
TO CERTAIN PERSONS, INCLUDING HOLDERS OF OPTIONS OR WARRANTS, AND MAY NOT APPLY
TO CERTAIN HOLDERS SUBJECT TO SPECIAL TAX RULES, INCLUDING DEALERS IN
SECURITIES, FOREIGN HOLDERS AND HOLDERS WHO ACQUIRED THEIR SHARES OF DIAGNOSTEK
COMMON STOCK PURSUANT TO THE EXERCISE OF OPTIONS OR OTHERWISE AS COMPENSATION.
THE DISCUSSION IS BASED UPON CURRENTLY EXISTING PROVISIONS OF THE CODE,
EXISTING TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND
COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE
COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION.
EACH HOLDER OF DIAGNOSTEK COMMON STOCK SHOULD CONSULT HIS OR HER OWN TAX
ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM OR
HER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
assets and liabilities of Value Health and Diagnostek
38
<PAGE>
will be carried forward to the combined corporation at their recorded amounts;
income of the combined corporation will include income of Value Health and
Diagnostek for the entire fiscal year in which the Merger occurs; and the
reported income of the separate corporations for prior periods will be combined
and restated as income of the combined companies.
The Merger Agreement provides that a condition to the consummation of the
Merger is the receipt of letters from the independent accountants of Value
Health and Diagnostek to the effect that the Merger qualifies for pooling of
interests accounting treatment.
CERTAIN LEGAL MATTERS
Except as set forth below, no federal or state regulatory requirements or
approvals, other than those arising in connection with the registration of VH
Common Stock to be issued in the Merger and the effectiveness of this Proxy
Statement-Prospectus, which are being obtained, and certain notice filings
after the Effective Date, must be complied with or obtained in connection with
the Merger.
Antitrust. Pursuant to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), Value Health and
Diagnostek filed on March 31, 1995 and April 4, 1995, respectively, a
Notification and Report Form for review under the HSR Act with the Federal
Trade Commission (the "FTC") and the Antitrust Division of the Department of
Justice (the "Antitrust Division"). Value Health and Diagnostek received early
termination of the waiting period under the HSR Act on May 3, 1995.
The FTC and the Antitrust Division frequently scrutinize the legality of
transactions such as the Merger under the antitrust laws. At any time before or
after the Effective Date, the FTC or the Antitrust Division could take such
action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the Merger or seeking the
divestiture of substantial assets of Value Health, Diagnostek or their
respective subsidiaries. State Attorneys General and private parties may also
bring legal actions under the federal or state antitrust laws under certain
circumstances. Based upon an examination of information available to Value
Health and Diagnostek relating to the businesses in which Value Health,
Diagnostek and their respective subsidiaries are engaged, Value Health and
Diagnostek believe that the consummation of the Merger will not violate the
antitrust laws. Nevertheless, there can be no assurance that a challenge to the
proposed Merger on antitrust grounds will not be made or, if such a challenge
is made, that Value Health and Diagnostek will prevail. Consummation of the
Merger is conditioned upon, among other things, the absence of any preliminary
or permanent injunction or other order issued by any federal or state court in
the United States which prevents the consummation of the Merger.
State Regulation. In connection with the Merger, the Surviving Corporation
may be required to file notices with certain state pharmacy boards regarding
the change of control of Diagnostek (relating to the pharmacy licenses held by
certain Diagnostek subsidiaries).
FEDERAL SECURITIES LAW CONSEQUENCES
All VH Common Stock issued in connection with the Merger will be freely
transferable, except that any VH Common Stock received by persons who are
deemed to be "affiliates" (as such term is defined under the Securities Act) of
Diagnostek or Value Health prior to the Merger may be sold by them only in
transactions permitted by the resale provisions of Rule 145 under the
Securities Act with respect to affiliates of Diagnostek, or Rule 144 under the
Securities Act with respect to persons who are or become affiliates of Value
Health, or as otherwise permitted under the Securities Act. Persons who may be
deemed to be affiliates of Diagnostek or Value Health generally include
individuals or entities that control, are controlled by, or are under common
control with, such party and may include certain officers and directors of such
party as well as principal stockholders of such party.
Affiliates may not sell their shares of VH Common Stock acquired in
connection with the Merger, except pursuant to an effective registration under
the Securities Act covering such shares or in compliance with Rule 145 (or Rule
144 under the Securities Act in the case of persons who are or become
affiliates of Value Health)
39
<PAGE>
or another applicable exemption from the registration requirements of the
Securities Act. In general, under Rule 145, for two years following the
Effective Date an affiliate of Diagnostek prior to the Merger (together with
certain related persons) would be entitled to sell shares of VH Common Stock
acquired in connection with the Merger only through unsolicited "broker
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 144. Additionally, the number of shares to be sold by such
an affiliate (together with certain related persons and certain persons acting
in concert) within any three-month period for purposes of Rule 145 may not
exceed the greater of 1% of the outstanding shares of VH Common Stock or the
average weekly trading volume of such stock during the four calendar weeks
preceding such sale. Rule 145 would only remain available, however, to
affiliates of Diagnostek prior to the Merger if Value Health remained current
with its informational filings with the Commission under the Exchange Act. Two
years after the Effective Date, an affiliate of Diagnostek prior to the Merger
would be able to sell such VH Common Stock without such manner of sale or
volume limitations provided that Value Health was current with its Exchange Act
informational filings and such affiliate was not then an affiliate of Value
Health. Three years after the Effective Date, an affiliate of Diagnostek prior
to the Merger would be able to sell such shares of VH Common Stock without any
restrictions so long as such affiliate had not been an affiliate of Value
Health for at least three months prior thereto. See "THE MERGER AGREEMENT--
Covenants."
STOCK EXCHANGE LISTING
It is a condition to the Merger that the shares of VH Common Stock to be
issued in connection with the Merger be authorized for listing on the NYSE,
subject to official notice of issuance.
APPRAISAL RIGHTS
Under the DGCL, neither the holders of VH Common Stock nor the holders of
Diagnostek Common Stock are entitled to any dissenters' rights of appraisal
with respect to the Merger.
EFFECT OF THE TERMINATION FEE
The $15 million termination fee provided for in the Merger Agreement may have
the effect of discouraging persons who might now or prior to the consummation
of the Merger be interested in acquiring all of or a significant interest in
Diagnostek from considering or proposing such an acquisition. See "THE MERGER
AGREEMENT--Termination; Fees and Expenses."
EXISTING DIAGNOSTEK LITIGATION
On July 11, 1994, a purported shareholder class action was filed in the
United States District Court for the District of New Mexico against Diagnostek
and Nunzio P. DeSantis (Chairman and Chief Executive Officer), Courtlandt G.
Miller (General Counsel, Secretary and Director), Vincent Villanueva (Vice
President) and William A. Barron (President). The plaintiffs have named two
class representatives: Irwin Bash (allegedly owning 200 shares of Diagnostek
Common Stock) and Leykin, Hyman and Bash Associates (allegedly owning 1,000
shares of Diagnostek Common Stock).
On July 7, 1994, Diagnostek announced that it had agreed with CIGNA that
Diagnostek's pharmacy service contracts in support of the CIGNA managed health
care plans in New Mexico and Arizona would be terminated. The agreement was
reached after Diagnostek received correspondence dated June 30, 1994 from CIGNA
giving notice of termination of the CIGNA contracts. The notice of termination
stated that the contracts were being terminated because of certain instances of
inappropriate purchases by Diagnostek of drugs (under the CIGNA contracts) from
three manufacturers, which were ultimately used for other Diagnostek customers.
These contracts, which had been awarded to Diagnostek during 1991 and 1992, had
originally been scheduled to expire at various times commencing in July 1995.
Diagnostek's revenues from the CIGNA contracts for the fiscal year ended March
31, 1994 were $80.7 million.
In their original Complaint, the plaintiffs have alleged that the named
defendants pursued a "scheme and course of conduct" to inflate Diagnostek's
reported earnings through the concealment of specific facts underlying the
termination of the CIGNA contracts. On December 30, 1994, the plaintiffs filed
their First Amended Complaint which set forth additional alleged facts in
support of the claims in the original
40
<PAGE>
Complaint. The defendants in their Answer to Plaintiffs' First Amended
Complaint asserted that they had taken appropriate remedial steps to rectify
the situation, believed in good faith that the matter would be resolved and did
not foresee that the contract would be terminated since at no time during the
period that Diagnostek was effecting remedial steps did CIGNA communicate its
intention to terminate the contracts. The defendants have raised in their
Answer the general defenses that they did not, at any time, deceive, manipulate
or defraud the plaintiffs or any other person regarding the CIGNA contracts and
that all disclosures required by law pertaining to these contracts were made at
all appropriate times by the defendants. The defendants have also asserted,
among other things, that the plaintiffs did not rely upon any statement, act or
omission of the defendants in purchasing Diagnostek Common Stock, and that any
changes in the market price of Diagnostek Common Stock were due to factors
other than the misrepresentations allegedly made by the defendants.
On April 11, 1995, the plaintiffs filed a Second Amended Complaint alleging
that the defendants made further misrepresentations in a press release and
certain filings with the Commission regarding the anticipated annual revenues
to be received in connection with a Department of Defense CHAMPUS contract
awarded in July 1994. The Second Amended Complaint also extended the requested
class period from July 6, 1994 to March 24, 1995.
The Second Amended Complaint asserts that the defendants violated federal
securities laws (including Section 10(b) of the Exchange Act and Rule 10(b)(5)
promulgated thereunder, and prohibitions on insider trading), and that the
defendants' actions constitute common law fraud and/or negligent
misrepresentation. The plaintiffs seek monetary damages for the losses suffered
as a result of the alleged misrepresentations, disgorgement of alleged insider
trading profits and an award of costs and expenses incurred in the filing of
these actions, including attorneys' fees, accountants' fees and experts' fees.
On May 18, 1995, the defendants filed a Motion to Dismiss Plaintiffs' Second
Amended Complaint asserting that the plaintiffs' allegations regarding the
CHAMPUS contract are wholly speculative, without a factual basis and that the
additional claims were filed purely for harassment purposes. In the event that
the defendants' Motion to Dismiss Plaintiffs' Second Amended Complaint is not
successful, the defendants expect to file an Answer raising the same general
defenses that were raised in response to the First Amended Complaint.
On May 26, 1995, the plaintiffs filed a motion seeking certification of a
class consisting of all persons who purchased or otherwise acquired Diagnostek
Common Stock during the period from April 28, 1994 through March 24, 1995, but
excluding defendants and certain others associated with defendants. Defendants
are seeking discovery in order to determine whether to oppose the motion for
class certification.
Although Diagnostek has denied any liability and is vigorously defending the
litigation, Diagnostek has not established a reserve with respect to such
litigation and there can be no assurance that the outcome of this litigation
will not materially adversely affect Value Health's results of operations
following consummation of the Merger.
In addition, the Commission is conducting a formal investigation into the
adequacy of Diagnostek's financial disclosures, books and records, and internal
accounting controls, including whether Diagnostek overstated its assets and
income in its financial statements for the fiscal year ended March 31, 1992 and
the quarter ended June 30, 1992. Diagnostek has cooperated fully in connection
with this investigation. Diagnostek has reached an agreement in principle with
the Staff of the Commission pursuant to which Diagnostek will consent, without
admitting or denying the Commission's findings, to a Commission order directing
Diagnostek to cease and desist from violating certain antifraud provisions of
the federal securities laws, provisions requiring accurate periodic filings
with the Commission, and provisions requiring Diagnostek to maintain accurate
financial records and adequate systems of internal accounting control. Similar
agreements in principle have been reached between the Commission staff and a
former officer of Diagnostek and an employee of its HCS subsidiary. The
agreements in principle are subject to further consideration by Diagnostek and
the Commission staff of the precise terms of a proposed order. Any such order
will be effective only if approved by the Commission, and there can be no
assurance that such approval will be forthcoming.
41
<PAGE>
THE MERGER AGREEMENT
The following description of the Merger Agreement does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement,
a copy of which is attached to this Proxy Statement-Prospectus as Annex A and
incorporated herein by reference. Stockholders of Value Health and Diagnostek
are urged to read the Merger Agreement in its entirety.
THE MERGER
The Merger Agreement provides that, subject to the approval of the Merger
Agreement by the stockholders of Diagnostek and the approval of the Value
Health Share Proposal by the stockholders of Value Health and the satisfaction
or waiver of the other conditions to the Merger, Sub will be merged with and
into Diagnostek in accordance with Delaware law, whereupon the separate
existence of Sub will cease and Diagnostek will be the Surviving Corporation of
the Merger. On the Effective Date, the conversion of Diagnostek Common Stock
and the conversion of shares of the common stock of Sub will be effected as
described below. The Certificate of Incorporation, as amended, and By-laws of
Diagnostek will be the Certificate of Incorporation and By-laws of the
Surviving Corporation. The directors of Sub and of Diagnostek immediately prior
to the Effective Date will become the directors of the Surviving Corporation
and the officers of Diagnostek immediately prior to the Effective Date will be
the officers of the Surviving Corporation, in each case until their respective
successors are duly elected and qualified.
EFFECTIVE DATE
Following the adoption of the Merger Agreement and the Value Health Share
Proposal and subject to satisfaction or waiver of certain terms and conditions,
including conditions to closing, contained in the Merger Agreement, the Merger
will become effective on such date as the Certificate of Merger is duly filed
with the Secretary of State of Delaware or at such time thereafter as is
provided in such Certificate. The filing of the Certificate of Merger will be
made as soon as practicable after all conditions contemplated by the Merger
Agreement have been satisfied or waived.
TERMS OF THE MERGER
At the Effective Date:
(i) each share of Diagnostek Common Stock held by Diagnostek or any
subsidiary of Diagnostek or held by Value Health, Sub or any other
subsidiary of Value Health immediately prior to the Effective Date will be
canceled, and no payment will be made with respect thereto;
(ii) each remaining outstanding share of Diagnostek Common Stock will be
converted into the right to receive 0.4975 shares of VH Common Stock, with
cash in lieu of fractional shares; and
(iii) each issued and outstanding share of the capital stock of Sub will
be converted into and represent one fully paid and nonassessable share of
common stock, par value $0.01 per share, of the Surviving Corporation.
As of the Effective Date, present holders of Diagnostek Common Stock will
cease to have any rights as holders of such shares, but will have the rights of
holders of VH Common Stock. After the Effective Date, the stock transfer books
of Diagnostek will be closed and there will be no further transfers of
Diagnostek Common Stock. See "THE MERGER--Conversion of Shares; Procedures for
Exchange of Certificates" and "COMPARISON OF STOCKHOLDER RIGHTS."
FRACTIONAL SHARES
Fractional shares of VH Common Stock will not be issued in connection with
the Merger. In lieu of any such fractional share, each holder of Diagnostek
Common Stock who would otherwise have been entitled to
42
<PAGE>
a fraction of a share of VH Common Stock upon surrender of certificates for
exchange will be paid cash (without interest) in an amount equal to such
holder's proportionate interest in the net proceeds from the sale or sales in
the open market by the Exchange Agent, on behalf of all such holders, of the
aggregate fractional VH Common Stock issued pursuant to the Merger Agreement.
As soon as practicable following the Effective Date, the Exchange Agent will
determine the excess of (i) the number of full shares of VH Common Stock
delivered to the Exchange Agent by Value Health over (ii) the aggregate number
of full shares of VH Common Stock to be distributed to holders of Diagnostek
Common Stock (the "Excess Value Health Shares"), and the Exchange Agent, as
agent for the former holders of Diagnostek Common Stock, will sell the Excess
Value Health Shares at the prevailing prices on the NYSE. The sale of the
Excess Value Health Shares by the Exchange Agent will be executed on the NYSE
through one or more member firms of the NYSE and will be executed in round
lots to the extent practicable. The Exchange Agent will deduct from the
proceeds of the sale of the Excess Value Health Shares all commissions,
transfer taxes and other out-of-pocket transaction costs, including the
expenses and compensation of the Exchange Agent, incurred in connection with
such sale of Excess Value Health Shares. Until the net proceeds of such sale
have been distributed to the former stockholders of Diagnostek, the Exchange
Agent will hold such proceeds in trust for such former stockholders subject to
the limitations described below. As soon as practicable after the
determination of the amount of cash to be paid to former stockholders of
Diagnostek in lieu of any fractional interests, the Exchange Agent will make
available such amounts to such former stockholders.
SURRENDER AND PAYMENT
The Merger Agreement provides that prior to the Effective Date, Value Health
will appoint Mellon Securities Transfer Services, or such other person
reasonably satisfactory to Diagnostek, to act as the Exchange Agent for the
Merger. As soon as practicable after the Effective Date, Value Health will
make available, and each holder of Diagnostek Common Stock will be entitled to
receive, upon surrender to the Exchange Agent of one or more certificates
representing Diagnostek Common Stock for cancellation, certificates
representing the number of shares of VH Common Stock into which such shares
are converted in the Merger and cash in consideration of fractional shares, as
described above. VH Common Stock into which Diagnostek Common Stock will be
converted in the Merger will be deemed to have been issued at the Effective
Date.
Any holder of shares of Diagnostek Common Stock who has not exchanged his or
her shares for VH Common Stock in accordance with the terms of the Merger
Agreement within six months after the Effective Date will have no further
claim upon the Exchange Agent and will thereafter look only to Value Health
and the Surviving Corporation for payment in respect of his or her shares of
Diagnostek Common Stock. If any certificates representing shares of Diagnostek
Common Stock entitled to payment pursuant to the Merger Agreement have not
been surrendered for such payment prior to such date on which any payment in
respect thereof would otherwise escheat to or become the property of any
governmental agency or other governmental entity, such shares of Diagnostek
Common Stock will, to the extent permitted by applicable law, be deemed to be
canceled and no money or other property will be due to the holder thereof.
No dividends or other distributions that are declared or made on VH Common
Stock will be paid to persons entitled to receive certificates representing VH
Common Stock until such persons surrender their certificates representing
Diagnostek Common Stock. Upon such surrender, there will be paid to the person
in whose name the certificates representing such VH Common Stock will be
issued any dividends or other distributions which will have become payable
with respect to such VH Common Stock in respect of a record date after the
Effective Date. In no event will the person entitled to receive such dividends
be entitled to receive interest on such dividends. In the event that any
certificates representing shares of VH Common Stock are to be issued in a name
other than that in which the certificates representing shares of Diagnostek
Common Stock surrendered in exchange therefor are registered, it is a
condition of such exchange that the certificate or certificates so surrendered
be properly endorsed or be otherwise in proper form for transfer and that the
person requesting such exchange pay to the Exchange Agent any transfer or
other taxes required by reason of the issuance of certificates for such shares
of VH Common Stock in a name other than that of the registered holder of the
certificate surrendered, or establish to the satisfaction of the Exchange
Agent that such tax has
43
<PAGE>
been paid or is not applicable. Notwithstanding the foregoing, neither the
Exchange Agent, Value Health, Diagnostek nor Sub will be liable to any holder
of shares of Diagnostek Common Stock for any shares of VH Common Stock or
dividends thereon delivered to a public official pursuant to any applicable
escheat laws.
DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO
HOLDERS OF DIAGNOSTEK COMMON STOCK PROMPTLY FOLLOWING THE EFFECTIVE DATE AS TO
THE METHOD OF EXCHANGING CERTIFICATES FORMERLY REPRESENTING SHARES OF
DIAGNOSTEK COMMON STOCK FOR CERTIFICATES REPRESENTING SHARES OF VH COMMON
STOCK. SEE "THE MERGER--CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF
CERTIFICATES." STOCKHOLDERS OF DIAGNOSTEK SHOULD NOT SEND CERTIFICATES
REPRESENTING THEIR SHARES TO DIAGNOSTEK OR TO THE EXCHANGE AGENT PRIOR TO
RECEIPT OF THE TRANSMITTAL LETTER.
STOCK OPTIONS
At or prior to the Effective Date, Diagnostek and Value Health will take all
action necessary to cause the assumption by Value Health as of the Effective
Date of all of the following which remain outstanding as of the Effective Date:
(i) the options to purchase Diagnostek Common Stock, whether vested or
unvested, issued under Diagnostek's 1983 Non-qualified Incentive Stock Option
Plan and 1991 Stock Option Plan (the "Stock Option Plans"), (ii) options to
purchase Diagnostek Common Stock pursuant to option agreements outside of the
Stock Option Plans and (iii) the warrants to purchase Diagnostek Common Stock
issued pursuant to warrant agreements (collectively, the "Outstanding
Options"). To the extent permitted under applicable law and the applicable
agreements and Stock Option Plans, each of the Outstanding Options will be
converted without any action on the part of the holder thereof into an option
to purchase shares of VH Common Stock as of the Effective Date. The number of
shares of VH Common Stock that the holder of an assumed Outstanding Option will
be entitled to receive upon the exercise of such option will be a number of
whole and fractional shares determined by multiplying the number of shares of
Diagnostek Common Stock subject to such option, determined immediately before
the Effective Date, by the Exchange Ratio. The exercise price of each share of
VH Common Stock subject to an Outstanding Option will be the amount (rounded up
to the nearest whole cent) obtained by dividing the exercise price per share of
Diagnostek Common Stock at which such option is exercisable immediately before
the Effective Date by the Exchange Ratio. Other than as set forth in the
Outstanding Options, the assumption and substitution of options as provided in
the Merger Agreement will not give the holders of such options additional
benefits or additional vesting rights which they did not have immediately prior
to the Effective Date or relieve the holders of any obligations or restrictions
applicable to their options or the shares obtainable upon exercise of the
options.
Only whole shares of VH Common Stock will be issued upon exercise of any
Outstanding Option, and in lieu of receiving any fractional share of VH Common
Stock, the holder of such option will receive in cash the fair market value of
the fractional share, net of the applicable exercise price of the fractional
share and applicable withholding taxes. Prior to the Effective Date, Diagnostek
will take such additional actions as are necessary under applicable law and the
applicable agreements and Stock Option Plans to assure that each Outstanding
Option will, from and after the Effective Date, represent only the right to
purchase, upon exercise, whole shares of VH Common Stock and cash in lieu of
any fractional share as described above. After the Effective Date, the Stock
Option Plans will be continued in effect by Value Health subject to amendment,
modification, suspension, abandonment or termination as provided therein, and
the Stock Option Plans as so continued (i) will relate solely to those
Outstanding Options that are governed by such Stock Option Plans immediately
prior to the Effective Date, (ii) thereafter will relate only to the issuance
of VH Common Stock as provided in the Merger Agreement and (iii) will continue
to provide for equitable adjustment in the terms of Outstanding Options in the
event of certain corporate events which alter the capital structure of Value
Health.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of Value Health and Diagnostek to consummate the Merger are
subject to the satisfaction of certain conditions, including: (i) the approval
of the Value Health Share Proposal by a majority
44
<PAGE>
of the votes cast on such proposal; (ii) the approval and adoption of the
Merger Agreement and the transactions contemplated thereby by the holders of a
majority of the outstanding Diagnostek Common Stock; (iii) the authorization
for listing on the NYSE, upon official notice of issuance, of the VH Common
Stock issuable to Diagnostek stockholders pursuant to the Merger Agreement;
(iv) the expiration or termination of the waiting period applicable to the
consummation of the Merger under the HSR Act (which occurred on May 3, 1995);
(v) the Registration Statement for the VH Common Stock to be issued in
connection with the Merger (the "Registration Statement") becoming effective
in accordance with the provisions of the Securities Act and not being the
subject of any stop order suspending effectiveness issued by the Commission;
(vi) the absence of any preliminary or permanent injunction or other order by
any federal or state court in the United States which prevents the
consummation of the Merger (each party agreeing to use its best efforts to
have any such injunction lifted); and (vii) the receipt by Value Health and
Diagnostek of letters from Coopers & Lybrand L.L.P. and KPMG Peat Marwick LLP,
respectively, to the effect that the Merger qualifies for pooling of interests
accounting treatment if consummated in accordance with the Merger Agreement.
The obligations of Value Health and Sub to consummate the Merger are also
subject to the satisfaction of the following further conditions (unless waived
by Value Health): (i) Diagnostek having performed in all material respects its
agreements contained in the Merger Agreement required to be performed by it on
or prior to the Effective Date, and the representations and warranties of
Diagnostek contained in the Merger Agreement are true when made and the
representations and warranties of Diagnostek described in clauses (ii), (iii),
(iv), (vi) and (xi) under "--Representations and Warranties" below are true on
and as of the Effective Date, except to the extent they relate to a particular
date, in which case they remain true and correct as of the applicable date
made; (ii) Value Health having received a favorable opinion of Gibson, Dunn &
Crutcher, counsel to Value Health, to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code; (iii) receipt of certain specified third party
consents; and (iv) audited financial statements of Diagnostek for the fiscal
year ending March 31, 1995 are available not later than June 6, 1995. Such
financial statements were delivered on that date.
The obligation of Diagnostek to consummate the Merger is also subject to the
satisfaction of the following further conditions (unless waived by
Diagnostek): (i) Value Health and Sub having performed in all material
respects their agreements contained in the Merger Agreement required to be
performed on or prior to the Effective Date, and the representations and
warranties of Value Health and Sub contained in the Merger Agreement are true
when made and on and as of the Effective Date, except to the extent they
relate to a specific date; (ii) Diagnostek having received the opinion of
Cozen and O'Connor, counsel to Diagnostek, to the effect that as of the
Effective Date, the Merger will be treated for federal income tax purposes as
a reorganization within the meaning of Section 368(a) of the Code with the
effects specified in the Merger Agreement; and (iii) receipt of certain
specified third party consents.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Value Health, Sub and Diagnostek relating to, among other things, the
following matters (which representations and warranties are subject, in
certain cases, to specified exceptions): (i) the due organization, power and
standing of, and similar corporate matters with respect to, each of
Diagnostek, Value Health and Sub; (ii) each of Diagnostek's and Value Health's
capitalizations; (iii) the authorization, execution, delivery, performance and
enforceability of the Merger Agreement by each such party and of the
transactions contemplated thereby; (iv) the absence of any conflict with
Diagnostek's, Value Health's and Sub's respective certificates of
incorporation and by-laws and compliance with applicable laws; (v) reports and
other documents filed with the Commission and other regulatory authorities and
the accuracy of the information contained therein; (vi) audited consolidated
financial statements for the most recently completed fiscal year, their
compliance with applicable accounting requirements and rules of the
Commission, their preparation in accordance with generally accepted accounting
principles applied on a consistent basis and the fairness of their
presentation of the financial position, results of operations and cash flow at
the end of or for such fiscal year presented therein; (vii) the absence of
certain changes or events having a material adverse effect on the condition
(financial or otherwise),
45
<PAGE>
business or results of operations of Diagnostek and Value Health (other than as
a result of changes in laws or regulations of general applicability); (viii)
the absence of any litigation that would have a material adverse effect on the
condition (financial or otherwise), business or results of operations of
Diagnostek and Value Health; (ix) the absence of any material untrue statements
in the Registration Statement and the Proxy Statement-Prospectus; (x) the
absence of any default under Diagnostek's employee benefit plans; (xi) the
inapplicability of Section 203 of the DGCL to the Merger and the transactions
contemplated thereby; (xii) the receipt of opinions of Diagnostek's and Value
Health's financial advisors; (xiii) compliance with applicable laws; (xiv) the
absence of undisclosed liabilities; (xv) the absence of any tax delinquencies
that would have a material adverse effect on the financial condition, business
or results of operations of Diagnostek; (xvi) the absence of actions taken by
Diagnostek or Value Health that would prevent the Merger from being effected as
a pooling of interests for accounting and financial reporting purposes; (xvii)
Diagnostek is not an "investment company"; (xviii) compliance by Diagnostek and
Value Health with applicable environmental laws, regulations and requirements,
and the absence of any claims against Diagnostek or Value Health regarding
environmental violations or liability; (xix) compliance by Diagnostek and Value
Health with Medicare and Medicaid statutes and regulations; (xx) compliance in
all material respects by Diagnostek and Value Health with applicable state laws
regulating pharmacies; (xxi) material contracts of Diagnostek and Value Health;
(xxii) Diagnostek's ownership or leasehold interest in properties free and
clear of liens; and (xxiii) Diagnostek's insurance coverage and intellectual
property rights.
CONDUCT OF BUSINESS PENDING THE MERGER
Prior to the Effective Date, unless Value Health otherwise agrees in writing,
Diagnostek will, and will cause its subsidiaries to, carry on their respective
businesses in the usual, regular and ordinary course in substantially the same
manner as previously conducted, and will, and will cause its subsidiaries to,
use their reasonable best efforts to preserve intact their present business
organizations, keep available the services of their present officers and key
employees and preserve their relationships with customers, suppliers and others
having business dealings with them to the end that their goodwill and ongoing
businesses will be unimpaired at the Effective Date, except for any impairment
which would not have a material adverse effect. Diagnostek will, and will cause
its subsidiaries to use their reasonable best efforts to: (i) maintain
insurance coverages and its books, accounts and records in the usual manner
consistent with prior practices; (ii) comply in all material respects with all
laws, ordinances and regulations of governmental entities applicable to
Diagnostek and its subsidiaries; (iii) maintain and keep its properties and
equipment in good repair, working order and condition, ordinary wear and tear
excepted; and (iv) perform in all material respects its obligations under all
contracts and commitments to which it is a party or by which it is bound, in
each case other than where the failure to so maintain, comply or perform,
either individually or in the aggregate, would have a material adverse effect
on Diagnostek.
Except as required by the Merger Agreement, Diagnostek will not and will not
propose to: (i) sell or pledge or agree to sell or pledge any capital stock
owned by it in any of its subsidiaries; (ii) amend its Certificate of
Incorporation or By-laws; (iii) split, combine or reclassify its outstanding
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of capital
stock of Diagnostek, or declare, set aside or pay any dividend or other
distribution payable in cash, stock or property; or (iv) directly or indirectly
redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise
acquire any shares of Diagnostek capital stock.
Diagnostek will not, nor will it permit any of its subsidiaries to: (i)
except as required by the Merger Agreement, issue, deliver or sell or agree to
issue, deliver or sell any additional shares of, or rights of any kind to
acquire any shares of, its capital stock of any class, any indebtedness (other
than pursuant to existing lines of credit for use in the ordinary course of
business and consistent with past practices) or any option, rights or warrants
to acquire, or securities convertible into, shares of capital stock other than
issuances of Diagnostek Common Stock disclosed in the Merger Agreement; (ii)
acquire, lease or dispose or agree to acquire, lease or dispose of any capital
assets or any other assets other than in the ordinary course of business;
46
<PAGE>
(iii) incur additional indebtedness or encumber or grant a security interest in
any asset or enter into any other material transaction other than in each case
in the ordinary course of business; (iv) acquire or agree to acquire by merging
or consolidating with, or by purchasing a substantial equity interest in, or by
any other manner, any business or any corporation, partnership, association or
other business organization or division thereof, in each case in this clause
(iv) which are material, individually or in the aggregate, to Diagnostek and
its subsidiaries taken as a whole, except that Diagnostek may create new wholly
owned subsidiaries with the prior written consent of Value Health, which
consent may not be unreasonably withheld; or (v) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing.
Except as disclosed to Value Health, Diagnostek will not, nor will it permit
any of its subsidiaries to, except as required to comply with applicable law or
pursuant to the terms of existing agreements that were not required to be
included in Diagnostek's disclosure schedule pursuant to the Merger Agreement:
(i) adopt, enter into, terminate or amend any bonus, profit sharing,
compensation, severance, termination, stock option, pension, retirement,
deferred compensation, employment or other Diagnostek benefit plan, agreement,
trust, fund or other arrangement for the benefit or welfare of any director,
officer or current or former employee; (ii) increase in any manner the
compensation or fringe benefit of any director, officer or employee (except for
normal increases in the ordinary course of business that are consistent with
past practice and that, in the aggregate, do not result in a material increase
in benefits or compensation expense to Diagnostek and its subsidiaries relative
to the level in effect prior to such amendment); (iii) pay any benefit not
provided under any existing plan or arrangement; (iv) grant any awards under
any bonus, incentive, performance or other compensation plan or arrangement or
Diagnostek benefit plan (including, without limitation, the grant of stock
options, stock appreciation rights, stock-based or stock-related awards,
performance units or restricted stock, or the removal of existing restrictions
in any benefit plans or agreements or awards made thereunder), other than such
plans and arrangements (other than stock options) which are made in the
ordinary course of business consistent with past practice; (v) take any action
to fund or in any other way secure the payment of compensation or benefits
under any employee plan, agreement, contract or arrangement or Diagnostek
benefit plan other than in the ordinary course of business consistent with past
practice; or (vi) adopt, enter into, amend or terminate any contract,
agreement, commitment or arrangement to do any of the foregoing; provided,
however, that nothing contained in the Merger Agreement will prevent Diagnostek
or any of its subsidiaries from paying any bonus to or increasing the
compensation of any employee in accordance with the terms of any employment
agreement for such employee that was provided to Value Health prior to the date
of the Merger Agreement.
Diagnostek will not, nor will it permit any of its subsidiaries to: (i) make
any investments in non-investment grade securities exceeding $1 million; or
sell, at a loss of greater than $50,000, any debt securities held for
investment purposes, (ii) form any corporation, partnership, joint venture or
other business association or entity, provided, however, that Diagnostek may
form a wholly owned subsidiary with the prior written consent of Value Health,
which consent will not be unreasonably withheld or (iii) take or cause to be
taken any action which would disqualify the Merger as a pooling of interests
for accounting purposes.
Prior to the Effective Date, unless Diagnostek otherwise agrees in writing or
except as otherwise required by the Merger Agreement: (i) Value Health will,
and will cause its Significant Subsidiaries (as defined in the Merger
Agreement) to use their reasonable best efforts to (A) preserve their
relationships with customers, suppliers and others having business dealings
with them to the end that their goodwill and ongoing businesses will be
unimpaired at the Effective Date, except such impairment as would not have a
material adverse effect on Value Health, (B) maintain insurance coverages and
its books, accounts and records in the usual manner consistent with prior
practices, (C) comply in all material respects with all laws, ordinances and
regulations of governmental entities applicable to Value Health and its
Significant Subsidiaries, (D) maintain and keep its properties and equipment in
good repair, working order and condition, ordinary wear and tear excepted and
(E) perform in all material respects its obligations under all contracts and
commitments to which it is a party or by which it is bound, in each case other
than where the failure to so maintain, comply or perform, either individually
or in the aggregate, would result in a material adverse effect on Value Health;
(ii) Value
47
<PAGE>
Health will not amend any of the material terms or provisions of the VH Common
Stock; (iii) Value Health will not take any action that would result in the
failure to maintain the trading of VH Common Stock on the NYSE; (iv) Value
Health will not declare or pay any dividend or distribution on any outstanding
shares of its capital stock; and (v) Value Health will not, nor will it permit
any of its subsidiaries to, take or cause to be taken any action which would
disqualify the Merger as a pooling of interests for accounting purposes.
Each party has agreed promptly to give written notice to the other party upon
becoming aware of the occurrence or, to its knowledge, impending or threatened
occurrence, of (i) any event which would cause or constitute a breach of any of
its representations, warranties or covenants contained or referenced in the
Merger Agreement and (ii) any change in circumstances or event which would
cause or constitute, in the case of notice by Value Health, a Parent Material
Adverse Effect (as defined in the Merger Agreement), and in the case of notice
by Diagnostek, a Company Material Adverse Effect (as defined in the Merger
Agreement).
COVENANTS
Each of Value Health and Diagnostek and their respective subsidiaries will
give the other access to all of its properties, books, contracts, commitments,
records and personnel through the Effective Date, and each will furnish
promptly to the other (i) a copy of each report, schedule and other document
filed or received by it pursuant to the requirements of federal or state
securities laws and (ii) all other information concerning its business,
properties and personnel as the other may reasonably request (including,
without limitation, updated information on pending litigation). Each of
Diagnostek and Value Health will hold, and will cause its respective employees
and agents to hold, in confidence all such information in accordance with the
terms of confidentiality agreements. Value Health and Diagnostek have further
agreed to prepare and file with the Commission preliminary proxy materials
consisting of a preliminary proxy statement and a preliminary prospectus with
respect to the VH Common Stock to be issued in connection with the Merger and
to make all necessary filings with respect to the Merger under applicable state
and federal securities laws and to use all reasonable efforts to obtain
required approvals and clearances with respect thereto. Diagnostek has also
agreed to file with the Commission a definitive proxy statement and Value
Health has agreed to file with the Commission a definitive proxy statement and
registration statement, and Diagnostek and Value Health have further agreed to
use all reasonable efforts to cause the registration statement to become
effective as soon as practicable thereafter.
Prior to the Effective Date, Diagnostek has agreed to deliver to Value Health
a letter identifying all persons who were, at the time of the Diagnostek
Special Meeting, "affiliates" of Diagnostek as that term is used in paragraphs
(c) and (d) of Rule 145 under the Securities Act (the "Affiliates"). In
identifying such Affiliates, Diagnostek will consult with counsel satisfactory
to counsel for Value Health. Diagnostek has agreed to deliver to Value Health,
on or prior to the Effective Date, a written agreement from each Affiliate that
he or she will not offer to sell, sell or otherwise dispose of any VH Common
Stock issued to him or her pursuant to the Merger, except in compliance with
Rule 145 or another exemption from the registration requirements of the
Securities Act. Diagnostek has agreed to use its best efforts to cause all
persons who are Affiliates to deliver to Value Health, on or prior to the
earlier of (i) the mailing of the Proxy Statement-Prospectus or (ii) the 30th
day prior to the Effective Date, written agreements that they will not sell or
in any other way reduce such Affiliate's risk relative to any VH Common Stock
received in the Merger, until such time as financial results covering at least
30 days of post-merger operations have been published, except as permitted by
Staff Accounting Bulletin No. 76 issued by the Commission. The Merger Agreement
provides that within 45 days after the end of the first fiscal quarter of Value
Health ending at least 30 days after the Effective Date, Value Health will
publish results including at least 30 days of combined operations of Value
Health and Diagnostek as referred to in the written agreements referred to in
the previous sentence.
Value Health has agreed to use its best efforts to list the VH Common Stock
issued pursuant to the Merger on the NYSE, upon official notice of issuance.
Each of Value Health and Diagnostek has filed a notification under the HSR
Act in connection with the Merger and the transactions contemplated thereby,
and agreed to use all reasonable efforts to respond as
48
<PAGE>
promptly as practicable to any inquiries received from the FTC and the
Antitrust Division for additional information or documentation and to respond
as promptly as practicable to all inquiries and requests received from any
State Attorney General or other governmental authority in connection with
antitrust matters. On May 3, 1995, Value Health and Diagnostek received early
termination of the waiting period under the HSR Act.
Value Health, Diagnostek and Sub have agreed to use all reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by the Merger
Agreement, including using all reasonable efforts to obtain all necessary
waivers, consents and approvals, to effect all necessary registrations and
filings (including, but not limited to, filings under the HSR Act and with all
applicable governmental entities) and to lift any injunction or other legal bar
to the Merger (and, in such case, to proceed with the Merger as expeditiously
as possible), subject, however, in the case of the Merger Agreement and the
Value Health Share Proposal, to the appropriate vote of the stockholders of
Diagnostek and Value Health. Notwithstanding the foregoing, there will be no
action required to be taken and no action will be taken in order to consummate
and make effective the transactions contemplated by the Merger Agreement if
such action, either alone or together with another action, would have a
material adverse effect on either Diagnostek or Value Health.
EFFECT ON EMPLOYEE BENEFIT PLANS
Subject to the provisions described below, Value Health will take all actions
necessary or appropriate to permit the employees of Diagnostek and its
subsidiaries on the Effective Date ("Affected Employees") to participate after
the Effective Date in those of Value Health's employee benefit programs that
are comparable to Diagnostek employee benefit programs and to cause the
Surviving Corporation to take all actions necessary or appropriate to adopt
such Value Health employee benefit programs effective as of the Effective Date.
Value Health will cause the Surviving Corporation to give each Affected
Employee full credit for service with Diagnostek for purposes of eligibility to
participate in, vesting and payment of benefits under, and eligibility for any
Value Health subsidized benefit provided under (but not, except as provided in
the preceding clause, for purposes of determining the amount of any benefit
under), any such Value Health employee benefit plan.
After the Effective Date, Value Health will have a reasonable period not to
exceed one year (the "Review Period") in which to review all of the employee
and fringe benefit plans maintained by Diagnostek or any of its subsidiaries
(the "Diagnostek Plans") for compatibility and consistency with Value Health's
employee benefit programs. During the Review Period, Value Health may determine
to have the Surviving Corporation continue in effect any one or more of the
Diagnostek Plans, amend or modify any one or more of the Diagnostek Plans,
merge one or more of the Diagnostek Plans into a comparable Value Health
employee benefit plan adopted by the Surviving Corporation or terminate any one
or more of the Diagnostek Plans in its or their entirety. Any such amendment,
modification or termination may not deprive any Affected Employee of any
benefit to which such Affected Employee has become entitled immediately prior
to the Effective Date. To the extent the Surviving Corporation continues in
effect any of the Diagnostek Plans during the Review Period, neither it nor
Value Health will be obligated to adopt a comparable Value Health employee
benefit plan for Affected Employees until such Diagnostek Plan is discontinued,
and such adopted employee benefit plan will be effective only as of the date of
such discontinuance. If Value Health does not maintain an employee benefit plan
comparable to one of the Diagnostek Plans, there will be no obligation to adopt
any plan or program upon the discontinuance or termination of such Diagnostek
Plan.
NO SOLICITATION
Subject to the fiduciary duties of the Diagnostek Board of Directors, as
advised by outside counsel, neither Diagnostek nor any of its subsidiaries
will, directly or indirectly, take (nor will Diagnostek authorize or permit its
subsidiaries, officers, directors, employees, representatives, investment
bankers, attorneys,
49
<PAGE>
accountants or other agents or affiliates, to take) any action to (i)
encourage, solicit or initiate the submission of any Acquisition Proposal (as
defined below), (ii) enter into any agreement with respect to any Acquisition
Proposal or (iii) participate in any way in discussions or negotiations with,
or furnish any information to, any person in connection with, or take any other
action to facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Acquisition
Proposal. Diagnostek will promptly communicate to Value Health any solicitation
by Diagnostek and the terms of any proposal or inquiry, including the identity
of the person and its affiliates making the same, that it may receive in
respect of any such transaction, or of any such information requested from it
or of any such negotiations or discussions being sought to be initiated with
it. "Acquisition Proposal" means any proposed (a) merger, consolidation or
similar transaction involving Diagnostek, (b) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise of
assets of Diagnostek or its subsidiaries representing 25% or more of the
consolidated assets of Diagnostek and its subsidiaries, (c) issue, sale or
other disposition of (including by way of merger, consolidation, share exchange
or any similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into, such securities) representing 25% or
more of the voting power of Diagnostek or (d) transaction in which any person
will acquire beneficial ownership (as such term is defined in Rule 13d-3 under
the Exchange Act), or the right to acquire beneficial ownership or any "group"
(as such term is defined under the Exchange Act) will have been formed which
beneficially owns or has the right to acquire beneficial ownership of 25% or
more of the outstanding Diagnostek Common Stock.
INDEMNIFICATION
The Merger Agreement provides that, from and after the Effective Date, Value
Health will, and will cause the Surviving Corporation to, indemnify, defend and
hold harmless the present and former directors and officers of Diagnostek
against all losses, expenses, claims, damages, liabilities or amounts that are
paid in settlement of, with the approval of Value Health and the Surviving
Corporation, or otherwise in connection with any claim, action, suit,
proceeding or investigation, based in whole or in part on the fact that such
person is or was a director or officer of Diagnostek and arising out of actions
or omissions occurring at or prior to the Effective Date (including, without
limitation, the transactions contemplated by the Merger Agreement), in each
case to the full extent permitted under the DGCL (and will pay expenses in
advance of the final disposition of any such action or proceeding to each
indemnified party to the fullest extent permitted under the DGCL, upon receipt
from the indemnified party to whom expenses are advanced of the undertaking to
repay such advances contemplated by Section 145(e) of the DGCL). The
Certificate of Incorporation of the Surviving Corporation will contain the
provision with respect to indemnification set forth in Diagnostek's Certificate
of Incorporation, as amended, on the date of the Merger Agreement, which
provision will not be amended, repealed or otherwise modified for a period of
six years after the Effective Date in any manner that would adversely affect
the rights thereunder of the individuals who at the Effective Date were
directors or officers of Diagnostek in respect of actions or omissions
occurring at or prior to the Effective Date (including, without limitation, the
transactions contemplated by the Merger Agreement), unless such modification is
required by law. The Merger Agreement provides that, with respect to matters
occurring prior to the Effective Date, Value Health will use its reasonable
best efforts to cause to be maintained in effect for not less than three years
after the Effective Date, the current policies of directors' and officers'
liability insurance maintained by Diagnostek; provided, however, that (i) Value
Health may substitute therefor policies of substantially similar coverage
containing substantially similar terms and conditions for the indemnified
parties to the extent reasonably available and (ii) Value Health will not be
required to pay an annual premium for such insurance in excess of 150% of the
last annual premium paid prior to March 27, 1995, but in such case will
purchase as much coverage as possible for such amount.
TERMINATION; FEES AND EXPENSES
The Merger Agreement may be terminated at any time prior to the Effective
Date, whether before or after approval by the stockholders of Diagnostek: (i)
by mutual consent of the Boards of Directors of Value
50
<PAGE>
Health and Diagnostek; (ii) by either Value Health or Diagnostek if the Merger
shall not have been consummated on or before September 15, 1995 (provided the
terminating party is not otherwise in material breach of its representations,
warranties or obligations under the Merger Agreement); (iii) by Diagnostek if
any of the conditions specified in Sections 9.1 and 9.2 of the Merger Agreement
has not been met or waived at such time as such condition is no longer capable
of satisfaction; (iv) by Value Health if any of the conditions specified in
Sections 9.1 and 9.3 of the Merger Agreement has not been met or waived at such
time as such condition is no longer capable of satisfaction; (v) by Value
Health if generally (A) any person commences a tender offer or exchange offer
for 25% or more of the then outstanding shares of Diagnostek Common Stock and
the Diagnostek Board of Directors has not recommended against such offer or
takes no position with respect to the acceptance of such offer by its
stockholders, (B) Diagnostek has authorized, recommended or proposed an
agreement with any person to merge, sell or dispose of 25% or more of its
consolidated assets or issue 25% or more of its voting stock, (C) any person
has acquired or has the right to acquire beneficial ownership of 25% or more of
the then outstanding Diagnostek Common Stock or (D) the holders of Diagnostek
Common Stock have not approved the Merger following a public announcement of a
proposal to engage in a transaction described in (A), (B) or (C) above or the
Diagnostek Board of Directors has withdrawn or modified its recommendation that
the holders of the Diagnostek Common Stock approve the Merger; or (vi) by
Diagnostek (A) if its Board of Directors in the exercise of its fiduciary
duties accepts an Acquisition Proposal of the type specified in (A), (B) or (C)
of (v) above or (B) upon the occurrence of an event specified in (v)(C) above.
Upon the termination of the Merger Agreement by Value Health pursuant to (v)
above, or by Diagnostek pursuant to (vi) above or following the occurrence of
an event specified in (v)(D) above, Diagnostek is obligated to pay Value Health
a fee of $15 million. Upon consummation of the Merger or the termination of the
Merger Agreement for any reason other than those set forth in the immediately
preceding sentence, any obligation to pay such fee shall expire. Generally, all
costs and expenses incurred in connection with the Merger will be paid by the
party incurring such expense, except that filing fees required under the HSR
Act and the Securities Act and all printing expenses incurred by either party
will be shared equally by Value Health and Diagnostek.
AMENDMENT; WAIVER
The Merger Agreement provides that it may be amended by the parties thereto,
by or pursuant to action taken by the respective Boards of Directors, at any
time before or after approval thereof by the stockholders of Value Health and
Diagnostek, but, after such approval, no amendment may be made which changes
the ratio at which Diagnostek Common Stock is to be converted into VH Common
Stock or which in any way materially adversely affects the rights of such
stockholders, without the further approval of such stockholders. The Merger
Agreement may not be amended except by an instrument in writing signed on
behalf of each of Value Health, Sub and Diagnostek.
At any time prior to the Effective Date, the parties to the Merger Agreement,
by or pursuant to action taken by their respective Boards of Directors, may:
(i) extend the time for the performance of any of the obligations or other acts
of the other parties thereto; (ii) waive any inaccuracies in the
representations and warranties contained therein or in any documents delivered
pursuant thereto; and (iii) waive compliance with any of the agreements or
conditions contained therein. Any agreement on the part of a party to the
Merger Agreement to any such extension or waiver will be valid if set forth in
an instrument in writing signed on behalf of such party.
LITIGATION WITH RESPECT TO THE MERGER
Promptly after the announcement of the execution of the Merger Agreement, 11
stockholder class action suits were filed in the Court of Chancery in the State
of Delaware against Diagnostek and its directors (Nunzio P. DeSantis,
Courtlandt G. Miller, David Devereaux, Julius Golden, Miles Stuchin and E.
Gerald
51
<PAGE>
Riesenbach) asserting that the value of the consideration to be received by
Diagnostek stockholders is unfair and grossly inadequate and that the directors
of Diagnostek breached their fiduciary duties to Diagnostek stockholders by
failing to take steps to maximize stockholder value. The suits seek, among
other things, to enjoin the Merger, to compel the directors of Diagnostek to
reconsider the Exchange Ratio and to recover unspecified damages. Diagnostek
and the individual defendants intend to vigorously defend these claims based
upon their belief that the actions of Diagnostek and its directors in
connection with the Merger Agreement were appropriately taken under applicable
law and that the Merger is fair to and in the best interests of Diagnostek's
stockholders. Value Health has been named as a defendant in certain of these
actions for allegedly aiding and abetting in the alleged breaches of fiduciary
duty by the Diagnostek directors. Value Health believes that the allegations
that it aided and abetted an alleged breach of fiduciary duty are without merit
and intends to defend such claims vigorously. The plaintiffs have served a
document production request upon the defendants, to which the defendants have
submitted written responses. Diagnostek has filed an answer denying the
principal allegations of the complaint. Value Health expects also to file an
answer denying the complaint's principal allegations. As of June 22, 1995, no
further action has been taken by either the plaintiffs or the defendants,
although counsel representing the plaintiffs have suggested that the actions be
consolidated and captioned "In Re: Diagnostek, Inc. Shareholders Litigation."
-----------------------------------------------
MERGER-RELATED EXPENSE
The costs of combining operations, including transaction costs, are expected
to result in a charge to Value Health's earnings estimated to be $40 million to
$50 million before income taxes. Such charge may be increased by unanticipated
additional expenses incurred in connection with the Merger which would have a
negative impact on Value Health's results of operations in the period the
charge is recorded. Of the expected charge, approximately $6 million to $8
million is anticipated to be incurred in connection with transaction costs and
$34 million to $42 million is anticipated to be incurred in connection with
costs associated with the combination of operations and related activities, all
of which will be incurred to eliminate duplicate facilities and excess
capacity. The exact timing of this charge cannot be determined but management
expects this charge will be recorded primarily in the quarter in which the
Merger is consummated.
52
<PAGE>
COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICY
Both the VH Common Stock and the Diagnostek Common Stock are listed on the
NYSE. Prior to November 18, 1992, the VH Common Stock traded on the Nasdaq
National Market.
The following table sets forth, for the periods indicated, the high and low
sales prices per share of the VH Common Stock as reported on the NYSE Composite
Tape (prior to November 18, 1992, on the Nasdaq National Market) and for the
Diagnostek Common Stock as reported on the NYSE Composite Tape, during such
calendar periods.
<TABLE>
<CAPTION>
DIAGNOSTEK
VH COMMON STOCK COMMON STOCK
------------------- ---------------
HIGH LOW HIGH LOW
--------- --------- ------- -------
<S> <C> <C> <C> <C>
1992:
First Quarter............................. $24 11/64 $18 1/2 $26 3/4 $21 1/2
Second Quarter............................ 25 1/2 18 21/64 21 7/8 11 3/4
Third Quarter............................. 30 1/2 21 1/4 17 7/8 9 3/8
Fourth Quarter............................ 40 1/4 23 1/2 18 6 5/8
1993:
First Quarter............................. 41 22 8 3/8 6
Second Quarter............................ 35 23 9 3/4 6 1/4
Third Quarter............................. 40 1/4 29 16 1/4 8 3/4
Fourth Quarter............................ 37 7/8 26 1/4 19 7/8 13 7/8
1994:
First Quarter............................. 43 1/2 30 1/8 22 1/4 16 3/8
Second Quarter............................ 45 1/2 37 1/4 25 1/4 13 7/8
Third Quarter............................. 52 37 1/2 25 3/4 17 1/2
Fourth Quarter............................ 48 1/4 31 3/4 20 1/8 12 5/8
1995:
First Quarter............................. 40 3/4 34 21 3/8 14 1/2
Second Quarter*........................... 40 1/2 31 7/8 21 5/8 16 3/4
</TABLE>
- --------
* Through June 21, 1995.
The following table sets forth the high and low sales prices, as reported on
the NYSE Composite Tape, of VH Common Stock and Diagnostek Common Stock on
March 24, 1995. The public announcement of the Merger Agreement occurred prior
to the opening of trading on March 27, 1995.
<TABLE>
<CAPTION>
VALUE HEALTH DIAGNOSTEK DIAGNOSTEK EQUIVALENT(1)
------------ ---------- ------------------------
<S> <C> <C> <C>
High..................... 35 18 3/4 17 13/32
Low...................... 34 1/4 18 1/4 17 3/64
</TABLE>
- --------
(1) The Diagnostek equivalent market value is computed by multiplying the high
and low market price per share of VH Common Stock by the Exchange Ratio.
Neither Value Health nor Diagnostek has historically paid any cash dividends
on its common stock. Value Health currently intends to retain its earnings to
finance future growth. Neither Value Health nor Diagnostek anticipates paying
any cash dividends in the foreseeable future.
53
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Value Health and
Diagnostek as of March 31, 1995, and as adjusted to give effect to the Merger
and related transactions. See "THE MERGER AGREEMENT--Terms of the Merger."
<TABLE>
<CAPTION>
AS OF MARCH 31, 1995
--------------------------------------------
HISTORICAL PRO FORMA
----------------------- --------------------
VALUE HEALTH DIAGNOSTEK ADJUSTMENTS COMBINED
------------ ---------- ----------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term debt, net of current
maturities:
Capitalized lease obligations.. $ 3,309 $ -- $ -- $ 3,309
Borrowings..................... -- 12,000 -- 12,000
-------- -------- --------- --------
Total long-term debt......... 3,309 12,000 -- 15,309
-------- -------- --------- --------
Stockholders' equity:
VH Common Stock................ 304,447 -- 137,238 441,685
Diagnostek Common Stock........ -- 244 (244) --
Additional paid-in capital..... -- 137,742 (137,742) --
Treasury stock................. -- (1,297) 1,297 --
Retained earnings.............. 106,095 49,717 (549) 155,263
Unrealized loss on securities
available-for-sale, net of
tax........................... (214) (2,358) -- (2,572)
-------- -------- --------- --------
Total stockholders' equity... 410,328 184,048 -- 594,376
-------- -------- --------- --------
Total capitalization....... $413,637 $196,048 $ -- $609,685
======== ======== ========= ========
</TABLE>
54
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma combined condensed financial statements (unaudited)
give effect to the Merger of Value Health and Diagnostek under the pooling of
interests method of accounting. These pro forma financial statements are
presented for illustrative purposes only and, therefore, are not necessarily
indicative of the operating results or financial position that would have
occurred or might have been achieved had the Merger occurred as of an earlier
date, nor are they necessarily indicative of operating results or financial
position that may occur in the future. Further, the pro forma combined
condensed financial statements exclude the transaction costs of the Merger, and
the potential cost savings that may be achieved, and the Merger-related
expenses that are expected to be incurred in connection with the integration of
Value Health's and Diagnostek's business operations.
A pro forma combined condensed balance sheet is provided as of March 31,
1995, giving effect to the Merger as though it had been consummated on that
date. Pro forma combined condensed statements of operations are provided for
the three-month periods ended March 31, 1995 and 1994 and for the years ended
December 31, 1994, 1993 and 1992, giving effect to the Merger as though it had
occurred at the beginning of the earliest period presented.
The pro forma combined condensed financial statements are derived from, and
should be read in conjunction with, Value Health's audited and unaudited
consolidated financial statements and Diagnostek's audited and unaudited
consolidated financial statements (which, because Diagnostek's fiscal year ends
March 31, have been recast to conform to Value Health's fiscal year of December
31), previously filed with the Commission. Certain audited and unaudited
financial statements of Value Health and Diagnostek have not been incorporated
by reference herein. See "INCORPORATION OF DOCUMENTS BY REFERENCE."
55
<PAGE>
VALUE HEALTH, INC. AND DIAGNOSTEK, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
--------------------
VALUE PRO FORMA PRO FORMA
HEALTH DIAGNOSTEK ADJUSTMENTS COMBINED
-------- ---------- ----------- ---------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents...... $ 66,838 $ 4,149 $ -- $ 70,987
Restricted cash................ 1,038 -- 1,038
Short-term investments......... 36,228 -- 36,228
Accounts receivable............ 181,860 55,984 237,844
Inventories.................... -- 28,966 9,512 38,478
Prepaid expenses and other
current assets................ 28,248 21,894 (9,512) 40,630
-------- -------- --------- --------
Total current assets.......... 314,212 110,993 -- 425,205
Fixed assets, net................ 89,412 22,951 112,363
Long-term investments............ 14,320 59,176 73,496
Goodwill, net.................... 115,323 62,299 177,622
Other assets..................... 22,283 11,031 33,314
-------- -------- --------- --------
Total assets.................. $555,550 $266,450 $ -- $822,000
======== ======== ========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Short-term borrowings.......... $ -- $ 10,337 $ -- $ 10,337
Payable to providers........... 77,053 -- 16,469 93,522
Accounts payable and accrued
expenses...................... 30,741 42,663 (16,469) 56,935
Accrued contract losses........ -- 9,621 9,621
Other current liabilities...... 28,541 6,761 35,302
-------- -------- --------- --------
Total current liabilities..... 136,335 69,382 -- 205,717
Long-term debt, net of current
portion......................... -- 12,000 12,000
Other liabilities................ 8,887 1,020 9,907
-------- -------- --------- --------
Total liabilities............. 145,222 82,402 -- 227,624
-------- -------- --------- --------
Stockholders' equity:
Preferred stock................ -- -- --
Common stock................... 304,447 244 136,994 441,685
Additional paid-in capital..... -- 137,742 (137,742) --
Treasury stock................. -- (1,297) 1,297 --
Retained earnings.............. 106,095 49,717 (549) 155,263
Unrealized loss on securities
available-for-sale, net of
tax........................... (214) (2,358) (2,572)
-------- -------- --------- --------
Total stockholders' equity.... 410,328 184,048 -- 594,376
-------- -------- --------- --------
Total liabilities and
stockholders' equity......... $555,550 $266,450 $ -- $822,000
======== ======== ========= ========
</TABLE>
56
<PAGE>
VALUE HEALTH, INC. AND DIAGNOSTEK, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL MERGER ACQUISITIONS
------------------- -------------------- ---------------------------------
TOTAL
PRO PRO
VALUE PRO FORMA FORMA OTHER PRO FORMA FORMA
HEALTH DIAGNOSTEK ADJUSTMENTS COMBINED ACQUISITIONS ADJUSTMENTS COMBINED
-------- ---------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $276,104 $177,248 $(9,239) $444,113 $3,335 $(61) $447,387
-------- -------- ------- -------- ------ ----- --------
Expenses:
Cost of services...... 210,806 168,107 (9,807) 369,106 393 -- 369,499
Selling, general and
administrative....... 31,112 12,796 (1,227) 42,681 2,151 -- 44,832
Other expenses........ 6,565 515 1,795 8,875 116 59 9,050
-------- -------- ------- -------- ------ ----- --------
248,483 181,418 (9,239) 420,662 2,660 59 423,381
-------- -------- ------- -------- ------ ----- --------
Earnings from continuing
operations before
income taxes........... 27,621 (4,170) -- 23,451 675 (120) 24,006
Provision for income 11,046 (1,490) -- 9,556 270 (48) 9,778
taxes.................. -------- -------- ------- -------- ------ ----- --------
Earnings from continuing $ 16,575 $ (2,680) $ -- $ 13,895 $ 405 $ (72) $ 14,228
operations............. ======== ======== ======= ======== ====== ===== ========
Earnings from continuing
operations per common $ 0.40 $ (0.11) $ -- $ 0.26 $ 0.26
share.................. ======== ======== ======= ======== ========
Weighted average common
shares and common share
equivalents 41,500 25,363 (12,745) 54,118 54,118
outstanding............ ======== ======== ======= ======== ========
</TABLE>
57
<PAGE>
VALUE HEALTH, INC. AND DIAGNOSTEK, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL MERGER ACQUISITIONS
------------------- -------------------- ---------------------------------
TOTAL
PRO PRO
VALUE PRO FORMA FORMA OTHER PRO FORMA FORMA
HEALTH DIAGNOSTEK ADJUSTMENTS COMBINED ACQUISITIONS ADJUSTMENTS COMBINED
-------- ---------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $216,350 $162,326 $(5,602) $373,074 $19,002 $(448) $391,628
-------- -------- ------- -------- ------- ------ --------
Expenses:
Cost of services...... 172,572 144,107 (5,986) 310,693 7,848 -- 318,541
Selling, general and
administrative....... 21,477 11,177 (590) 32,064 9,191 (178) 41,077
Other expenses........ 4,263 12,424 974 17,661 330 144 18,135
-------- -------- ------- -------- ------- ------ --------
198,312 167,708 (5,602) 360,418 17,369 (34) 377,753
-------- -------- ------- -------- ------- ------ --------
Earnings from continuing
operations before
income taxes........... 18,038 (5,382) -- 12,656 1,633 (414) 13,875
Provision for income 7,261 (1,618) -- 5,643 815 (77) 6,381
taxes.................. -------- -------- ------- -------- ------- ------ --------
Earnings from continuing $ 10,777 $ (3,764) $ -- $ 7,013 $ 818 $ (337) $ 7,494
operations............. ======== ======== ======= ======== ======= ====== ========
Earnings from continuing
operations per common $ 0.26 $ (0.15) $ -- $ 0.13 $ 0.14
share.................. ======== ======== ======= ======== ========
Weighted average common
shares and common share
equivalents 41,311 25,287 (12,707) 53,891 53,891
outstanding............ ======== ======== ======= ======== ========
</TABLE>
58
<PAGE>
VALUE HEALTH, INC. AND DIAGNOSTEK, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL MERGER ACQUISITIONS
------------------- ---------------------- -----------------------------------
TOTAL PRO
VALUE PRO FORMA PRO FORMA OTHER PRO FORMA FORMA
HEALTH DIAGNOSTEK ADJUSTMENTS COMBINED ACQUISITIONS ADJUSTMENTS COMBINED
-------- ---------- ----------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $976,403 $660,523 $(31,000) $1,605,926 $50,556 $(1,105) $1,655,377
-------- -------- -------- ---------- ------- ------- ----------
Expenses:
Costs of services..... 763,631 586,267 (32,881) 1,317,017 24,249 -- 1,341,266
Selling, general and
administrative....... 104,034 43,141 (2,892) 144,283 20,479 (711) 164,051
Other expenses........ 26,165 14,105 4,773 45,043 1,321 526 46,890
-------- -------- -------- ---------- ------- ------- ----------
893,830 643,513 (31,000) 1,506,343 46,049 (185) 1,552,207
-------- -------- -------- ---------- ------- ------- ----------
Earnings from continuing
operations before
income taxes........... 82,573 17,010 -- 99,583 4,507 (920) 103,170
Provision for income
taxes.................. 32,952 7,110 -- 40,062 2,185 (171) 42,076
-------- -------- -------- ---------- ------- ------- ----------
Earnings from continuing
operations............. $ 49,621 $ 9,900 $ -- $ 59,521 $ 2,322 $ (749) $ 61,094
======== ======== ======== ========== ======= ======= ==========
Earnings from continuing
operations per common
share.................. $ 1.19 $ 0.39 $ -- $ 1.10 $ 1.13
======== ======== ======== ========== ==========
Weighted average common
shares and common share
equivalents
outstanding............ 41,585 25,286 (12,706) 54,165 54,165
======== ======== ======== ========== ==========
</TABLE>
59
<PAGE>
VALUE HEALTH, INC. AND DIAGNOSTEK, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MERGER
----------------------
HISTORICAL
----------------------- PRO FORMA PRO FORMA
VALUE HEALTH DIAGNOSTEK ADJUSTMENTS COMBINED
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenues.................. $689,455 $436,588 $(13,700) $1,112,343
-------- -------- -------- ----------
Expenses:
Costs and expenses............ 540,728 379,692 (15,576) 904,844
Selling, general and
administrative............... 78,140 37,759 (2,888) 113,011
Other expenses................ 52,911 6,043 4,764 63,718
-------- -------- -------- ----------
671,779 423,494 (13,700) 1,081,573
-------- -------- -------- ----------
Earnings from continuing
operations before income taxes. 17,676 13,094 -- 30,770
Provision for income taxes...... 10,678 5,162 -- 15,840
-------- -------- -------- ----------
Earnings from continuing
operations..................... $ 6,998 $ 7,932 $ -- $ 14,930
======== ======== ======== ==========
Earnings from continuing
operations per common share.... $ 0.17 $ 0.33 $ -- $ 0.29
======== ======== ======== ==========
Weighted average common shares
and common share equivalents
outstanding.................... 40,284 24,241 (12,181) 52,344
======== ======== ======== ==========
</TABLE>
60
<PAGE>
VALUE HEALTH, INC. AND DIAGNOSTEK, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1992
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MERGER
--------------------
HISTORICAL PRO
----------------------- PRO FORMA FORMA
VALUE HEALTH DIAGNOSTEK ADJUSTMENTS COMBINED
------------ ---------- ----------- --------
<S> <C> <C> <C> <C>
Total revenues.................... $365,643 $368,481 $ (3,500) $730,624
-------- -------- -------- --------
Expenses:
Costs of services............... 284,560 324,663 (5,293) 603,930
Selling, general and
administrative................. 44,991 25,571 (2,757) 67,805
Other expenses.................. 8,719 6,537 4,550 19,806
-------- -------- -------- --------
338,270 356,771 (3,500) 691,541
-------- -------- -------- --------
Earnings from continuing
operations before income taxes... 27,373 11,710 -- 39,083
Provision for income taxes........ 8,013 4,351 -- 12,364
-------- -------- -------- --------
Earnings from continuing
operations....................... $ 19,360 $ 7,359 $ -- $ 26,719
======== ======== ======== ========
Earnings from continuing
operations per common share...... $ 0.53 $ 0.30 $ -- $ 0.55
======== ======== ======== ========
Weighted average common shares and
common share equivalents
outstanding...................... 36,047 24,428 (12,275) 48,200
======== ======== ======== ========
</TABLE>
61
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
1. The unaudited pro forma combined condensed balance sheet reflects the
issuance of 12,068,229 shares of VH Common Stock in exchange for 24,257,746
shares of Diagnostek Common Stock. The number of shares of VH Common Stock
to be issued is based on the Exchange Ratio of 0.4975 shares of VH Common
Stock for each share of Diagnostek Common Stock.
2. Earnings per share for each period is based on the weighted average number
of shares of VH Common Stock outstanding, including common stock
equivalents of VH Common Stock, plus the weighted average number of shares
of Diagnostek Common Stock outstanding, including common stock equivalents
of Diagnostek, multiplied by the Exchange Ratio.
3. The pro forma combined condensed financial information contains no
adjustments to conform the accounting policies of Value Health, Diagnostek
or the companies discussed in Note 5, because any such adjustments have
been determined to be immaterial by the management of Value Health and
Diagnostek. To conform the reporting practices of Value Health and
Diagnostek, Diagnostek operating expenses and other income have been
reclassified. In addition, Diagnostek sales to Value Health are treated as
intercompany sales and eliminated. Certain balance sheet accounts of each
company have been reclassified.
4. The pro forma combined condensed financial statements of Value Health and
Diagnostek exclude any nonrecurring costs and expenses associated with
combining the operations of the companies. The costs of combining
operations, including transaction costs, are expected to result in a charge
to Value Health's earnings estimated to be $40 million to $50 million
before income taxes. Such charge may be increased by unanticipated
additional expenses incurred in connection with the Merger which would have
a negative impact on Value Health's results of operations in the period the
charge is recorded. Of the expected charge, approximately $6 million to $8
million is anticipated to be incurred in connection with transaction costs
and $34 million to $42 million is anticipated to be incurred in connection
with costs associated with the combination of operations and related
activities, all of which will be incurred to eliminate duplicate facilities
and excess capacity. The exact timing of this charge cannot be determined
but management expects this charge will be recorded primarily in the quarter
in which the Merger is consummated.
ACQUISITIONS
5. On June 21, 1994, Value Health completed its acquisition of Community Care
Network, Inc. ("CCN"). The purchase price was $40 million in cash and
contingent consideration of up to an additional $80 million. The contingent
consideration will be determined by a formula based upon a multiple of
CCN's earnings before taxes during a 12-month calculation period, which
period will end not later than December 31, 1996. Goodwill of $23.4 million
was recorded and is being amortized over 35 years. Any contingent payments
will be recorded as additional goodwill.
On February 15, 1995, Value Health's subsidiary VBH completed its
acquisition of Health Management Strategies International, Inc. ("HMS") for
$13.9 million in cash. Goodwill of approximately $11.8 million was recorded
and is being amortized over 25 years. HMS provides managed behavioral
health services and is located in Alexandria, Virginia.
The pro forma combined condensed statement of operations for the three-
month periods ended March 31, 1995 and 1994 and for the year ended December
31, 1994, presents both acquisitions as if they had occurred on January 1,
1994. For presentation purposes, these transactions, which are accounted
for as purchases, are grouped together under the heading "Other
Acquisitions." Pro forma adjustments include elimination of interest income
on cash utilized for these purchases and elimination of certain management
fees which are included in selling, general and administrative expense.
Amortization of goodwill is included in other expense. The tax effect of
the pro forma adjustments is presented separately.
62
<PAGE>
OTHER
6.Value Health Supplemental Financial Data
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
----------------- --------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS)
REVENUES
<S> <C> <C> <C> <C> <C>
Prescription drugs-servic-
es....................... $138,479 $112,299 $499,734 $341,194 $172,777
Prescription drugs-prod-
ucts..................... 43,574 34,725 154,671 98,648 52,684
Mental health services.... 52,771 46,696 198,599 161,643 114,223
Insurance services........ 23,458 9,009 67,268 35,895 1,409
Information services...... 14,034 10,049 40,721 36,878 12,711
Other..................... 2,185 2,179 9,710 7,413 6,128
Investment income......... 1,603 1,393 5,700 7,784 5,711
-------- -------- -------- -------- --------
TOTAL REVENUES $276,104 $216,350 $976,403 $689,455 $365,643
======== ======== ======== ======== ========
COSTS OF SALES
Costs of services......... $173,853 $142,298 $628,465 $449,550 $238,321
Costs of products sold.... 36,953 30,274 135,166 91,178 46,239
-------- -------- -------- -------- --------
TOTAL COSTS OF SALES...... $210,806 $172,572 $763,631 $540,728 $284,560
======== ======== ======== ======== ========
</TABLE>
Prescription drug service revenues for the three months ended March 31, 1995
increased by $26.2 million or 23.3% over the first quarter of 1994. Of this
increase, $12.9 million was associated with existing customers. Approximately
$13.3 million was associated with the addition of new customers, primarily for
Value Health's ValueFee service. Prescription drug mail service product
revenues increased by $8.8 million or 25.5% over the first quarter of 1994.
Revenues from existing customers decreased by $.6 million while additional
revenues from new customers were approximately $9.4 million.
Prescription drug service revenues for the year ended December 31, 1994
increased by $158.5 million or 46.5% over 1993. Of this increase, $65.8 million
was associated with existing customers resulting from additional covered lives
under Value Health's ValueFee service and the expansion of the contract with
the Ford Motor Company. Approximately $88.0 million was associated with the
addition of new customers, primarily for Value Health's ValueFee service.
Acquisitions accounted for $4.7 million of the revenue increase in 1994.
Prescription drug mail service product revenues increased by $56.0 million or
56.8% over 1993. Revenues from existing customers increased by $7.2 million
while additional revenues from new customers were approximately $48.8 million.
Prescription drug service revenues for the year ended December 31, 1993
increased by $168.4 million or 97.5% over 1992. Of this increase, $34.2 million
was associated with existing customers resulting from additional covered lives
under Value Health's ValueFee service. Approximately $127.2 million was
associated with the addition of new customers, primarily for Value Health's
ValueFee service. Acquisitions accounted for $7.0 million of the revenue
increase in 1993. Prescription drug mail service product revenues increased by
$46.0 million or 87.2% over 1992. Additional revenues from new customers were
$17.0 million while revenues resulting from acquisitions accounted for $29.0
million of the 1993 increase.
As a percentage of revenues, costs of services decreased to 74.8% during the
first quarter of 1995 from 78.3% during the first quarter of 1994. The costs of
services percentage increased to 76.5% during 1994 from 76.1% in 1993 and 76.2%
in 1992. The 1995 decrease is due largely to the acquisition of CCN in June
1994 which carries a lower costs of services ratio than other Value Health
companies. The 1994 increase is due to a product mix shift to prescription drug
services which was partially offset by the impact of the CCN acquisition.
63
<PAGE>
As a percentage of revenues, costs of products sold decreased to 84.8% during
the first quarter of 1995 from 87.2% during the first quarter of 1994 and
decreased to 87.4% in 1994 from 92.4% in 1993 and 87.8% in 1992. All of the
decreases were due to efficiencies gained from a larger revenue base. The
increase in 1993 was due to the start up and relatively low capacity
utilization of the Davenport, Iowa mail service facility in 1993.
64
<PAGE>
DESCRIPTION OF THE VH CAPITAL STOCK
GENERAL
Value Health's authorized capital stock as of the date of this Proxy
Statement-Prospectus consists of 100,000,000 shares of VH Common Stock, without
par value, and 1,000,000 shares of preferred stock, $0.01 par value. No shares
of preferred stock are presently outstanding. Value Health does not presently
have outstanding, and Value Health's Certificate of Incorporation does not
authorize, any other classes of capital stock. The issued and outstanding
shares of VH Common Stock are duly authorized, validly issued, fully paid and
nonassessable.
COMMON STOCK
Holders of shares of VH Common Stock have no preemptive, redemption or
conversion rights. The holders of VH Common Stock are entitled to receive
dividends when and as declared by the Value Health Board of Directors out of
funds legally available therefor. Upon liquidation, dissolution or winding up
of Value Health, the holders of VH Common Stock share ratably in the net assets
of Value Health after distribution in full of the preferential amounts, if any,
to the holders of shares of preferred stock, if any. Each holder of VH Common
Stock is entitled to one vote per share of VH Common Stock held of record by
such holders. As of the date of this Proxy Statement-Prospectus, there are
shares of VH Common Stock outstanding. The VH Common Stock is traded
on the NYSE under the symbol "VH."
The transfer agent for the VH Common Stock is Mellon Securities Transfer
Services.
RIGHTS PLAN
On February 24, 1994, the Value Health Board of Directors declared a dividend
distribution of one preferred share purchase right (a "Right") for each
outstanding share of VH Common Stock to stockholders of record on March 7,
1994. Each Right entitles the registered holder to purchase from Value Health a
unit consisting of one one-thousandth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, par value $0.01 per share (the "Preferred
Stock"), of Value Health, at a purchase price of $120 per Unit, subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between Value Health and Mellon Bank, as
Rights Agent.
At the present time, the Rights are attached to all VH Common Stock
certificates representing outstanding shares, and no separate Rights
Certificates are distributed. The Rights will separate from the VH Common Stock
and a Distribution Date will occur upon the earlier of (i) ten days following a
public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person" (as further defined below)) has acquired beneficial
ownership of 15% or more of the outstanding shares of VH Common Stock (the
"Stock Acquisition Date"), or (ii) ten business days (or such later date as may
be determined by action of the Value Health Board of Directors, with the
concurrence of a majority of the Continuing Directors (as defined below))
following the commencement of a tender offer or exchange offer that would
result in a person or group beneficially owning 15% or more of such outstanding
shares of VH Common Stock. The term "Acquiring Person" is defined to exclude
Warburg, Pincus Capital Company ("Warburg, Pincus") unless Warburg, Pincus has
acquired beneficial ownership of 30% or more of the outstanding shares of VH
Common Stock. "Continuing Directors" are (i) directors who are not an Acquiring
Person, an associate or affiliate of an Acquiring Person or a representative or
nominee of an Acquiring Person and who were directors of Value Health on the
date the Rights Plan was executed, and (ii) those who subsequently become
directors who are not an Acquiring Person, if such person's nomination or
election to the Value Health Board of Directors is recommended by a majority of
the Continuing Directors. Until the Distribution Date, (i) the Rights will be
evidenced by the VH Common Stock certificates and will be transferred with and
only with such VH Common Stock certificates, (ii) VH Common Stock certificates
issued after March 7, 1994 contain a notation incorporating the Rights
Agreement by reference and (iii) the surrender for transfer of any
65
<PAGE>
certificates for VH Common Stock outstanding will also constitute the transfer
of the Rights associated with the VH Common Stock represented by such
certificate.
The Rights are not exercisable until the Distribution Date and will expire at
the close of business on February 24, 2004, unless earlier redeemed by Value
Health as described below.
Each share of Preferred Stock will be entitled to a minimum preferential
quarterly dividend payment of $0.005 per share but will be entitled to an
aggregate dividend of 1,000 times the dividend declared per share of VH Common
Stock. In the event of liquidation, the holders of the Preferred Stock will be
entitled to a minimum preferential liquidation payment of $40 per share but
will be entitled to an aggregate payment (after certain payments to the holders
of VH Common Stock) of 1,000 times the payment made per share of VH Common
Stock. Each share of Preferred Stock will have 1,000 votes, voting together
with the VH Common Stock. In the event of any merger, consolidation or other
transaction in which VH Common Stock is exchanged, each share of Preferred
Stock will be entitled to receive 1,000 times the amount received per share of
VH Common Stock. The Preferred Stock may be redeemed at the option of Value
Health at any time, in whole or in part, at a redemption price equal to 1,000
times the current per share market price of the VH Common Stock.
At such time there is an Acquiring Person (except pursuant to an offer for
all outstanding shares of VH Common Stock which a majority of each of the
Continuing Directors and independent directors determine to be fair to and
otherwise in the best interests of Value Health and its stockholders), the
Rights will entitle each holder to receive, upon exercise of the Right, VH
Common Stock (or in certain circumstances, cash, property or other securities
of Value Health) having a value equal to two times the exercise price of the
Right. However, Rights are not exercisable following the occurrence of any of
the events set forth above until such time as the rights are no longer
redeemable by Value Health as set forth below.
In the event that, at any time following the Stock Acquisition Date, (i)
Value Health is acquired in a merger or other business combination transaction
in which Value Health is not the surviving corporation or the VH Common Stock
is changed or exchanged, or (ii) 50% or more of Value Health's assets or
earning power is sold or transferred, each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the exercise price of the Right. The events set forth
in this paragraph and in the preceding paragraph are referred to as the
"Triggering Events."
The Purchase Price payable, and the number of Units of Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) if holders of the Preferred Stock are granted certain
rights or warrants to subscribe for Preferred Stock or convertible securities
at less than the current market price of the Preferred Stock or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness or
assets (excluding regular quarterly cash dividends) or of subscription rights
or warrants (other than those referred to above). With certain exceptions, no
adjustment in the Purchase Price will be required until cumulative adjustments
amount to at least 1% of the Purchase Price. No fractional Units will be issued
and, in lieu thereof, an adjustment in cash will be made based on the market
price of the Preferred Stock on the last trading date prior to the date of
exercise.
At any time until ten days (or such later date as determined by action of the
Value Health Board of Directors with the concurrence of a majority of the
Continuing Directors) following the Stock Acquisition Date, Value Health may
redeem the Rights in whole, but not in part, at a price of $0.01 per Right
(payable in cash or stock). Immediately upon the action of the Value Health
Board of Directors ordering redemption of the Rights, the Rights will terminate
and the only right of the holders of Rights will be to receive the $0.01
redemption price.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of Value Health, including, without limitation, the right to
vote or to receive dividends.
66
<PAGE>
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended by the
Value Health Board of Directors prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Value Health Board of Directors (with the concurrence of a majority of the
Continuing Directors), if adopted following the Stock Acquisition Date, in
order to cure any ambiguity, to make changes which do not adversely affect the
interests of holders of Rights (other than an Acquiring Person or its
associates or affiliates) or to shorten or lengthen any time period under the
Rights Agreement, provided, however, that no amendment to adjust the time
period governing redemption shall be made at such time as the Rights are not
redeemable.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Value Health
without conditioning the offer on a substantial number of Rights being
acquired. The Rights should not interfere with any merger or other business
combination approved by each of the Value Health Board of Directors and the
Continuing Directors since the Value Health Board of Directors may (with the
concurrence of the Continuing Directors), at its option, at any time until ten
days (or such later date as may be determined by action of such Board of
Directors with the concurrence of a majority of the Continuing Directors)
following the Stock Acquisition Date, redeem all but not less than the then
outstanding Rights at the Redemption Price.
PREFERRED STOCK
The Value Health Board of Directors has the power, without further vote of
stockholders, to authorize the issuance of up to 1,000,000 shares of preferred
stock and to fix and determine the terms, limitations and relative rights and
preferences of any shares of preferred stock that it causes to be issued. This
power includes the authority to establish voting, dividend, redemption,
conversion, liquidation and other rights of any such shares. No shares of
preferred stock are now outstanding, and Value Health has no current plan to
issue any such shares.
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of material differences between the rights of
holders of Diagnostek Common Stock and the rights of holders of VH Common
Stock.
Each of Diagnostek and Value Health is organized under the laws of the State
of Delaware. Any material differences in the rights of their respective
stockholders would arise from various provisions of the certificate of
incorporation and by-laws of each of Diagnostek and Value Health. Among the
differences between the rights of the holders of Diagnostek Common Stock and VH
Common Stock are that the By-laws of Diagnostek provide that a special meeting
of the stockholders may be called at any time by the Board of Directors or the
Chairman of the Board or the President, and must be called upon the written
request of the holders of 20% or more of the outstanding stock, while the
Amended and Restated By-laws of Value Health provide that a special meeting of
the stockholders must be called upon the written request of a majority of the
directors or the holders of 25% or more of the VH Common Stock. In addition,
the By-laws of Diagnostek provide that the holders of Diagnostek Common Stock
may act without a meeting upon the written consent of all stockholders who
would have been entitled to vote upon the action had a meeting been held, while
the Amended and Restated By-laws of Value Health provide that the holders of VH
Common Stock may act without a meeting upon the written consent of the holders
of not less than the minimum number of shares of VH Common Stock that would
have been necessary to approve such action at a meeting at which all of the
shares of VH Common Stock were present.
The Certificate of Incorporation, as amended, of Diagnostek also provides for
the division of the Diagnostek Board of Directors into three classes, with each
class consisting, as nearly as possible, of one-third of the whole number of
the Board of Directors. The terms to which directors in each class are elected
to
67
<PAGE>
serve expire in different years so that the term of only one class of
directors expires each year. As a result of the classification of the
Diagnostek Board of Directors, any person attempting to have a slate of
nominees elected which would constitute a majority of the Diagnostek Board of
Directors would need at least two annual meetings to do so and, as a result,
Diagnostek's classified board may have certain anti-takeover effects.
Diagnostek's Certificate of Incorporation, as amended, provides further that
the Diagnostek Board of Directors will consist of not less than three nor more
than 15 directors, subject to the rights of the holders of any class or series
of preferred stock. The Value Health Amended and Restated By-laws provide that
the Value Health Board of Directors will consist of not less than four nor
more than ten directors. The Value Health Board of Directors is not divided
into classes.
Both Value Health and Diagnostek have rights plans which affect the rights
of their respective stockholders. Although Diagnostek's rights plan is
different from the Value Health Rights Plan in certain respects, each plan
would have anti-takeover effects. For a detailed description of the Value
Health Rights Plan, see "DESCRIPTION OF THE VH CAPITAL STOCK--Rights Plan."
Neither the certificate of incorporation nor the by-laws of either
Diagnostek or Value Health contain any other provisions designed to delay or
impede a change of control or supermajority voting provisions; nor are there
other material differences in the rights of holders of VH Common Stock and
Diagnostek Common Stock.
BENEFICIAL OWNERSHIP OF DIAGNOSTEK COMMON STOCK
The following table sets forth, as of the Diagnostek Record Date,
information regarding the beneficial ownership of the Diagnostek Common Stock
(i) by each person who is known by Diagnostek to own beneficially more than
five percent of the outstanding Diagnostek Common Stock, (ii) by each director
of Diagnostek and (iii) by all directors and executive officers of Diagnostek
as a group:
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
NATURE OF OF
BENEFICIAL COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP(1) STOCK
- ------------------------ ------------ ----------
<S> <C> <C>
Nunzio P. DeSantis(2)................................... 1,577,213 6.3%
Courtlandt G. Miller(3)................................. 461,318 1.9%
David G. Devereaux(4)................................... 12,500 *
Julius Golden(5)........................................ 149,776 *
Miles M. Stuchin(6)..................................... 284,841 1.2%
E. Gerald Riesenbach(7)................................. 85,000 *
Snyder Capital Management, Inc.(8)...................... 1,215,650 5.0%
Dietche & Field Advisers, Inc.(9)....................... 1,564,300 6.4%
Roxbury Capital Management(10).......................... 1,373,425 5.7%
All directors and executive officers as a group
(9 persons)(2)(3)(4)(5)(6)(7)(11)...................... 2,711,503 10.5%
</TABLE>
- ------------
* Less than one percent.
(1) Except as otherwise noted, each person listed has sole voting and
investment power with regard to shares set forth opposite such person's
name.
(2) Mr. DeSantis' address is c/o 4500 Alexander Boulevard, N.E., Albuquerque,
New Mexico 87107. Includes 725,000 shares held in a family trust as to
which Mr. DeSantis and his wife are co-trustees and 804,160 shares
issuable upon the exercise of options which are currently exercisable or
exercisable within 60 days.
(3) Includes 116,000 shares held in joint tenancy with Mr. Miller's wife and
345,000 shares issuable upon the exercise of options currently
exercisable or exercisable within 60 days.
(4) Represents 12,500 shares issuable upon the exercise of options currently
exercisable or exercisable within 60 days.
(5) Includes 100,000 shares issuable upon the exercise of options which are
currently exercisable or exercisable within 60 days.
68
<PAGE>
(6) Includes 9,266 shares held in joint tenancy with Mr. Stuchin's wife and
85,000 shares issuable upon the exercise of options currently exercisable
or exercisable within 60 days. Does not include 90,000 shares held by Mr.
Stuchin's wife, as to which Mr. Stuchin disclaims beneficial ownership.
(7) Represents 85,000 shares issuable upon the exercise of options currently
exercisable or exercisable within 60 days.
(8) Based upon information filed on Schedule 13G as of December 31, 1994.
Snyder Capital Management, Inc.'s address is 350 California Street, Suite
1460, San Francisco, California 94104.
(9) Based upon information filed on Schedule 13G as of December 31, 1994.
Dietche & Field Advisers, Inc.'s address is 437 Madison Avenue, New York,
New York 10017.
(10) Based upon information filed on Schedule 13G as of December 31, 1994.
Roxbury Capital Management's address is P.O. Box 2213, Santa Monica,
California 90407-1436.
(11) Includes 101,000 shares issuable to executive officers, other than those
named above, upon the exercise of options currently exercisable or
exercisable within 60 days. In the event the Merger is approved, all
options granted under the 1991 Stock Option Plan will become vested,
which will result in options held by executive officers for an additional
331,500 shares becoming exercisable.
OTHER MATTERS
It is not expected that any matters other than those described in this Proxy
Statement-Prospectus will be brought before the Diagnostek Special Meeting or
the Value Health Special Meeting. If any other matters are presented, however,
it is the intention of the persons named in the Diagnostek proxy and Value
Health proxy to vote the proxy in accordance with the discretion of the
persons named in such proxy.
LEGAL MATTERS
The validity of the securities to be issued in the Merger will be passed
upon for Value Health by Gibson, Dunn & Crutcher, New York, New York.
EXPERTS
The consolidated financial statements of Value Health as of December 31,
1994 and 1993, and for each of the three years in the period ended December
31, 1994, incorporated by reference in this Proxy Statement-Prospectus, have
been so incorporated in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated balance sheet of Preferred Health Care Ltd. and its
subsidiaries as of December 31, 1993, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years
in the period ended December 31, 1993, incorporated by reference in this Proxy
Statement- Prospectus, have been so incorporated in reliance on the report of
Deloitte & Touche LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The statements of operations, stockholders' equity (deficit) and cash flows
of RxNet, Inc. for the year ended December 31, 1992, incorporated by reference
in this Proxy Statement-Prospectus, have been so incorporated in reliance on
the report of Price Waterhouse, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Diagnostek as of March 31, 1995 and
1994, and for each of the years in the three-year period ended March 31, 1995,
incorporated by reference in this Proxy Statement-Prospectus, have been so
incorporated in reliance on the report of KPMG Peat Marwick LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. The report of KPMG Peat Marwick LLP covering Diagnostek's March
31, 1995 financial statements contains an explanatory paragraph that states
that Diagnostek is a defendant in stockholder litigation, the ultimate outcome
of which cannot presently be determined. Such consolidated financial
statements do not include any adjustments that may result from the outcome of
that uncertainty.
Representatives of Coopers & Lybrand L.L.P. are expected to be present at
the Value Health Special Meeting, will have an opportunity to make a statement
if they so desire and will be available to respond to appropriate questions.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
Diagnostek Special Meeting, will have an opportunity to make a statement if
they so desire and will be available to respond to appropriate questions.
69
<PAGE>
STOCKHOLDER PROPOSALS
If the Merger is not consummated within the time period currently
contemplated, stockholder proposals intended to be presented at the 1995 annual
meeting of Diagnostek must have been submitted to Diagnostek by June 15, 1995
in order to be considered for inclusion in the proxy materials for such
meeting. Stockholder proposals intended to be presented at the Value Health
1996 annual meeting of stockholders must be received by Value Health's
Secretary no later than December 31, 1995 in order to be included in the proxy
statement relating to that meeting. In order to curtail controversy as to the
date on which a proposal was received by Value Health, it is suggested that
proponents submit their proposals by certified mail, return receipt requested,
to Value Health's Secretary at Value Health's principal executive offices.
70
<PAGE>
ANNEX A
AGREEMENT
AND
PLAN OF MERGER
DATED AS OF
MARCH 27, 1995
AMONG
VALUE HEALTH, INC.
VHI MERGER-SUB. CORP.
AND
DIAGNOSTEK, INC.
AS AMENDED AS OF
JUNE 4, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER........................................................... A-5
Section 1.1 The Merger........................................................... A-5
Section 1.2 Effective Date of the Merger......................................... A-5
ARTICLE II THE SURVIVING CORPORATION............................................ A-5
Section 2.1 Certificate of Incorporation......................................... A-5
Section 2.2 Bylaws............................................................... A-5
Section 2.3 Board of Directors; Directors........................................ A-5
Section 2.4 Effects of Merger.................................................... A-6
ARTICLE III CONVERSION OF SHARES................................................. A-6
Section 3.1 Exchange Ratio....................................................... A-6
Section 3.2 Parent to Make Certificates Available................................ A-6
Section 3.3 Dividends; Transfer Taxes............................................ A-6
Section 3.4 No Fractional Shares................................................. A-7
Section 3.5 Stock Options........................................................ A-7
Section 3.6 Shareholders' Meetings............................................... A-8
Section 3.7 Closing of the Company's Transfer Books.............................. A-8
Section 3.8 Assistance in Consummation of the Merger............................. A-9
Section 3.9 Closing.............................................................. A-9
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT............................. A-9
Section 4.1 Organization and Qualification....................................... A-9
Section 4.2 Capitalization....................................................... A-9
Section 4.3 Subsidiaries......................................................... A-10
Section 4.4 Authority Relative to This Merger Agreement.......................... A-10
Section 4.5 Reports and Financial Statements..................................... A-11
Section 4.6 Absence of Certain Changes or Events................................. A-11
Section 4.7 Litigation........................................................... A-12
Section 4.8 Information in Disclosure Documents, Registration Statements, etc.... A-12
Section 4.9 Interested Stockholder............................................... A-12
Section 4.10 Fairness Opinion..................................................... A-12
Section 4.11 Financial Advisor.................................................... A-12
Section 4.12 Compliance with Applicable Laws...................................... A-12
Section 4.13 Liabilities.......................................................... A-13
Section 4.14 Accounting Matters................................................... A-13
Section 4.15 Environmental Liability.............................................. A-13
Section 4.16 Certain Relationships................................................ A-14
Section 4.17 Certain Healthcare Regulatory Matters................................ A-14
Section 4.18 Certain Agreements................................................... A-14
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................ A-14
Section 5.1 Organization and Qualification....................................... A-14
Section 5.2 Capitalization....................................................... A-15
Section 5.3 Subsidiaries......................................................... A-15
Section 5.4 Authority Relative to This Merger Agreement.......................... A-15
Section 5.5 Reports and Financial Statements..................................... A-16
Section 5.6 Absence of Certain Changes or Events................................. A-17
Section 5.7 Litigation........................................................... A-17
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C>
Section 5.8 Information in Disclosure Documents.................................. A-17
Section 5.9 Employee Benefit Plans............................................... A-17
Section 5.10 ERISA................................................................ A-18
Section 5.11 Takeover Provisions Inapplicable..................................... A-18
Section 5.12 Fairness Opinion..................................................... A-18
Section 5.13 Financial Advisor.................................................... A-19
Section 5.14 Compliance with Applicable Laws...................................... A-19
Section 5.15 Liabilities.......................................................... A-19
Section 5.16 Taxes................................................................ A-19
Section 5.17 Certain Agreements................................................... A-20
Section 5.18 Patents, Trademarks, etc............................................. A-21
Section 5.19 Accounting Matters................................................... A-21
Section 5.20 Investment Company Act............................................... A-21
Section 5.21 Properties, Liens.................................................... A-21
Section 5.22 Environmental Liability.............................................. A-21
Section 5.23 Certain Relationships................................................ A-22
Section 5.24 Insurance............................................................ A-22
Section 5.25 Certain Healthcare Regulatory Matters................................ A-22
ARTICLE VI REPRESENTATIONS AND WARRANTIES REGARDING SUB......................... A-22
Section 6.1 Organization......................................................... A-22
Section 6.2 Capitalization....................................................... A-23
Section 6.3 Authority Relative to This Merger Agreement.......................... A-23
ARTICLE VII CONDUCT OF BUSINESS PENDING THE MERGER............................... A-23
Section 7.1 Conduct of Business by the Company Pending the Merger................ A-23
Section 7.2 Conduct of Business by Parent Pending the Merger..................... A-24
Section 7.3 Conduct of Business of Sub........................................... A-25
Section 7.4 Notice of Breach..................................................... A-25
Section 7.5 Notice Certain Changes or Events..................................... A-25
ARTICLE VIII ADDITIONAL AGREEMENTS................................................ A-25
Section 8.1 Access and Information............................................... A-25
Section 8.2 Registration Statement/Proxy Statement............................... A-25
Section 8.3 Compliance with the Securities Act................................... A-26
Section 8.4 Stock Exchange Listing............................................... A-26
Section 8.5 Employee Matters..................................................... A-26
Section 8.6 Registration of Securities........................................... A-27
Section 8.7 Indemnification of Directors and Officers............................ A-27
Section 8.8 HSR Act.............................................................. A-28
Section 8.9 Further Assurances................................................... A-28
Section 8.10 No Solicitation...................................................... A-28
ARTICLE IX CONDITIONS PRECEDENT................................................. A-29
Section 9.1 Conditions to Each Party's Obligation to Effect the Merger........... A-29
Section 9.2 Conditions to Obligation of the Company to Effect the Merger......... A-29
Section 9.3 Conditions to Obligations of Parent and Sub to Effect the Merger..... A-30
ARTICLE X TERMINATION, AMENDMENT AND WAIVER.................................... A-31
Section 10.1 Termination.......................................................... A-31
Section 10.2 Effect of Termination................................................ A-32
Section 10.3 Amendment............................................................ A-32
Section 10.4 Waiver............................................................... A-32
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE XI GENERAL PROVISIONS................................................... A-32
Section 11.1 Effectiveness of Representations and Warranties...................... A-32
Section 11.2 Notices.............................................................. A-32
Section 11.3 Fees and Expenses.................................................... A-33
Section 11.4 Publicity............................................................ A-33
Section 11.5 Specific Performance................................................. A-33
Section 11.6 Interpretation....................................................... A-34
Section 11.7 Miscellaneous........................................................ A-34
</TABLE>
A-4
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement"), dated as of March
27, 1995 by and among VALUE HEALTH, INC., a Delaware corporation ("Parent"),
VHI MERGER-SUB. CORP., a Delaware corporation and a direct, wholly-owned
subsidiary of Parent ("Sub"), and DIAGNOSTEK, INC., a Delaware corporation (the
"Company"), as amended as of June 4, 1995:
W I T N E S S E T H
WHEREAS, Parent and the Company desire to effect a business combination by
means of the merger of Sub with and into the Company;
WHEREAS, the Boards of Directors of Parent, Sub and the Company have approved
the merger of Sub into the Company (the "Merger"), upon the terms and subject
to the conditions set forth herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests;"
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions hereof,
on the Effective Date (as defined in Section 1.2), Sub shall be merged into the
Company and the separate existence of Sub shall thereupon cease, and the
Company, as the surviving corporation in the Merger (the "Surviving
Corporation"), shall by virtue of the Merger continue its corporate existence
under the laws of the State of Delaware.
Section 1.2 Effective Date of the Merger. The Merger shall become effective
at the date and time (the "Effective Date") when a properly executed
Certificate of Merger is duly filed with the Secretary of State of the State of
Delaware, which filing shall be made as soon as practicable following
fulfillment of the conditions set forth in Article IX hereof, or at such time
thereafter as is provided in such Certificate.
ARTICLE II
THE SURVIVING CORPORATION
Section 2.l Certificate of Incorporation. The Certificate of Incorporation of
the Company shall be the Certificate of Incorporation of the Surviving
Corporation after the Effective Date, and thereafter may be amended in
accordance with its terms and as provided by law and this Agreement.
Section 2.2 Bylaws. The Bylaws of the Company as in effect on the Effective
Date shall be the Bylaws of the Surviving Corporation.
Section 2.3 Board of Directors, Officers. The directors of Sub immediately
prior to the Effective Date shall be the directors of the Surviving Corporation
and the officers of the Company immediately prior to the
A-5
<PAGE>
Effective Date shall be the officers of the Surviving Corporation, in each case
until their respective successors are duly elected and qualified.
Section 2.4 Effects of Merger. The Merger shall have the effects set forth in
Section 259 of the Delaware General Corporation Law (the "DGCL").
ARTICLE III
CONVERSION OF SHARES
Section 3.1 Exchange Ratio. On the Effective Date, by virtue of the Merger
and without any action on the part of any holder of any common stock, $0.01 par
value, of the Company ("Company Common Stock"):
(a) All shares of Company Common Stock which are held by the Company or
any subsidiary of the Company, and any shares of Company Common Stock owned
by Parent, Sub or any other subsidiary of Parent, shall be canceled.
(b) Subject to Section 3.4, each remaining outstanding share of Company
Common Stock shall be converted into the right to receive .4975 (the
"Exchange Ratio") fully paid and nonassessable shares of the no par value
common stock of Parent ("Parent Common Stock").
(c) In the event of any stock dividend, stock split, reclassification,
recapitalization, combination or exchange of shares with respect to, or
rights issued in respect of, Parent Common Stock after the date hereof, the
Exchange Ratio shall be adjusted accordingly.
(d) Each issued and outstanding share of capital stock of Sub shall be
converted into and become one fully paid and nonassessable share of Common
Stock, $0.01 par value, of the Surviving Corporation.
Section 3.2 Parent to Make Certificates Available.
(a) Prior to the Closing, Parent shall select Mellon Securities Transfer
Services or such other person or persons reasonably satisfactory to the Company
to act as Exchange Agent for the Merger (the "Exchange Agent"). As soon as
practicable after the Effective Date, Parent shall make available, and each
holder of Company Common Stock will be entitled to receive, upon surrender to
the Exchange Agent of one or more certificates ("Certificates") representing
such stock for cancellation, certificates representing the number of shares of
Parent Common Stock into which such shares are converted in the Merger and cash
in consideration of fractional shares as provided in Section 3.4. Parent Common
Stock into which Company Common Stock shall be converted in the Merger shall be
deemed to have been issued on the Effective Date (the "Share Consideration").
(b) Any holder of shares of Company Common Stock who has not exchanged his
shares for Parent Common Stock in accordance with subsection (a) within six
months after the Effective Time shall have no further claim upon the Exchange
Agent and shall thereafter look only to Parent and the Surviving Corporation
for payment in respect of his shares of Company Common Stock. Until so
surrendered, certificates representing Company Common Stock shall represent
solely the right to receive the Share Consideration (and cash in lieu of any
fractional shares pursuant to Section 3.4 hereof). If any certificates
representing shares of Company Common Stock entitled to payment pursuant to
Section 3.l shall not have been surrendered for such payment prior to such date
on which any payment in respect thereof would otherwise escheat to or become
the property of any governmental agency or other governmental entity, such
shares of Company Common Stock shall, to the extent permitted by applicable
law, be deemed to be canceled and no money or other property will be due to the
holder thereof.
Section 3.3 Dividends; Transfer Taxes. No dividends or other distributions
that are declared or made on Parent Common Stock will be paid to persons
entitled to receive certificates representing Parent Common
A-6
<PAGE>
Stock pursuant to this Merger Agreement until such persons surrender their
Certificates representing Company Common Stock. Upon such surrender, there
shall be paid to the person in whose name the certificates representing such
Parent Common Stock shall be issued any dividends or other distributions which
shall have become payable with respect to such Parent Common Stock in respect
of a record date after the Effective Date. In no event shall the person
entitled to receive such dividends be entitled to receive interest on such
dividends. In the event that any certificates for any shares of Parent Common
Stock are to be issued in a name other than that in which the Certificates
representing shares of Company Common Stock surrendered in exchange therefor
are registered, it shall be a condition of such exchange that the certificate
or certificates so surrendered shall be properly endorsed or be otherwise in
proper form for transfer and that the person requesting such exchange shall pay
to the Exchange Agent any transfer or other taxes required by reason of the
issuance of certificates for such shares of Parent Common Stock in a name other
than that of the registered holder of the Certificate surrendered, or shall
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not applicable. Notwithstanding the foregoing, neither the Exchange Agent
nor any party hereto shall be liable to a holder of shares of Company Common
Stock for any shares of Parent Common Stock or dividends thereon delivered to a
public official pursuant to any applicable escheat laws.
Section 3.4 No Fractional Shares. No certificates or scrip representing less
than one share of Parent Common Stock shall be issued upon the surrender for
exchange of Certificates representing Company Common Stock pursuant to Section
3.1(b). In lieu of any such fractional share, each holder of Company Common
Stock who would otherwise have been entitled to a fraction of a share of Parent
Common Stock upon surrender of Certificates for exchange pursuant to Section
3.l(b) shall be paid upon such surrender cash (without interest) in an amount
equal to such holder's proportionate interest in the net proceeds from the sale
or sales in the open market by the Exchange Agent, on behalf of all such
holders, of the aggregate fractional Parent Common Stock issued pursuant to
this Section 3.4. As soon as practicable following the Effective Date, the
Exchange Agent shall determine the excess of (a) the number of full shares of
Parent Common Stock delivered to the Exchange Agent by Parent over (b) the
aggregate number of full shares of Parent Common Stock to be distributed to
holders of Company Common Stock (such excess being herein called the "Excess
Shares"), and the Exchange Agent, as agent for the former holders of Company
Common Stock, shall sell the Excess Shares at the prevailing prices on the New
York Stock Exchange ("NYSE"). The sale of the Excess Shares by the Exchange
Agent shall be executed on the NYSE through one or more member firms of the
NYSE and shall be executed in round lots to the extent practicable. The
Exchange Agent shall deduct from the proceeds of the sale of the Excess Shares
all commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred in
connection with such sale of Excess Shares. Until the net proceeds of such sale
have been distributed to the former stockholders of the Company, the Exchange
Agent will hold such proceeds in trust for such former stockholders (the
"Fractional Securities Fund"). As soon as practicable after the determination
of the amount of cash to be paid to former stockholders of the Company in lieu
of any fractional interests, the Exchange Agent shall make available in
accordance with this Agreement such amounts to such former stockholders.
Section 3.5 Stock Options.
(a) At or prior to the Effective Date, the Company and Parent shall take all
action necessary to cause the assumption by Parent as of the Effective Date of
all of the following which remain outstanding as of the Effective Date: (i) the
options to purchase Company Common Stock listed in Section 5.2 of the Company
Disclosure Schedule (as defined below), whether vested or unvested, issued
under the Company's 1983 Non-qualified and Incentive Stock Option Plan and 1991
Stock Option Plan (collectively, the "Stock Option Plans"), (ii) options to
purchase Company Common Stock listed in Section 5.2 of the Company Disclosure
Schedule pursuant to option agreements outside of the Stock Option Plans, and
(iii) the warrants to purchase Company Common Stock listed in Section 5.2 of
the Company Disclosure Schedule issued pursuant to warrant agreements
(collectively, the "Outstanding Options"). To the extent permitted under
applicable law and the applicable agreements and Stock Option Plans, each of
the Outstanding Options shall be converted without any action on the part of
the holder thereof into an option to purchase shares of Parent Common Stock as
of the Effective Date. The number of shares of Parent Common Stock that the
holder of an assumed
A-7
<PAGE>
Outstanding Option shall be entitled to receive upon the exercise of such
option shall be a number of whole and fractional shares determined by
multiplying the number of shares of Company Common Stock subject to such
option, determined immediately before the Effective Date, by the Exchange
Ratio. The exercise price of each share of Parent Common Stock subject to an
Outstanding Option shall be the amount (rounded up to the nearest whole cent)
obtained by dividing the exercise price per share of Company Common Stock at
which such option is exercisable immediately before the Effective Date by the
Exchange Ratio. Other than as set forth in the Outstanding Options, the
assumption and substitution of options as provided herein shall not give the
holders of such options additional benefits or additional vesting rights which
they did not have immediately prior to the Effective Date or relieve the
holders of any obligations or restrictions applicable to their options or the
shares obtainable upon exercise of the options. Only whole shares of Parent
Common Stock shall be issued upon exercise of any Outstanding Option, and in
lieu of receiving any fractional share of Parent Common Stock, the holder of
such option shall, upon exercise, receive in cash the fair market value of the
fractional share, net of the applicable exercise price of the fractional share
and applicable withholding taxes. Prior to the Effective Date, the Company
shall take such additional actions as are necessary under applicable law and
the applicable agreements and Stock Option Plans to assure that each
Outstanding Option shall, from and after the Effective Date, represent only the
right to purchase, upon exercise, whole shares of Parent Common Stock and cash
in lieu of any fractional share in accordance with the provisions of this
Section 3.5.
(b) After the Effective Date, the Stock Option Plans shall be continued in
effect by Parent subject to amendment, modification, suspension, abandonment or
termination as provided therein, and the Stock Option Plans as so continued (i)
shall relate solely to those Outstanding Options that are governed by such
Stock Option Plans immediately prior to the Effective Date, (ii) thereafter
shall relate only to the issuance of Parent Common Stock as provided in this
Section and (iii) shall continue to provide for equitable adjustment in the
terms of Outstanding Options in the event of certain corporate events which
alter the capital structure of Parent. Parent shall reserve for issuance the
number of shares of Parent Common Stock that will become issuable after the
Effective Date upon the exercise of the Outstanding Options pursuant to this
Section 3.5. After the Effective Date, Parent shall promptly notify the holders
of Outstanding Options of the assumption by Parent of such options pursuant to
this Merger Agreement.
Section 3.6 Shareholders' Meetings.
(a) The Company shall take all action necessary, in accordance with
applicable law and its Certificate of Incorporation and Bylaws, to convene a
special meeting of the holders of Company Common Stock (the "Company Meeting")
as promptly as practicable for the purpose of considering and taking action
upon this Merger Agreement. Subject to its fiduciary duties, as advised by
outside counsel, the Board of Directors of the Company will recommend that
holders of Company Common Stock vote in favor of and approve the Merger and the
adoption of the Merger Agreement at the Company Meeting. At the Company
Meeting, all of the shares of Company Common Stock then owned by Parent, Sub,
or any other subsidiary of Parent, or with respect to which Parent, Sub, or any
other subsidiary of Parent holds the power to direct the voting, will be voted
in favor of approval of the Merger and adoption of this Merger Agreement.
(b) Parent shall take all action necessary, in accordance with applicable law
and its Certificate of Incorporation and Bylaws, to convene a special meeting
of the holders of Parent Common Stock (the "Parent Meeting") as promptly as
practicable for the purpose of considering and taking action to authorize the
issuance of Parent Common Stock pursuant to the Merger under the applicable
guidelines of the NYSE (the "Parent Share Proposal"). Subject to its fiduciary
duties, as advised by outside counsel, the Board of Directors of Parent will
recommend that holders of Parent Common Stock vote in favor of and approve the
Parent Share Proposal at the Parent Meeting.
Section 3.7 Closing of the Company's Transfer Books. At the Effective Date,
the stock transfer books of the Company shall be closed and no transfer of
shares of Company Common Stock shall be made
A-8
<PAGE>
thereafter. In the event that, after the Effective Date, Certificates are
presented to the Surviving Corporation, they shall be canceled and exchanged
for full shares of Parent Common Stock as provided in Section 3.1(b) and cash
in lieu of fractional shares, if any, as provided in Section 3.4.
Section 3.8 Assistance in Consummation of the Merger. Each of Parent, Sub and
the Company shall provide all reasonable assistance to, and shall cooperate
with, each other to bring about the consummation of the Merger as soon as
possible in accordance with the terms and conditions of this Merger Agreement.
Parent shall cause Sub to perform all of its obligations in connection with
this Merger Agreement.
Section 3.9 Closing. The closing of the transactions contemplated by this
Merger Agreement shall take place (a) at the offices of Gibson, Dunn &
Crutcher, 200 Park Avenue, New York, New York 10166, at 9:00 A.M. local time on
the day which is at least one business day after the day on which the last of
the conditions set forth in Article IX is fulfilled or waived or (b) at such
other time and place as Parent and the Company shall agree in writing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Except as disclosed in the schedule delivered to Company concurrently with
the execution hereof, which schedule shall identify exceptions and other
information by specific Section references and shall be initialed by Parent and
the Company for identification purposes (the "Parent Disclosure Schedule"),
Parent represents and warrants to the Company as follows:
Section 4.1 Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power to carry on its business as it is now
being conducted or currently proposed to be conducted. Parent is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where
the failure to be so qualified will not, individually or in the aggregate, have
a "Parent Material Adverse Effect" (as defined below). As used in this
Agreement, a "Parent Material Adverse Effect" shall mean any event,
circumstance, development or occurrence, individually or when taken together
with all other such events, circumstances, developments or occurrences,
causing, resulting in or having, or reasonably likely to cause, result in or
have, a material adverse effect on the condition (financial or otherwise),
business, properties, business relationships, prospects or results of
operations of Parent and its subsidiaries taken as a whole. Complete and
correct copies of the Certificate of Incorporation and Bylaws of Parent, as
amended to the date hereof, have been delivered to the Company as attachments
to Section 4.1 of the Parent Disclosure Schedule.
Section 4.2 Capitalization. The authorized capital stock of Parent consists
of 100,000,000 shares of Parent Common Stock, and l,000,000 shares of preferred
stock, $0.01 par value. As of March 17, 1995, 40,587,272 shares of Parent
Common Stock were validly issued and outstanding, fully paid, and
nonassessable, and no shares of preferred stock were issued and outstanding,
and, since that date through the date of execution and delivery of this Merger
Agreement, no additional shares of capital stock of Parent have been issued
except shares of Parent Common Stock issued pursuant to the exercise of stock
options or other commitments set forth herein or in Section 4.2 of the Parent
Disclosure Schedule. As of the date hereof, there are no bonds, debentures,
notes or other indebtedness having the right to vote on any matters on which
the Parent's shareholders may vote issued or outstanding. As of March 17, 1995,
except for options to acquire 4,497,477 shares of Parent Common Stock, and
except as provided herein or in Section 4.2 of the Parent Disclosure Schedule,
there are no options, warrants, calls or other rights, agreements or
commitments presently outstanding obligating Parent to issue, deliver or sell
shares of its capital stock or any debt securities or other instruments or
rights convertible into or exchangeable for such capital stock, or obligating
Parent to
A-9
<PAGE>
grant, extend or enter into any such option, warrant, call or other such right,
agreement or commitment, or to issue any such convertible or exchangeable debt
security, instrument or right and, since that date through the date of
execution and delivery of this Merger Agreement, no such options, warrants,
calls or other rights, agreements or commitments, or such convertible or
exchangeable debt securities, instruments or other rights have been issued,
granted or entered into except for the grant of additional stock options
pursuant to Parent's stock plans. All of the shares of Parent Common Stock
issuable in accordance with this Merger Agreement in exchange for Company
Common Stock at the Effective Date in accordance with this Merger Agreement
will be, when so issued, duly authorized, validly issued, fully paid and
nonassessable and shall be delivered free and clear of all liens, claims,
charges and encumbrances of any kind or nature whatsoever, including any
preemptive rights of any stockholder of Parent. There are no obligations,
contingent or otherwise, of Parent or any of its Significant Subsidiaries (as
defined below) to repurchase, redeem or otherwise acquire any shares of capital
stock of Parent or any Significant Subsidiary of Parent.
Section 4.3 Subsidiaries. Section 4.3 of the Parent Disclosure Schedule lists
the only "Significant Subsidiaries" (as such term is defined in Rule 1-02 of
Regulation S-X of the Securities and Exchange Commission (the "Commission"))
("Significant Subsidiaries") owned directly or indirectly by Parent. Each
Significant Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation and has the
corporate power to carry on its business as it is now being conducted or
currently proposed to be conducted. Each Significant Subsidiary is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary except
where the failure to be so qualified will not have a Parent Material Adverse
Effect. All the outstanding shares of capital stock of each Significant
Subsidiary are validly issued, fully paid and nonassessable and those owned by
Parent or by a Significant Subsidiary of Parent are owned free and clear of any
liens, claims or encumbrances. There are no existing options, warrants, calls
or other rights, agreements or commitments of any character relating to the
issued or unissued capital stock or other securities of any of the Significant
Subsidiaries of Parent. Parent has made available to the Company true and
complete copies of the charter and bylaws, in the case of a corporation, or
equivalent governing document, in the case of non-corporate entities, for each
corporation, partnership, joint venture or other business association or entity
owned, directly or indirectly, by Parent that is material to Parent and its
subsidiaries taken as a whole.
Section 4.4 Authority Relative to This Merger Agreement. Parent has the
corporate power to enter into this Merger Agreement and to carry out its
obligations hereunder. The execution and delivery of this Merger Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by Parent's Board of Directors. The Merger Agreement constitutes a
valid and binding obligation of Parent enforceable in accordance with its terms
except as enforcement may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor may
be brought. Except for the approval of the holders of the Parent Common Stock
described in Section 3.6(b), no other corporate proceedings on the part of
Parent are necessary to authorize the Merger Agreement and the transactions
contemplated hereby. Except as disclosed in Section 4.4 of the Parent
Disclosure Schedule, Parent is not subject to or obligated under (a) any
charter or bylaw provision, or (b) any indenture or other loan document
provision, other contract, license, franchise, permit, order, decree,
concession, lease, instrument, judgment, statute, law, ordinance, rule or
regulation applicable to Parent or any of its subsidiaries or their respective
properties or assets, which would be breached or violated, or under which there
would be a default (with or without notice or lapse of time, or both), or under
which there would arise a right of termination, cancellation or acceleration of
any obligation or the loss of a material benefit, by its executing and carrying
out this Merger Agreement other than in the case of clause (b) only, (i) any
breaches, violations, defaults, terminations, cancellations, accelerations or
losses which, either singly or in the aggregate, will not have a Parent
Material Adverse Effect or prevent the consummation of the transactions
contemplated hereby and (ii) the laws and regulations referred to in the next
sentence. Except as disclosed in Section 4.4 of the Parent Disclosure Schedule
and except for compliance
A-10
<PAGE>
with the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), the Securities Act of 1933, as amended (the
"Securities Act"), the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), DGCL and the securities or blue sky laws or regulations of the
various states, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation by
Parent of the Merger or the other transactions contemplated by this Merger
Agreement, other than filings, registrations, authorizations, consents or
approvals the failure of which to make or obtain would not have a Parent
Material Adverse Effect or prevent the consummation of the transactions
contemplated hereby.
Section 4.5 Reports and Financial Statements.
(a) Parent has previously furnished the Company with true and complete copies
of its (i) Annual Report on Form 10-K for the years ended December 31, 1992 and
1993 as filed with the Commission (and any amendments thereto), (ii) Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1994, June 30, 1994 and
September 30, 1994 as filed with the Commission (and any amendments thereto),
(iii) definitive proxy statement related to its 1994 Annual Meeting of
Shareholders (and any supplements thereto), and (iv) all other reports (and any
amendments thereto) filed with the Commission since the filing of its Form 10-K
for the year ended December 31, 1993 (other than preliminary material) that
Parent was required to file with the Commission pursuant to the Exchange Act
and the rules and regulations of the Commission thereunder since that date (the
documents referred to in clauses (i) through (iv) being referred to herein
collectively as the "Parent SEC Reports"). As of their respective dates, the
Parent SEC Reports complied in all material respects with the requirements of
the Exchange Act and the rules and regulations of the Commission thereunder
applicable to such Parent SEC Reports. As of their respective dates, the Parent
SEC Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim financial statements of Parent included in the Parent SEC Reports
comply in all material respects with applicable accounting requirements and
with the published rules and regulations of the Commission with respect
thereto. The financial statements included in the Parent SEC Reports have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be indicated therein or in the notes
thereto); present fairly, in all material respects, the financial position of
Parent and its subsidiaries as at the dates thereof and the results of their
operations and cash flows for the periods then ended subject, in the case of
the unaudited interim financial statements, to normal year-end audit
adjustments, any other adjustments described therein and the fact that certain
information and notes have been condensed or omitted in accordance with the
Exchange Act and the rules promulgated thereunder; and are, in all material
respects, in accordance with the books of account and records of the Parent.
(b) Parent has previously furnished the Company with true and correct copies
of the audited consolidated financial statements of Parent for the fiscal year
ended December 31, 1994 (the "1994 Financial Statements"). The 1994 Financial
Statements comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the Commission
with respect thereto. The 1994 Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated therein or in the notes thereto);
present fairly, in all material respects, the financial position of Parent and
its subsidiaries as at December 31, 1994 and the results of their operations
and cash flow for the fiscal year then ended; and are in all material respects,
in accordance with the books of account and records of Parent.
Section 4.6 Absence of Certain Changes or Events. Except as disclosed in the
Parent SEC Reports or as disclosed in Section 4.6 of the Parent Disclosure
Schedule, since December 31, 1994, there has not been any Parent Material
Adverse Effect (other than as a result of changes in laws or regulations of
general applicability).
A-11
<PAGE>
Section 4.7 Litigation. Except as disclosed in the Parent SEC Reports or as
disclosed in Section 4.7 of the Parent Disclosure Schedule, there is no suit,
action or proceeding pending or, to the knowledge of Parent, threatened against
Parent or any of its subsidiaries which, alone or in the aggregate, is likely,
insofar as Parent reasonably foresees, to have a Parent Material Adverse
Effect, nor is there any judgment, decree, injunction, rule or order of any
court, governmental department, commission, agency, instrumentality or
arbitrator outstanding specifically against Parent or any of its subsidiaries
having, or which, insofar as Parent reasonably foresees, in the future could
have, either alone or in the aggregate, any such Parent Material Adverse
Effect.
Section 4.8 Information in Disclosure Documents, Registration Statements,
etc.
(a) None of the information concerning Parent or Sub in (i) the Registration
Statement to be filed with the Commission by Parent on Form S-4 under the
Securities Act for the purpose of registering the shares of Parent Common Stock
to be issued in the Merger (the "Registration Statement") and (ii) the joint
prospectus/proxy statement of the Company and Parent (the "Proxy Statement")
required to be mailed to the shareholders of the Company and Parent in
connection with the Merger will, in the case of the Proxy Statement or any
amendments or supplements thereto, at the time of the mailing of the Proxy
Statement and any amendments or supplements thereto, and at the time of the
Parent Meeting of shareholders to be held in connection with the Merger, or, in
the case of the Registration Statement, at the time it becomes effective and at
the Effective Date, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Registration Statement will comply as to form in all
material respects with the provisions of the Securities Act, and the rules and
regulations promulgated thereunder. The Proxy Statement will comply as to form
in all material respects with the provisions of the Exchange Act and the rules
and regulations thereunder. The foregoing representations and warranties of
Parent contained in this Section 4.8 shall in no event apply to any statements
or omissions in the Registration Statement or the Proxy Statement based upon
information provided by the Company for use therein.
(b) No representation or warranty made by Parent contained in this Agreement
and no statement contained in any certificate, list, exhibit or other
instrument specified in this Agreement, including without limitation the Parent
Disclosure Schedule, contains any untrue statement of a material fact or omits
or will omit to state a material fact necessary to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading.
Section 4.9 Interested Stockholder. Neither Parent nor any "affiliate" or
"associate" (as defined in Section 203 of the DGCL) of Parent is an "Interested
Stockholder" (as defined in Section 203 of the DGCL) of the Company.
Section 4.10 Fairness Opinion. Parent has received the written opinion of
Montgomery Securities, financial advisors to Parent, dated the date hereof, to
the effect that the Exchange Ratio is fair to the shareholders of Parent from a
financial point of view.
Section 4.11 Financial Advisor. Except as may be disclosed in Section 4.11 of
the Parent Disclosure Schedule, no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or the transactions contemplated by this Merger Agreement based
upon arrangements made by or on behalf of Parent.
Section 4.12 Compliance with Applicable Laws. Parent and its Significant
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all courts, administrative agencies or commissions or other
governmental authorities or instrumentalities, domestic or foreign (each a
"Governmental Entity"), including, without limitation, applicable state
insurance and health commissions, except for such permits, licenses, variances,
exemptions, orders and approvals the failure of which to hold would not have a
Parent Material Adverse Effect (the "Parent Permits"). Parent and its
Significant Subsidiaries are in compliance with
A-12
<PAGE>
the terms of the Parent Permits, except for such failures to comply, which
singly or in the aggregate, would not have a Parent Material Adverse Effect.
Except as disclosed in the Parent SEC Reports filed prior to the date of this
Merger Agreement or in Section 4.12 of the Parent Disclosure Schedule, the
businesses of Parent and its Significant Subsidiaries are not being conducted
in violation of any law, ordinance or regulation of any Governmental Entity,
including, without limitation, applicable state insurance and health
commissions, except for possible violations which individually or in the
aggregate do not and would not have a Parent Material Adverse Effect. Except as
disclosed in Section 4.12 of the Parent Disclosure Schedule, no investigation
or review by any Governmental Entity, including, without limitation, applicable
state insurance and health commissions, with respect to Parent or any of its
Significant Subsidiaries is pending, or, to the knowledge of Parent,
threatened, nor has any Governmental Entity, including, without limitation,
applicable state insurance and health commissions, indicated an intention to
conduct the same, other than those the outcome of which would not have a Parent
Material Adverse Effect.
Section 4.13 Liabilities. Except as disclosed in Section 4.13 of the Parent
Disclosure Schedule, neither Parent nor any of its Significant Subsidiaries has
any material liabilities or obligations (absolute, accrued, contingent or
otherwise) that would be required to be reflected on, or reserved against in, a
balance sheet of Parent, or disclosed in the notes thereto, prepared in
accordance with the published rules and regulations of the Commission regarding
Quarterly Statements on Form 10-Q and Annual Statements on Form 10-K and
generally accepted accounting principles, except (a) as otherwise reported in
the consolidated financial statements contained in Parent's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994 or in the 1994 Financial
Statements or (b) for liabilities or obligations incurred in the ordinary
course of business since December 31, 1994, that would not have a Parent
Material Adverse Effect.
Section 4.14 Accounting Matters. Neither Parent nor, to its best knowledge,
any of its affiliates, has through the date hereof, taken or agreed to take any
action that would prevent the business combination to be effected by the Merger
from being accounted for as a "pooling of interests." Parent has received a
letter from Coopers & Lybrand L.L.P., a copy of which is attached to Section
4.14 of the Parent Disclosure Schedule, to the effect that the Merger will
qualify for "pooling of interests" accounting treatment if consummated in
accordance with this Merger Agreement and if the operations of Parent and the
Surviving Corporation are conducted in a manner that do not violate "pooling of
interests" accounting treatment.
Section 4.15 Environmental Liability.
(a) The businesses of Parent and its Significant Subsidiaries have been and
are operated in material compliance with all applicable statutory or regulatory
requirements of all Governmental Entities with jurisdiction over the
environment or over workplace health and safety, and neither Parent nor any of
its Significant Subsidiaries has caused or allowed the generation, treatment,
storage, release or disposal of hazardous substances except in accordance with
such statutes and regulations as they existed at the time of such generation,
treatment, storage, release or disposal.
(b) Neither Parent nor its Significant Subsidiaries has received any written
notice or, to the best knowledge of Parent, any other communication, from any
Governmental Entities alleging or concerning any violation by Parent or any of
its Significant Subsidiaries of, or responsibility or liability of Parent or
any of its Significant Subsidiaries under, any statute or regulation relating
to the environment. There are no pending or, to the best knowledge of Parent,
threatened, claims, suits, proceedings or investigations with respect to the
businesses or operations of Parent or any of its Significant Subsidiaries
alleging or concerning any violation of or responsibility or liability under
any statutes or regulations relating to the environment, nor does Parent have
any knowledge of any fact or condition which might reasonably be expected to
give rise to such a claim, suit, proceeding or investigation.
(c) Parent and its Significant Subsidiaries are in possession of all material
approvals, permits and licenses from all Governmental Entities under statutes
and regulations relating to the environment and to workplace health and safety
with respect to the operation of the businesses of Parent and its Significant
Subsidiaries;
A-13
<PAGE>
there are no pending or, to the best knowledge of Parent, threatened, actions,
proceedings or investigations seeking to revoke or deny renewal of any of such
approvals, permits and licenses; nor does Parent have knowledge of any fact or
condition which might reasonably be expected to give rise to any action,
proceeding or investigation to revoke or deny renewal of such approvals,
permits or licenses if such revocation or denial would constitute a Parent
Material Adverse Effect.
Section 4.16 Certain Relationships. All billings made to customers and
suppliers of Parent or any Significant Subsidiary have been properly computed
and billed in compliance with applicable laws, rules, regulations, agreements
and procedures, and no such customer has any right to any refund, price or fee
adjustments, offsets or similar right with respect to any such charges, except
where the failure to so comply or the amount of such right would not have a
Parent Material Adverse Effect.
Section 4.17 Certain Healthcare Regulatory Matters.
(a) To the best knowledge of Parent, Parent and its Significant Subsidiaries
have not engaged knowingly and willfully in any activities which are prohibited
under federal Medicare and Medicaid statutes, including, without limitation, 42
U.S.C. (S) 1320a-7b and 42 U.S.C. (S) 1395nn or related state or local statutes
or regulations or which otherwise constitutes fraud, including, without
limitation, the following: (i) 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; (ii) 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; (iii) knowingly and willfully
failing to disclose knowledge of the occurrence of any event affecting the
initial or continued right to any benefit or payment on its behalf or on behalf
of another, with intent to secure such benefit or payment fraudulently; (iv)
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 such remuneration (A) 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 (B) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing or ordering any
good, facility, service or item for which payment may be made in whole or in
part by Medicare or Medicaid.
(b) Parent and its Significant Subsidiaries have complied and are in
compliance, in all material respects, with applicable state laws regulating
pharmacies.
Section 4.18 Certain Agreements. Section 4.18 of the Parent Disclosure
Schedule contains a list of each contract, agreement and understanding with any
customer or supplier of Parent or any Significant Subsidiary that is material
to the business of Parent and its subsidiaries taken as a whole.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed in the schedule delivered to Parent concurrently with the
execution hereof, which schedule shall identify exceptions and other
information by specific Section references and shall be initialed by Company
and the Parent for identification purposes (the "Company Disclosure Schedule"),
the Company represents and warrants to Parent and Sub as follows:
Section 5.1 Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power to carry on its business as it is now
being conducted or currently proposed to be conducted. The Company is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary,
except where the failure to be so qualified will not have a "Company Material
Adverse Effect" (as
A-14
<PAGE>
defined below). As used in this Agreement, a "Company Material Adverse Effect"
shall mean any event, circumstance, development or occurrence, individually or
when taken together with all other such events, circumstances, developments or
occurrences, causing, resulting in or having, or reasonably likely to cause,
result in or have, a material adverse effect on the condition (financial or
otherwise), business, properties, business relationships, prospects or results
of operations of Company and its subsidiaries taken as a whole. Complete and
correct copies of the Certificate of Incorporation and Bylaws of the Company,
Diagnostek Pharmacy Services, Inc. ("DPSI"), Health Care Services, Inc. ("HCS")
and HPI Health Care Services, Inc. ("HPI"), as amended to the date hereof, have
been delivered to Parent as attachments to Section 5.1 of the Company
Disclosure Schedule.
Section 5.2 Capitalization. The authorized capital stock of the Company
consists of 45,000,000 shares of Company Common Stock and 5,000,000 shares of
preferred stock, $0.01 par value. As of March 22, 1995, 24,238,246 shares of
Company Common Stock were validly issued and outstanding, fully paid and
nonassessable, 111,989 shares of Company Common Stock were held in treasury,
and no shares of preferred stock were outstanding, and, since that date, no
additional shares of capital stock of Company have been issued except shares of
Company Common Stock issued pursuant to the exercise of stock options or other
commitments set forth in Section 5.2 of the Company Disclosure Schedule. As of
the date hereof, there are no bonds, debentures, notes or other indebtedness
having the right to vote on any matters on which the Company's shareholders may
vote issued or outstanding. Except as set forth in Section 5.2 of the Company
Disclosure Schedule, there are no options, warrants, calls or other rights,
agreements or commitments outstanding obligating the Company to issue, deliver
or sell shares of its capital stock or any debt securities or other instruments
or rights convertible into or exchangeable for such capital stock, or
obligating the Company to grant, extend or enter into any such option, warrant,
call or other such right, agreement or commitment, or to issue any such
convertible or exchangeable debt security, instrument or right. There are no
obligations, contingent or otherwise, of the Company or any of its subsidiaries
to repurchase, redeem or otherwise acquire any shares of capital stock of the
Company or any subsidiary of the Company. The Company has delivered to Parent
complete and correct copies of (a) the 1983 Non-qualified and Incentive Stock
Option Plan and the 1991 Stock Option Plan, and all amendments thereto, and (b)
each form of stock option agreement and warrant agreement used by the Company
with respect to the Outstanding Options.
Section 5.3 Subsidiaries. Section 5.3 of the Company Disclosure Schedule
lists all subsidiaries of the Company. Each such subsidiary is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the corporate power to carry on its
business as it is now being conducted or currently proposed to be conducted.
Each such subsidiary is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities makes such
qualification necessary except where the failure to be so qualified will not
have a Company Material Adverse Effect. All the outstanding shares of capital
stock of each such subsidiary are validly issued, fully paid and nonassessable
and those owned by the Company or by a subsidiary of the Company are owned free
and clear of any liens, claims or encumbrances. There are no existing options,
warrants, calls or other rights, agreements or commitments of any character
relating to the issued or unissued capital stock or other securities of any of
such subsidiaries. Except as disclosed in Section 5.3 of the Company Disclosure
Schedule and except for wholly owned subsidiaries the formation of which was
approved pursuant to Section 7.1(f) hereof, the Company does not directly or
indirectly own any interest in any other corporation, partnership, joint
venture or other business association or entity.
Section 5.4 Authority Relative to This Merger Agreement. The Company has the
corporate power to enter into this Merger Agreement and, subject to approval of
this Agreement by the holders of Company Common Stock, to carry out its
obligations hereunder. The execution and delivery of this Merger Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by the Company's Board of Directors. This Merger Agreement
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms except as enforcement may be limited by bankruptcy,
insolvency or
A-15
<PAGE>
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. Except for the approval of the holders of
Company Common Stock, no other corporate proceedings on the part of the Company
are necessary to authorize this Merger Agreement and the transactions
contemplated hereby. Except as set forth in Section 5.4 of the Company
Disclosure Schedule, the Company is not subject to or obligated under (a) any
charter or bylaw provision, or (b) any indenture or other loan document
provision, other contract, license, franchise, permit, order, decree,
concession, lease, instrument, judgment, statute, law, ordinance, rule or
regulation applicable to the Company or any of its subsidiaries or their
respective properties or assets which would be breached or violated, or under
which there would be a default (with or without notice or lapse of time, or
both), or under which there would arise a right of termination, cancellation or
acceleration of any obligation or the loss of a material benefit, by its
executing and carrying out this Merger Agreement, other than, in the case of
clause (b) only, (A) any breaches, violations, defaults, terminations,
cancellations, accelerations or losses which, either singly or in the
aggregate, will not have a Company Material Adverse Effect or prevent the
consummation of the transactions contemplated hereby and (B) the laws and
regulations referred to in the next sentence. Except as disclosed in Section
5.4 of the Company Disclosure Schedule or, with respect to the Merger or the
transactions contemplated thereby, in connection, or in compliance, with the
provisions of the HSR Act, the Securities Act, the Exchange Act, and the
corporation, securities or blue sky laws or regulations of the various states,
no filing or registration with, or authorization, consent or approval of, any
public body or authority is necessary for the consummation by the Company of
the Merger or the other transactions contemplated hereby, other than filings,
registrations, authorizations, consents or approvals the failure of which to
make or obtain would not have a Company Material Adverse Effect or prevent the
consummation of the transactions contemplated hereby.
Section 5.5 Reports and Financial Statements.
(a) The Company has previously furnished Parent with true and complete copies
of its (i) Annual Reports on Form 10-K for the fiscal years ended March 31,
1993 and 1994, as filed with the Commission (and any amendments thereto), (ii)
Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 1994,
September 30, 1994 and December 31, 1994, as filed with the Commission (and any
amendments thereto), (iii) definitive proxy statements (and any supplements
thereto) related to all meetings of its shareholders (whether annual or
special) since April 1, 1994 and (iv) all other reports filed by the Company
with the Commission since March 31, 1994, which are all the documents (other
than preliminary material) that the Company was required to file with the
Commission pursuant to the Exchange Act and the rules and regulations of the
Commission thereunder since that date (clauses (i) through (iv) being referred
to herein collectively as the "Company SEC Reports"). As of their respective
dates, the Company SEC Reports complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the
Commission thereunder applicable to such Company SEC Reports. As of their
respective dates, the Company SEC Reports did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim financial statements of
the Company included in the Company SEC Reports comply in all material respects
with applicable accounting requirements and with the published rules and
regulations of the Commission with respect thereto. The financial statements
included in the Company SEC Reports: have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis (except
as may be indicated therein or in the notes thereto); present fairly, in all
material respects, the financial position of the Company and its subsidiaries
as at the dates thereof and the results of their operations and cash flow for
the periods then ended subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments and any other adjustments
described therein and the fact that certain information and notes have been
condensed or omitted in accordance with the Exchange Act and the rules
promulgated thereunder; and are in all material respects, in accordance with
the books of account and records of the Company.
A-16
<PAGE>
(b) The audited consolidated financial statements of the Company for the
fiscal year ended March 31, 1995 (the "1995 Financial Statements") delivered to
Parent pursuant to Section 9.3(d) hereof comply in all material respects with
applicable accounting requirements and with the published rules and regulations
of the Commission with respect thereto. The 1995 Financial Statements have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be indicated therein or in the notes
thereto); present fairly, in all material respects, the financial position of
the Company and its subsidiaries as at March 31, 1995 and the results of their
operations and cash flow for the fiscal year then ended; and are in all
material respects, in accordance with the books of account and records of the
Company. The parties hereto acknowledge that the representation and warranty
contained in this Section 5.5(b) shall not be effective until the date the 1995
Financial Statements are delivered to Parent pursuant to Section 9.3(d) hereof.
Section 5.6 Absence of Certain Changes or Events. Except as disclosed in the
Company SEC Reports or as disclosed in Section 5.6 of the Company Disclosure
Schedule, since March 31, 1994, there has not been any Company Material Adverse
Effect (other than as a result of changes in laws or regulations of general
applicability).
Section 5.7 Litigation. Except as disclosed in Section 5.7 of the Company
Disclosure Schedule, there is no suit, action or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries which, either alone or in the aggregate, is likely, insofar as the
Company reasonably foresees, to have a Company Material Adverse Effect, nor is
there any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or arbitrator
outstanding specifically against the Company or any of its subsidiaries having,
or which, insofar as the Company reasonably foresees, in the future could have,
either alone or in the aggregate, a Company Material Adverse Effect.
Section 5.8 Information in Disclosure Documents.
(a) None of the information concerning the Company or its subsidiaries to be
included or incorporated by reference in the Proxy Statement or the
Registration Statement will, in the case of the Proxy Statement or any
amendments or supplements thereto, at the time of the mailing of the Proxy
Statement and any amendments or supplements thereto, and at the time of the
Meeting of holders of Company Common Stock to be held in connection with the
Merger, or, in the case of the Registration Statement, at the time it becomes
effective and at the Effective Date, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder. The foregoing
representations and warranties of Company contained in this Section 5.8 shall
in no event apply to any statements or omissions in the Registration Statement
or the Proxy Statement based upon information provided by Parent for use
therein.
(b) No representation or warranty made by the Company contained in this
Agreement and no statement contained in any certificate, list, exhibit or other
instrument specified in this Agreement, including without limitation the
Company Disclosure Schedule, contains any untrue statement of a material fact
or omits or will omit to state a material fact necessary to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading.
Section 5.9 Employee Benefit Plans. Except as disclosed in the Company SEC
Reports or in Section 5.9 of the Company Disclosure Schedule, there are no
employee benefit or compensation plans or arrangements, including "employee
benefit plans," as defined in Section 3(3) of ERISA, and including, but not
limited to, plans or arrangements relating to former employees, including, but
not limited to, retiree medical plans, established or maintained by or
contributed to by the Company or any of its subsidiaries or "ERISA Affiliates",
or collective bargaining agreements to which the Company or any of its
subsidiaries is a
A-17
<PAGE>
party (together, the "Company Benefit Plans"). An "ERISA Affiliate" shall mean
any corporation or trade or business that is a member of any group of
organizations (i) described in Section 4.14(b) or (c) of the Code, of which the
Company is a member and (ii) described in Section 4.14(m) or (o) of the Code,
of which the Company is a member. To the best knowledge of the Company, no
default exists with respect to the obligations of the Company or any of its
subsidiaries or ERISA Affiliates under such Company Benefit Plan, which
default, alone or in the aggregate, would have a Company Material Adverse
Effect. Except as disclosed in Section 5.9 of the Company Disclosure Schedule,
there are no disputes or grievances subject to any grievance procedure, unfair
labor practice proceedings, arbitration or litigation under such Company
Benefit Plans, which have not been finally resolved, settled or otherwise
disposed of, nor is there any default, or any condition which, with notice or
lapse of time or both, would constitute such a default, under any such Plans,
by the Company or its subsidiaries or ERISA Affiliates or, to the best
knowledge of the Company and its subsidiaries, any other party thereto, which
failure to resolve, settle or otherwise dispose of, or which default, alone or
in the aggregate, would have a Company Material Adverse Effect. Since December
31, 1994, there have been no strikes, lockouts or work stoppages or slowdowns,
or to the best knowledge of the Company and its subsidiaries, jurisdictional
disputes or except as set forth in Section 5.9 of the Company Disclosure
Schedule organizing activity occurring or threatened with respect to the
business or operations of the Company or its subsidiaries which have had or
would have a Company Material Adverse Effect.
Section 5.10 ERISA. All Company Benefit Plans have been administered in
accordance, and are in compliance, with the applicable provisions of ERISA,
except where such failures to administer or comply would not have a Company
Material Adverse Effect. Except as disclosed in Section 5.10 of the Company
Disclosure Schedule, each of the Company Benefit Plans which is intended to
meet the requirements of Section 401(a) of the Code has been determined by the
Internal Revenue Service to be "qualified," within the meaning of such section
of the Code, and the Company knows of no fact which is likely to have an
adverse effect on the qualified status of such plans. Except with respect to
the SEIU Local 36 Pension Plan as to which the Company makes no representation,
none of the Company Benefit Plans which are defined benefit pension plans have
incurred any "accumulated funding deficiency" (whether or not waived) as that
term is defined in Section 412 of the Code and the fair market value of the
assets of each such plan equal or exceed the accrued liabilities of such plan.
To the best knowledge of the Company, except with respect to the SEIU Local 36
Pension Plan as to which the Company makes no representation, there are not now
nor have there been any non-exempt "prohibited transactions," as such term is
defined in Section 4975 of the Code or Section 406 of ERISA, involving the
Company's Benefit Plans which could subject the Company, its subsidiaries,
ERISA Affiliates or Parent to the penalty or tax imposed under Section 502(i)
of ERISA or Section 4975 of the Code. No Company Benefit Plan which is subject
to Title IV of ERISA has been completely or partially terminated; no
proceedings to completely or partially terminate any Company Benefit Plan have
been instituted within the meaning of Subtitle C of said Title IV of ERISA; and
no reportable event within the meaning of Section 4043(b) of said Subtitle C of
ERISA has occurred with respect to any Company Benefit Plan except, in each
case that the Company makes no representation with respect to the SEIU Local 36
Pension Plan. Neither the Company nor any of its subsidiaries or ERISA
Affiliates has made a complete or partial withdrawal, within the meaning of
Section 4201 of ERISA, from any multiemployer plan which has resulted in, or is
reasonably expected to result in, any withdrawal liability to the Company or
any of its subsidiaries except for any such liability which would not have a
Company Material Adverse Effect. Neither the Company nor any of its
subsidiaries or ERISA Affiliates has engaged in any transaction described in
Section 4069 of ERISA within the last five years except for any such
transaction which would not have a Company Material Adverse Effect.
Section 5.11 Takeover Provisions Inapplicable. Assuming the representation in
Section 4.9 is accurate, as of the date hereof and at all times on or prior to
the Effective Date, Section 203 of the DGCL is, and shall be, inapplicable to
the Merger and the transactions contemplated by this Merger Agreement.
Section 5.12 Fairness Opinion. The Company has received the written opinion
of Lazard Freres & Co., financial advisors to the Company, dated the date
hereof, to the effect that the consideration to be received by the Company's
shareholders is fair to the shareholders of the Company from a financial point
of view.
A-18
<PAGE>
Section 5.13 Financial Advisor. The Company represents and warrants that, (a)
except for Lazard Freres & Co., no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or the transactions contemplated by this Merger Agreement based
upon arrangements made by or on behalf of the Company, and (b) the fees and
commissions payable to Lazard Freres & Co., as contemplated by this Section
will not exceed the aggregate amount set forth in the letter dated March 15,
1995, from Lazard Freres & Co. to the Company (a complete and correct copy of
which has been delivered to Parent as an attachment to Section 5.13 of the
Company Disclosure Schedule).
Section 5.14 Compliance with Applicable Laws. The Company and its
subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities, including, without limitation,
applicable state insurance and health commissions, except for such permits,
licenses, variances, exemptions, orders and approvals the failure of which to
hold would not have a Company Material Adverse Effect (the "Company Permits").
The Company and its subsidiaries are in compliance with the terms of the
Company Permits, except for such failures to comply, which singly or in the
aggregate, would not have a Company Material Adverse Effect. Except as
disclosed in the Company SEC Reports filed prior to the date of this Merger
Agreement or in Section 5.14 of the Company Disclosure Schedule, the businesses
of the Company and its subsidiaries are not being conducted in violation of any
law, ordinance or regulation of any Governmental Entity, including, without
limitation, applicable state insurance and health commissions, except for
possible violations which individually or in the aggregate do not and would not
have a Company Material Adverse Effect. Except as disclosed in Section 5.14 of
the Company Disclosure Schedule, no investigation or review by any Governmental
Entity, including, without limitation, applicable state insurance and health
commissions, with respect to the Company or any of its subsidiaries is pending,
or, to the knowledge of the Company, threatened, nor has any Governmental
Entity, including, without limitation, applicable state insurance and health
commissions, indicated an intention to conduct the same, other than those the
outcome of which would not have a Company Material Adverse Effect.
Section 5.15 Liabilities. Except as disclosed in Section 5.15 of the Company
Disclosure Schedule, neither the Company nor any of its subsidiaries has any
material liabilities or obligations (absolute, accrued, contingent or
otherwise) that would be required to be reflected on, or reserved against in, a
balance sheet of the Company, or disclosed in the notes thereto, prepared in
accordance with the published rules and regulations of the Commission regarding
Quarterly Statements on Form 10-Q and Annual Statements on Form 10-K and
generally accepted accounting principles, except (a) as otherwise reported in
the consolidated financial statements contained in the Company SEC Reports or
(b) for liabilities or obligations incurred in the ordinary course of business
since December 31, 1994, that would not have a Company Material Adverse Effect.
Section 5.16 Taxes. Each of the Company and its subsidiaries has filed all
tax returns (including, without limitation, estimated tax returns) required to
be filed by any of them (other than for returns, the due date for the filing of
which, including extensions, has not yet passed) and has paid (or the Company
has paid on its behalf), or has set up an adequate reserve for the payment of,
all taxes (including, without limitation, estimated taxes) required to be paid
in respect of the periods covered by such returns (except (a) where the failure
to pay would not have a Company Material Adverse Effect, (b) in the case of
failure to file any return with any state or local taxing authority (other than
any return required to be filed with respect to income taxes, franchise taxes
imposed in lieu of income taxes, sales taxes and employment taxes by the
Company, DPSI, HCS or HPI with the States of Arizona, California and New Mexico
and the Commonwealth of Pennsylvania), where such failure would not have a
Company Material Adverse Effect and (c) in the case of failure to file any
return required to be filed with respect to income taxes, franchise taxes
imposed in lieu of income taxes, sales taxes and employment taxes by the
Company, DPSI, HCS or HPI with the States of Arizona, California and New Mexico
and the Commonwealth of Pennsylvania, where such failures would not subject the
Company and such subsidiaries to liability attributable solely to failure to
file in excess of $100,000 in the aggregate). The information contained in such
tax returns is true, complete and accurate, except where a failure to be so
would not have a Company Material Adverse Effect. Except as disclosed in
A-19
<PAGE>
Section 5.16 of the Company Disclosure Schedule, neither the Company nor any
subsidiary of the Company is delinquent in the payment of any tax, assessment
or governmental charge, except where such delinquency would not have a Company
Material Adverse Effect. Except as disclosed in Section 5.16 of the Company
Disclosure Schedule, no deficiencies for any taxes have been proposed, asserted
or assessed against the Company or any of its subsidiaries that have not been
finally settled or paid in full, which would have a Company Material Adverse
Effect, and no requests for waivers of the time to assess any such tax are
pending. The federal income tax returns of the Company and each of its
subsidiaries consolidated in such returns for periods through March 31, 1990
have been examined by and settled with the Internal Revenue Service or are
considered closed years for federal income tax purposes. Neither the Company
nor any of its subsidiaries is a party to or obligated under any agreement,
commitment or arrangement that could in connection with the transactions
contemplated hereby require the payment of any "excess parachute payment"
within the meaning of section 280G of the Code. Neither the Company nor any of
its subsidiaries (a) has filed a consent under section 341(f) of the Code
concerning collapsible corporations or (b) been a member of an affiliated,
combined, unitary group, other than a group the common parent of which is the
Company, or has any liability for taxes of any other person under Treasury
Regulation section 1.1502-6 or any similar provision of state, local or foreign
law, as transferee or successor, by contract or otherwise. For the purposes of
this Merger Agreement, the term "tax" shall include all federal, state, local
and foreign income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise and other taxes, duties and
assessments of any nature whatsoever together with all interest, penalties and
additions imposed with respect to such amounts.
Section 5.17 Certain Agreements.
(a) Except as disclosed in the Company SEC Reports filed prior to the date of
this Merger Agreement or in Section 5.17 of the Company Disclosure Schedule,
neither the Company nor any of its subsidiaries is a party to any oral or
written (i) agreement, contract, indenture or other instrument relating to
Indebtedness (as defined below) in an amount outstanding exceeding $1,000,000,
(ii) agreement which, after giving effect to the transactions contemplated by
this Merger Agreement, purports to restrict or bind Parent or any of its
subsidiaries (other than the Surviving Corporation and its subsidiaries but
only to the extent such agreement would bind or restrict the Company and/or one
or more of its subsidiaries without regard to the consummation of this Merger
Agreement) in any respect that could have a Parent Material Adverse Effect or
(iii) contract, agreement or commitment (except those entered into in the
ordinary course of business) having a Company Material Adverse Effect. For
purposes of this Merger Agreement, "Indebtedness" means any liability in
respect of (A) borrowed money, (B) capitalized lease obligations, (C) the
deferred purchase price of property or services (other than trade payables in
the ordinary course of business) and (D) guarantees of any of the foregoing.
Except as disclosed in Section 5.17 of the Company Disclosure Schedule, neither
the Company nor any of its subsidiaries is in default (or would be in default
with notice or lapse of time, or both) under any indenture, note, credit
agreement, loan document, lease, license or other agreement including, but not
limited to, any Company Benefit Plan, whether or not such default has been
waived, which default, alone or in the aggregate with other such defaults,
would have a Company Material Adverse Effect.
(b) Section 5.17 of the Company Disclosure Schedule contains a list of (i)
each of the customers of HCS who as a group constitute such subsidiary's 30
highest revenue producing customers for the nine months ended December 31,
1994, (ii) each of the customers of HPI who as a group constitute such
subsidiary's 30 highest revenue producing customers for the nine months ended
December 31, 1994 and (iii) each of the pharmaceutical suppliers of the Company
and its subsidiaries who as a group constitute the 30 most significant
pharmaceutical suppliers to the Company and its subsidiaries taken as a whole
(as measured by the dollar amounts paid to such pharmaceutical suppliers during
the nine months ended December 31, 1994).
(c) The Company has made available to Parent a true and complete copy of each
agreement between the Company or any subsidiary of the Company and any employee
or consultant which (i) in any year could involve the payment of $50,000 or
more to any such employee, or $100,000 or more to any such
A-20
<PAGE>
consultant or (ii) is not terminable by the Company or a subsidiary of the
Company without additional liability upon notice of 90 days or less.
Section 5.18 Patents, Trademarks, etc. The Company and its subsidiaries have
all patents, trademarks, trade names, service marks, trade secrets, copyrights
and licenses and other proprietary intellectual property rights and licenses as
are necessary in connection with the businesses of the Company and its
subsidiaries, the lack of which would have a Company Material Adverse Effect,
and except as disclosed in Section 5.18 of the Company Disclosure Statement,
the Company does not have any knowledge of any conflict with the rights of the
Company and its subsidiaries therein or any knowledge of any conflict by them
with the rights of others therein which, insofar as reasonably can be foreseen,
could have a Company Material Adverse Effect.
Section 5.19 Accounting Matters. Neither the Company nor, to its best
knowledge, any of its affiliates, has through the date hereof, taken or agreed
to take any action that would prevent Parent from accounting for the business
combination to be effected by the Merger as a "pooling of interests." The
Company has received a letter from KPMG Peat Marwick LLP, a copy of which is
attached to Section 5.19 of the Company Disclosure Schedule, to the effect that
the Merger will qualify for "pooling of interests" accounting treatment if
consummated in accordance with this Merger Agreement and if the operations of
Parent and the Surviving Corporation are conducted in a manner that do not
violate "pooling of interests" accounting treatment.
Section 5.20 Investment Company Act. The Company is not an "investment
company" within the meaning of the Investment Company Act of 1940.
Section 5.21 Properties, Liens. The Company and its subsidiaries own or lease
all of their respective tangible and intangible properties, real and personal,
free and clear of any liens, claims, charges, options or other encumbrance (it
being understood that, with respect to leased properties, such representation
regarding the absence of liens, claims, charges, options or other encumbrances
relates only to the leasehold interest of Company or its subsidiary), except
for (a) statutory mechanics and materialmen's liens (b) liens for current taxes
not yet delinquent and (c) liens to secure Indebtedness created solely to
finance the acquisition of the property subject thereto, the existence of
which, are not reasonably likely to result in a Company Material Adverse
Effect. All buildings, structures and equipment owned or leased by the Company
or its subsidiaries are in satisfactory condition and repair for the
requirements of its business as now being conducted, except where the failure
to be in such condition and repair would not have a Company Material Adverse
Effect. There are no proceedings affecting any of such properties pending or
threatened which may reasonably be expected to curtail the use of such property
for the purpose for which it was acquired or the purpose for which it is now
used, except where such curtailment would not have a Company Material Adverse
Effect. Section 5.21 of the Company Disclosure Schedule lists all real property
owned or leased by the Company. The Company has delivered to Parent complete
and correct copies of all leases of real or personal property to which the
Company or any of its subsidiaries is a party and which involve payment by or
to the Company or any of its subsidiaries in excess of $150,000 per any 12-
month period.
Section 5.22 Environmental Liability.
(a) The businesses of the Company and its subsidiaries have been and are
operated in material compliance with all applicable statutory or regulatory
requirements of all Governmental Entities with jurisdiction over the
environment or over workplace health and safety, and neither the Company nor
any of its subsidiaries has caused or allowed the generation, treatment,
storage, release or disposal of hazardous substances except in accordance with
such statutes and regulations as they existed at the time of such generation,
treatment, storage, release or disposal.
(b) Neither the Company nor its subsidiaries has received any written notice
or, to the best knowledge of the Company, any other communication, from any
Governmental Entity alleging or concerning any violation by the Company or any
of its subsidiaries of, or responsibility or liability of the Company or any of
its subsidiaries under, any statute or regulation relating to the environment.
There are no pending or, to the best knowledge of the Company, threatened,
claims, suits, proceedings or investigations with respect to the
A-21
<PAGE>
businesses or operations of the Company or any of its subsidiaries alleging or
concerning any violation of or responsibility or liability under any statutes
or regulations relating to the environment, nor does the Company have any
knowledge of any fact or condition which might reasonably be expected to give
rise to such a claim, suit, proceeding or investigation.
(c) The Company and its subsidiaries are in possession of all material
approvals, permits and licenses from all Governmental Entities under statutes
and regulations relating to the environment and to workplace health and safety
with respect to the operation of the businesses of the Company and its
subsidiaries; there are no pending or, to the best knowledge of the Company,
threatened, actions, proceedings or investigations seeking to revoke or deny
renewal of any of such approvals, permits and licenses; nor does the Company
have knowledge of any fact or condition which might reasonably be expected to
give rise to any action, proceeding or investigation to revoke or deny renewal
of such approvals, permits or licenses if such revocation or denial would
constitute a Company Material Adverse Effect.
Section 5.23 Certain Relationships. All billings made to customers and
suppliers of the Company or any subsidiary have been properly computed and
billed in compliance with applicable laws, rules, regulations, agreements, and
procedures, and no such customer has any right to any refund, price or fee
adjustments, offsets, or similar right with respect to any such charges, except
where the failure to so comply or the amount of such right would not have a
Company Material Adverse Effect.
Section 5.24 Insurance. Section 5.24 of the Company Disclosure Schedule
contains a complete list of all of the Company's current insurance policies and
bonds and sets forth for each such policy and bond the name of the insurance
company, the name of the insured, the name of any additional insureds, the
amount and type of coverage, and, if greater than $10,000, the amount of the
deductible or retention, if any.
Section 5.25 Certain Healthcare Regulatory Matters.
(a) To the best knowledge of the Company, the Company and its subsidiaries
have not engaged knowingly and willfully in any activities which are prohibited
under federal Medicare and Medicaid statutes, including, without limitation, 42
U.S.C. (S) 1320a-7b and 42 U.S.C. (S) 1395nn or related state or local statutes
or regulations or which otherwise constitutes fraud, including, without
limitation, the following: (i) 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; (ii) 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; (iii) knowingly and willfully
failing to disclose knowledge of the occurrence of any event affecting the
initial or continued right to any benefit or payment on its behalf or on behalf
of another, with intent to secure such benefit or payment fraudulently; (iv)
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 such remuneration (a) 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 (b) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility, service, or item for which payment may be made in whole or in
part by Medicare or Medicaid.
(b) The Company and its subsidiaries have complied and are in compliance, in
all material respects, with applicable state laws regulating pharmacies.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES REGARDING SUB
Parent and Sub jointly and severally represent and warrant to the Company as
follows:
Section 6.1 Organization. Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Sub has
not engaged in any business (other than certain organizational matters) since
it was incorporated.
A-22
<PAGE>
Section 6.2 Capitalization. The authorized capital stock of Sub consists of
1,000 shares of common stock, par value $0.01 per share, 100 shares of which
are validly issued and outstanding, fully paid and nonassessable and are owned
by Parent free and clear of all liens, claims and encumbrances.
Section 6.3 Authority Relative to This Merger Agreement. Sub has the
corporate power to enter into this Merger Agreement and to carry out its
obligations hereunder. The execution and delivery of this Merger Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by its Board of Directors and sole shareholder, and no other
corporate proceedings on the part of Sub are necessary to authorize this Merger
Agreement and the transactions contemplated hereby. Except as referred to
herein or in connection, or in compliance, with the provisions of the HSR Act,
the Securities Act, the Exchange Act and the environmental, corporation,
securities or blue sky laws or regulations of the various states, no filing or
registration with, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by Sub of the Merger or the
transactions contemplated by this Merger Agreement, other than filings,
registrations, authorizations, consents or approvals the failure to make or
obtain would not prevent the consummation of the transactions contemplated
hereby.
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
Section 7.1 Conduct of Business by the Company Pending the Merger. Prior to
the Effective Date, unless Parent shall otherwise agree in writing:
(a) The Company shall, and shall cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause its subsidiaries to, use their reasonable best efforts to preserve
intact their present business organizations, keep available the services of
their present officers and key employees and preserve their relationships
with customers, suppliers and others having business dealings with them to
the end that their goodwill and on-going businesses shall be unimpaired at
the Effective Date, except such impairment as would not have a Company
Material Adverse Effect. The Company shall, and shall cause its
subsidiaries to use their reasonable best efforts to, (i) maintain
insurance coverages and its books, accounts and records in the usual manner
consistent with prior practices; (ii) comply in all material respects with
all laws, ordinances and regulations of Governmental Entities applicable to
the Company and its subsidiaries; (iii) maintain and keep its properties
and equipment in good repair, working order and condition, ordinary wear
and tear excepted; and (iv) perform in all material respects its
obligations under all contracts and commitments to which it is a party or
by which it is bound, in each case other than where the failure to so
maintain, comply or perform, either individually or in the aggregate, would
result in a Company Material Adverse Effect;
(b) except as required by this Merger Agreement, the Company shall not
and shall not propose to (i) sell or pledge or agree to sell or pledge any
capital stock owned by it in any of its subsidiaries, (ii) amend its
Certificate of Incorporation or Bylaws, (iii) split, combine or reclassify
its outstanding capital stock or issue or authorize or propose the issuance
of any other securities in respect of, in lieu of or in substitution for
shares of capital stock of the Company, or declare, set aside or pay any
dividend or other distribution payable in cash, stock or property, or (iv)
directly or indirectly redeem, purchase or otherwise acquire or agree to
redeem, purchase or otherwise acquire any shares of Company capital stock;
(c) the Company shall not, nor shall it permit any of its subsidiaries
to, (i) except as required by this Merger Agreement, issue, deliver or sell
or agree to issue, deliver or sell any additional shares of, or rights of
any kind to acquire any shares of, its capital stock of any class, any
Indebtedness (other than pursuant to existing lines of credit for use in
the ordinary course of business and consistent with past practices) or any
option, rights or warrants to acquire, or securities convertible into,
shares of capital
A-23
<PAGE>
stock other than issuances of Company Common Stock disclosed in Section 7.1
of the Company Disclosure Schedule; (ii) acquire, lease or dispose or agree
to acquire, lease or dispose of any capital assets or any other assets
other than in the ordinary course of business, (iii) incur additional
Indebtedness or encumber or grant a security interest in any asset or enter
into any other material transaction other than in each case in the ordinary
course of business; (iv) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in, or
by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, in each
case in this Clause (iv) which are material, individually or in the
aggregate, to the Company and its subsidiaries taken as a whole, except
that the Company may create new wholly-owned subsidiaries in the ordinary
course of business; or (v) enter into any contract, agreement, commitment
or arrangement with respect to any of the foregoing;
(d) except as disclosed in the Company Disclosure Schedule, the Company
shall not, nor shall it permit, any of its subsidiaries to, except as
required to comply with applicable law or pursuant to the terms of existing
agreements that were not required to be included in the Company Disclosure
Schedule, (i) adopt, enter into, terminate or amend any bonus, profit
sharing, compensation, severance, termination, stock option, pension,
retirement, deferred compensation, employment or other Company Benefit
Plan, agreement, trust, fund or other arrangement for the benefit or
welfare of any director, officer or current or former employee, (ii)
increase in any manner the compensation or fringe benefit of any director,
officer or employee (except for normal increases in the ordinary course of
business that are consistent with past practice and that, in the aggregate,
do not result in a material increase in benefits or compensation expense to
the Company and its subsidiaries relative to the level in effect prior to
such amendment), (iii) pay any benefit not provided under any existing plan
or arrangement, (iv) grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or Company Benefit
Plan (including, without limitation, the grant of stock options, stock
appreciation rights, stock based or stock related awards, performance units
or restricted stock, or the removal of existing restrictions in any benefit
plans or agreements or awards made thereunder) (other than such plans and
arrangements (other than stock options) which are made in the ordinary
course of business consistent with past practice), (v) take any action to
fund or in any other way secure the payment of compensation or benefits
under any employee plan, agreement, contract or arrangement or Company
Benefit Plan other than in the ordinary course of business consistent with
past practice, or (vi) adopt, enter into, amend or terminate any contract,
agreement, commitment or arrangement to do any of the foregoing, provided,
however, that nothing contained herein shall prevent the Company or any of
its subsidiaries from paying any bonus to or increasing the compensation of
any employee in accordance with the terms of any employment agreement for
such employee that was provided to Parent prior to the date hereof;
(e) the Company shall not, nor shall it permit any of its subsidiaries
to, (i) make any investments in non-investment grade securities exceeding
$1,000,000 or (ii) sell, at a loss of greater than $50,000, any debt
securities held for investment purposes;
(f) the Company shall not, nor shall it permit any of its subsidiaries to
form any corporation, partnership, joint venture or other business
association or entity, provided, however, that the Company may form a
wholly owned subsidiary with the prior written consent of Parent, which
consent shall not be unreasonably withheld; and
(g) the Company shall not, nor shall it permit any of its subsidiaries
to, take or cause to be taken any action, which would disqualify the Merger
as a "pooling of interests" for accounting purposes.
Section 7.2 Conduct of Business by Parent Pending the Merger. Prior to the
Effective Date, unless the Company shall otherwise agree in writing or except
as otherwise required by this Merger Agreement:
(a) Parent shall, and shall cause its Significant Subsidiaries to, use
their reasonable best efforts to preserve their relationships with
customers, suppliers and others having business dealings with them to the
end that their goodwill and on-going businesses shall be unimpaired at the
Effective Date, except
A-24
<PAGE>
such impairment as would not have a Parent Material Adverse Effect. Parent
shall, and shall cause its Significant Subsidiaries to use their reasonable
best efforts to, (i) maintain insurance coverages and its books, accounts
and records in the usual manner consistent with prior practices; (ii)
comply in all material respects with all laws, ordinances and regulations
of Governmental Entities applicable to Parent and its Significant
Subsidiaries; (iii) maintain and keep its properties and equipment in good
repair, working order and condition, ordinary wear and tear excepted; and
(iv) perform in all material respects its obligations under all contracts
and commitments to which it is a party or by which it is bound, in each
case other than where the failure to so maintain, comply or perform, either
individually or in the aggregate, would result in a Parent Material Adverse
Effect;
(b) Parent shall not amend any of the material terms or provisions of the
Parent Company Stock;
(c) Parent shall not take any action that would result in the failure to
maintain the trading of Parent Common Stock on the New York Stock Exchange;
(d) Parent shall not declare or pay any dividend or distribution on any
outstanding shares of its capital stock; and
(e) Parent shall not, nor shall it permit any of its subsidiaries to,
take, or cause to be taken, any action which would disqualify the Merger as
a "pooling of interests" for accounting purposes.
Section 7.3 Conduct of Business of Sub. During the period from the date of
this Merger Agreement to the Effective Date, Sub shall not engage in any
activities of any nature except as provided in or contemplated by this Merger
Agreement. Parent shall take all actions necessary to cause Sub to perform its
obligations under this Merger Agreement and to consummate the Merger on the
terms and conditions set forth herein.
Section 7.4 Notice of Breach. Each party shall promptly give written notice
to the other party upon becoming aware of the occurrence or, to its knowledge,
impending or threatened occurrence, of any event which would cause or
constitute a breach of any of its representations, warranties or covenants
contained or referenced in this Merger Agreement and will use all reasonable
efforts to prevent or promptly remedy the same. Any such notification shall not
be deemed an amendment of the Company Disclosure Schedule or the Parent
Disclosure Schedule.
Section 7.5 Notice Certain Changes of Events. Each party shall promptly give
written notice to the other party upon becoming aware of the occurrence or, to
its knowledge, impending or threatened occurrence, of any change in
circumstances or event which would cause or constitute, in the case of a
written notice by Parent, a Parent Material Adverse Effect or, in the case of a
written notice by the Company, a Company Material Adverse Effect.
ARTICLE VIII
ADDITIONAL AGREEMENTS
Section 8.1 Access and Information. Each of the Company and Parent and their
respective subsidiaries shall afford to the other and to the other's employees,
accountants, counsel and other representatives full access during normal
business hours (and at such other times as the parties may mutually agree)
throughout the period prior to the Effective Date to all of its properties,
books, contracts, commitments, records and personnel and, during such period,
each shall furnish promptly to the other (a) a copy of each report, schedule
and other document filed or received by it pursuant to the requirements of
federal or state securities laws, and (b) all other information concerning its
business, properties and personnel as the other may reasonably request
(including, without limitation, updated information on pending litigation). An
employee or agent of a party desiring access pursuant to this Section 8.1 shall
contact one of the representatives of the other party whose name is set forth
in Section 8.1 of such other party's Disclosure Schedule. Each of the Company
and Parent shall hold, and shall cause their respective employees and agents to
hold, in confidence all such information in accordance with the terms of the
confidentiality agreement dated January 11, 1995 between Parent and the Lazard
Freres & Co. on behalf of the Company.
Section 8.2 Registration Statement/Proxy Statement.
(a) As promptly as practicable after the execution of this Merger Agreement,
the Company and Parent shall prepare and file with the Commission preliminary
proxy materials which shall constitute the preliminary
A-25
<PAGE>
Proxy Statement and a preliminary prospectus with respect to the Parent Common
Stock to be issued in connection with the Merger. As promptly as practicable
after comments are received from the Commission with respect to the preliminary
proxy materials and after the furnishing by the Company and Parent of all
information required to be contained therein, the Company shall file with the
Commission the definitive Proxy Statement and Parent shall file with the
Commission the definitive Proxy Statement and the Registration Statement and
Parent and the Company shall use all reasonable efforts to cause the
Registration Statement to become effective as soon thereafter as practicable.
(b) Parent and the Company shall make all necessary filings with respect to
the Merger and the Parent Share Proposal, under the Securities Act and the
Exchange Act and the rules and regulations thereunder, and under applicable
blue sky or similar securities laws and shall use all reasonable efforts to
obtain required approvals and clearances with respect thereto.
Section 8.3 Compliance with the Securities Act.
(a) Prior to the Effective Date, the Company shall deliver to Parent a letter
identifying all persons who were, at the time of the Company Shareholders'
Meeting convened in accordance with Section 3.6, "affiliates" of the Company as
that term is used in paragraphs (c) and (d) of Rule 145 under the Securities
Act (the "Affiliates"). In identifying such Affiliates, the Company shall
consult with counsel, which counsel shall be satisfactory to counsel for
Parent.
(b) The Company shall obtain a written agreement from each person who is
identified as an Affiliate in the letter referred to in clause (a) above, in
the form previously approved by the parties, that he or she will not offer to
sell, sell or otherwise dispose of any Parent Common Stock issued to him or her
pursuant to the Merger, except in compliance with Rule 145 or another exemption
from the registration requirements of the Securities Act. The Company shall
deliver such written agreements to Parent on or prior to the Effective Date.
The Company shall use its best efforts to cause each person who is identified
as an Affiliate in such opinion to deliver to Parent, on or prior to the
earlier of (i) the mailing of the Proxy Statement/Prospectus or (ii) the 30th
day prior to the Effective Date, a written agreement, in the form to be
approved by the parties hereto, that such Affiliate will not thereafter sell or
in any other way reduce such Affiliate's risk relative to any Parent Common
Stock received in the Merger (within the meaning of the Commission's Financial
Reporting Release No. l, "Codification of Financing Reporting Policies,"
(S) 201.01 (47 F.R. 21030) (April 15, 1982)), until such time as financial
results (including combined sales and net income) covering at least 30 days of
post-merger operations have been published, except as permitted by Staff
Accounting Bulletin No. 76 issued by the Commission. Within 45 days after the
end of the first fiscal quarter of Parent ending at least 30 days after the
Effective Date, Parent will publish results including at least 30 days of
combined operations of Parent and the Company as referred to in the written
agreements provided for by this Section 8.3(b).
Section 8.4 Stock Exchange Listing. Parent shall use its best efforts to list
on the NYSE, upon official notice of issuance, the Parent Common Stock to be
issued pursuant to the Merger.
Section 8.5 Employee Matters.
(a) Subject to the provisions of subsection (b) of this Section 8.5, Parent
shall take all actions necessary or appropriate to permit the employees of the
Company and its subsidiaries on the Effective Date ("Affected Employees") to
participate after the Effective Date in those of Parent's employee benefit
programs that are comparable to Company employee benefit programs and to cause
the Surviving Corporation to take all actions necessary or appropriate to adopt
such Parent employee benefit programs effective as of the Effective Date.
Parent will cause the Surviving Corporation to give each Affected Employee full
credit for service with the Company for purposes of eligibility to participate
in, vesting and payment of benefits under, and eligibility for any Parent-
subsidized benefit provided under (but not, except as provided in the preceding
clause for purposes of determining the amount of any benefit under), any such
Parent employee benefit program.
A-26
<PAGE>
(b) After the Effective Date, Parent shall have a reasonable period not to
exceed one year (the "Review Period") in which to review all of the employee
and fringe benefit plans maintained by the Company or any of its subsidiaries
(the "Company Plans") for compatibility and consistency with Parent's employee
benefit programs. During the Review Period, Parent may determine to have the
Surviving Corporation continue in effect any one or more of the Company Plans,
amend or modify any one or more of the Company Plans, merge one or more of the
Company Plans into a comparable Parent employee benefit plan adopted by the
Surviving Corporation or terminate any one or more of the Company Plans in its
or their entirety. Any such amendment, modification or termination shall not
deprive any Affected Employee of any benefit in which such Affected Employee
has become entitled to immediately prior to the Effective Date. If the
Surviving Corporation is continuing in effect any of the Company Plans during
the Review Period, then (i) neither it nor Parent shall be obligated to adopt a
comparable Parent employee benefit plan for Affected Employees, it being
intended by the parties that there be no duplication of benefits, and (ii) the
obligation to have the Surviving Corporation adopt the comparable Parent
employee benefit plan or program, as set out in subsection (a) above, shall
arise, and such adoption shall be effective only as of the date the comparable
Company Plan is discontinued and not as of the Effective Date. If Parent does
not maintain an employee benefit plan comparable to one of the Company Plans,
there shall be no obligation to adopt any plan or program upon the
discontinuance or termination of such Company Plan.
(c) Parent acknowledges the existence and continuing obligations of HCS under
the collective bargaining agreements listed on Section 5.9 of the Company
Disclosure Schedule. Notwithstanding the foregoing, nothing contained in this
Merger Agreement shall be construed under any circumstances as imposing on
Parent or any of its subsidiaries (other than HCS after the Effective Date) any
obligation or liability under such collective bargaining agreements.
Section 8.6 Registration of Securities. Parent promptly shall prepare and
file with the Commission a registration statement under the Securities Act
covering the shares of Parent Common Stock issuable to directors, officers or
employees of the Company upon exercise of the Outstanding Options pursuant to
the provisions of Section 3.5 (the "Employee Shares Registration Statement").
Subsequent to the Effective Date, Parent will use all reasonable efforts to (a)
cause the Employee Shares Registration Statement to become effective and (b) to
the extent required by law, keep the Employee Shares Registration Statement
current and effective under the Securities Act.
Section 8.7 Indemnification of Directors and Officers.
(a) The Certificate of Incorporation of the Surviving Corporation shall
contain the provision with respect to indemnification set forth in the
Certificate of Incorporation of the Company on the date of this Agreement,
which provisions shall not be amended, repealed or otherwise modified for a
period of six years after the Effective Date in any manner that would adversely
affect the rights thereunder of individuals who at the Effective Date were
directors or officers of the Company in respect of actions or omissions
occurring at or prior to the Effective Date (including, without limitation, the
transactions contemplated by this Agreement), unless such modification is
required by law.
(b) From and after the Effective Date, Parent shall, and shall cause the
Surviving Corporation to, indemnify, defend and hold harmless the present and
former officers and directors of the Company (collectively, the "Indemnified
Parties") against all losses, expenses, claims, damages, liabilities or amounts
that are paid in settlement of, with the approval of Parent and the Surviving
Corporation, or otherwise in connection with any claim, action, suit,
proceeding or investigation (a "Claim"), based in whole or in part on the fact
that such person is or was a director or officer of the Company and arising out
of actions or omissions occurring at or prior to the Effective Date (including,
without limitation, the transactions contemplated by this Agreement), in each
case to the full extent permitted under the DGCL (and shall pay expenses in
advance of the final disposition of any such action or proceeding to each
Indemnified Party to the fullest extent permitted under DGCL, upon receipt from
the Indemnified Party to whom expenses are advanced of the undertaking to repay
such advances contemplated by Section 145(e) of the DGCL).
A-27
<PAGE>
(c) Any Indemnified Party wishing to claim indemnification under this Section
8.7, upon learning of any such Claim, shall notify Parent (although the failure
so to notify Parent shall not relieve Parent from any liability which Parent
may have under this Section 8.7 except to the extent such failure prejudices
Parent), and shall deliver to Parent the undertaking contemplated by Section
145(e) of the DGCL.
(d) Parent shall use its reasonable best efforts to cause to be maintained in
effect for not less than three years after the Effective Date the current
policies of directors' and officers' liability insurance maintained by the
Company with respect to matters occurring prior to the Effective Date;
provided, however, that (i) Parent may substitute therefor policies of
substantially similar coverage containing substantially similar terms and
conditions for the Indemnified Parties to the extent reasonably available and
(ii) Parent shall not be required to pay an annual premium for such insurance
in excess of 150% of the last annual premium paid prior to the date hereof, but
in such case shall purchase as much coverage as possible for such amount.
(e) This Section 8.7 is intended to be for the benefit of, and shall be
enforceable by, the Indemnified Parties, their heirs and personal
representatives and shall be binding on Parent and the Surviving Corporation
and their respective successors and assigns.
Section 8.8 HSR Act. The Company and Parent shall use all reasonable efforts
to file as soon as practicable notifications under the HSR Act in connection
with the Merger and the transactions contemplated hereby and to respond as
promptly as practicable to any inquiries received from the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") for additional information or documentation and to
respond as promptly as practicable to all inquiries and requests received from
any State Attorney General or other governmental authority in connection with
antitrust matters.
Section 8.9 Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Merger
Agreement, including using all reasonable efforts to obtain all necessary
waivers, consents and approvals, to effect all necessary registrations and
filings (including, but not limited to, filings under the HSR Act and with all
applicable Governmental Entities) and to lift any injunction or other legal bar
to the Merger (and, in such case, to proceed with the Merger as expeditiously
as possible), subject, however, in the case of the Merger Agreement and the
Parent Share Proposal, to the appropriate vote of the shareholders of the
Company and Parent. Notwithstanding the foregoing, there shall be no action
required to be taken and no action will be taken in order to consummate and
make effective the transactions contemplated by this Merger Agreement if such
action, either alone or together with another action, would result in a Company
Material Adverse Effect or a Parent Material Adverse Effect.
Section 8.10 No Solicitation. Subject to the fiduciary duties of the Board of
Directors of the Company, as advised by outside counsel, neither the Company
nor any of its subsidiaries shall, directly or indirectly, take (nor shall the
Company authorize or permit its subsidiaries, officers, directors, employees,
representatives, investment bankers, attorneys, accountants or other agents or
affiliates, to take) any action to (a) encourage, solicit or initiate the
submission of any Acquisition Proposal (as defined below), (b) enter into any
agreement with respect to any Acquisition Proposal or (c) participate in any
way in discussions or negotiations with, or furnish any information to, any
person in connection with, or take any other action to facilitate any inquiries
or the making of any proposal that constitutes, or may reasonably be expected
to lead to, any Acquisition Proposal. The Company will promptly communicate to
Parent any solicitation by the Company and the terms of any proposal or
inquiry, including the identity of the person and its affiliates making the
same, that it may receive in respect of any such transaction, or of any such
information requested from it or of any such negotiations or discussions being
sought to be initiated with it. For purposes of this Merger Agreement,
"Acquisition Proposal" shall mean any proposed (i) merger, consolidation or
similar
A-28
<PAGE>
transaction involving the Company, (ii) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise of
assets of the Company or its subsidiaries representing 25% or more of the
consolidated assets of the Company and its subsidiaries, (iii) issue, sale, or
other disposition of (including by way of merger, consolidation, share exchange
or any similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into, such securities) representing 25% or
more of the voting power of the Company or (iv) transaction in which any person
shall acquire beneficial ownership (as such term is defined in Rule 13d-3 under
the Exchange Act), or the right to acquire beneficial ownership or any "group"
(as such term is defined under the Exchange Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of 25% or
more of the outstanding Company Common Stock.
ARTICLE IX
CONDITIONS PRECEDENT
Section 9.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the following conditions:
(a) This Merger Agreement and the transactions contemplated hereby shall
have been approved and adopted by the requisite vote of the holders of the
Company Common Stock.
(b) The Parent Share Proposal shall have been approved by the requisite
vote of the holders of the Parent Common Stock.
(c) The Parent Common Stock issuable in the Merger shall have been
authorized for listing on the NYSE upon official notice of issuance.
(d) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
(e) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act. No stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and remain in effect.
(f) No preliminary or permanent injunction or other order by any federal
or state court in the United States which prevents the consummation of the
Merger shall have been issued and remain in effect.
(g) Parent and the Company shall have received updated letters from
Coopers & Lybrand L.L.P. and KPMG Peat Marwick LLP, dated not more than two
business days prior to the Effective Date, to the effect that the Merger
qualifies for "pooling of interests" accounting treatment if consummated in
accordance with this Merger Agreement and if the operations of Parent and
the Surviving Corporation are conducted in a manner that do not violate
"pooling of interests" accounting treatment.
Section 9.2 Conditions to Obligation of the Company to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by the Company:
(a) Parent and Sub shall have performed in all material respects their
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date and the representations and warranties of
Parent and Sub contained in this Merger Agreement shall be true when made
and on and as of the Effective Date as if made on and as of such date
(except to the extent they relate to a particular date, in which case they
shall remain true and correct as of such date), and the Company shall have
received a certificate of the President or Chief Executive Officer or a
Vice President of Parent and Sub to that effect.
A-29
<PAGE>
(b) The Company shall have received a favorable opinion of Cozen and
O'Connor, based upon certain factual representations of the Company,
Parent, Sub and, if available, holders of greater than five percent of
Company Common Stock reasonably requested by such counsel, dated the
Effective Date, to the effect that the Merger will constitute a
reorganization for federal income tax purposes within the meaning of
Section 368(a) of the Code and that accordingly:
(i) No gain or loss will be recognized by the shareholders of the
Company upon the conversion of their shares of Company Common Stock
into shares of Parent Common Stock pursuant to the terms of the Merger
(except to the extent cash is received in lieu of fractional shares);
(ii) The tax basis of the shares of Parent Common Stock received by
the shareholders of the Company on the conversion of Company Common
Stock pursuant to the Merger will be the same as the basis of the
shares of Company Common Stock converted (less any portion of such
basis allocable to any fractional interest in any share of Parent
Common Stock); and
(iii) The holding period of the Parent Common Stock into which shares
of Company Common Stock are converted will include the period that such
shares of Company Common Stock were held by the holder, provided such
shares were held as a capital asset by such holder.
(c) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 4.4 of
the Parent Disclosure Schedule shall have been obtained, and all filings
and notices set forth in Section 4.4 of the Parent Disclosure Schedule
shall have been submitted by Parent.
Section 9.3 Conditions to Obligations of Parent and Sub to Effect the Merger.
The obligations of Parent and Sub to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by Parent:
(a) The Company shall have performed in all material respects its
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date, the representations and warranties of the
Company contained in this Merger Agreement shall be true when made and,
except as contemplated or permitted by this Merger Agreement, the
representations and warranties contained in Sections 5.2, 5.3, 5.4, 5.5(b)
and 5.11 shall be true on and as of the Effective Date as if made on and as
of such date (except to the extent they relate to a particular date, in
which case they shall remain true and correct as of the applicable date
made); and Parent and Sub shall have received a certificate of the
President or Chief Executive Officer or a Vice President of the Company to
the foregoing effects.
(b) Parent shall have received a favorable opinion of Gibson, Dunn &
Crutcher, based upon certain factual representations of the Company,
Parent, Sub and, if available, holders of greater than five percent of
Company Common Stock reasonably requested by such counsel, dated the
Effective Date, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, and that the Company, Parent and Sub will each be a
party to that reorganization within the meaning of Section 368(b) of the
Code.
(c) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 5.4 of
the Company Disclosure Schedule shall have been obtained and to the extent
required to be submitted prior to the Effective Date, all filings and
notices set forth in Section 5.4 of the Company Disclosure Schedule shall
have been submitted by the Company.
(d) Audited financial statements of the Company and its subsidiaries for
the fiscal year ending March 31, 1995 will be available as soon as
reasonably practicable but not later than June 6, 1995.
A-30
<PAGE>
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.l Termination. This Merger Agreement may be terminated at any time
prior to the Effective Date, whether before or after approval by the
shareholders of the Company:
(a) by mutual consent of the Board of Directors of Parent and the Board
of Directors of the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated on or before September 15, 1995 (provided the terminating party
is not otherwise in material breach of its representations, warranties or
obligations under this Merger Agreement);
(c) by the Company if any of the conditions specified in Sections 9.1 and
9.2 have not been met or waived by the Company at such time as such
condition is no longer capable of satisfaction; or
(d) by Parent if any of the conditions specified in Sections 9.1 and 9.3
have not been met or waived by Parent at such time as such condition is no
longer capable of satisfaction.
(e) by Parent if any of the following shall have occurred:
(i) any person (other than Parent or any subsidiary of Parent) shall
have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), a tender offer or exchange offer to purchase any shares
of Company Common Stock such that, upon consummation of such offer,
such person would own or control 25% or more of the then outstanding
Company Common Stock and the Board of Directors of the Company, within
ten business days after such tender offer or exchange offer is so
commenced, either fails to recommend against acceptance of such tender
offer or exchange offer by its shareholders or takes no position with
respect to the acceptance of such tender offer or exchange offer by its
shareholders;
(ii) the Company or any subsidiary of the Company shall have
authorized, recommended, proposed or publicly announced an intention to
authorize, recommend or propose, or entered into, an agreement with any
person (other than Parent or any subsidiary of Parent) to (A) effect a
merger, consolidation or similar transaction involving the Company or
any of its material subsidiaries, (B) sell, lease or otherwise dispose
of assets of the Company or its subsidiaries representing 25% or more
of the consolidated assets of the Company and its subsidiaries or (C)
issue, sell or otherwise dispose of (including by way of merger,
consolidation, share exchange or any similar transaction) securities
(or options, rights or warrants to purchase, or securities convertible
into, such securities) representing 25% or more of the voting power of
the Company or any of its subsidiaries;
(iii) any person (other than Parent, any subsidiary of Parent or the
Company or any of its subsidiaries in a fiduciary capacity) shall have
acquired beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act) or the right to acquire beneficial ownership
of, or any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 25% or more of the then outstanding
Company Common Stock; or
(iv) the holders of Company Common Stock shall not have approved the
Merger Agreement at the meeting of such stockholders held for the
purpose of voting on the Merger Agreement or such meeting shall not
have been held prior to September 14, 1995 or shall have been canceled,
in each case after (A) any person (other than Parent or any subsidiary
of Parent) shall have publicly announced a proposal, or publicly
disclosed an intention to make a proposal, to engage in any transaction
described in clauses (i), (ii) or (iii) above or (B) the Company's
Board of Directors shall have withdrawn or modified in a manner adverse
to Parent the recommendation of the Company's Board of Directors that
the holders of the Company Common Stock approve the Merger Agreement
A-31
<PAGE>
and the Merger; provided that any communication by the Company as
contemplated by Regulation 14d-9(e) promulgated under the Exchange Act
shall not be deemed a withdrawal or modification of such
recommendation.
(f) by the Company (i) if its Board of Directors, in the exercise of its
fiduciary duties, accepts an Acquisition Proposal of the type specified in
(i), (ii) or (iii) of such term's definition, or (ii) upon the occurrence
of an event specified in paragraph (e)(iii) of this Section 10.1.
Section 10.2 Effect of Termination. In the event of termination of this
Merger Agreement by either Parent or the Company, as provided above, this
Merger Agreement shall forthwith become void and (except for the willful breach
of this Merger Agreement by any party hereto) there shall be no liability on
the part of either the Company, Parent or Sub or their respective officers or
directors; provided that Sections 4.11 and 5.13, the last sentence of Section
8.1, Section 10.2, the last sentence of Section 11.1 and Sections 11.2, 11.3
and 11.7 shall survive the termination.
Section 10.3 Amendment. This Merger Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
at any time before or after approval hereof by the shareholders of the Company
and Parent, but, after such approval, no amendment shall be made which changes
the ratios at which Company Common Stock is to be converted into Parent Common
Stock as provided in Section 3.1 or which in any way materially adversely
affects the rights of such shareholders, without the further approval of such
shareholders. This Merger Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto.
Section 10.4 Waiver. At any time prior to the Effective Date, the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
may (a) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any documents delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions 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 XI
GENERAL PROVISIONS
Section 11.1 Effectiveness of Representations and Warranties. The
representations and warranties set forth in this Agreement shall (a) remain
operative regardless of any investigation made by or on behalf of any other
party hereto, whether prior to or after execution hereof, and (b) terminate at
the Effective Date (except as expressly stated elsewhere herein). All covenants
and agreements set forth in this Agreement shall survive the Effective Date and
any termination of this Merger Agreement in accordance with their terms.
Section 11.2 Notices. All notices or other communications under this Merger
Agreement shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person, by cable, telegram, telex
or other standard form of telecommunications, or by registered or certified
mail, postage prepaid, return receipt requested, addressed as follows:
If to the Company:
Diagnostek, Inc.
4500 Alexander Boulevard, N.E.
Albuquerque, New Mexico 87107
Attn: Nunzio P. DeSantis, Chairman
Facsimile No: (505) 761-6125
A-32
<PAGE>
With a copy to:
Cozen & O'Connor
1900 Market Street
Philadelphia, Pennsylvania 19103
Attn: E. Gerald Riesenbach, Esq.
Facsimile No.: (215) 665-2013
If to Parent or Sub:
Value Health, Inc.
22 Waterville Road
Avon, Connecticut 06001
Attn: General Counsel
Facsimile No.: (203) 676-8695
With a copy to:
Gibson, Dunn & Crutcher
200 Park Avenue
New York, New York 10166
Attn: Sean P. Griffiths, Esq.
Facsimile No.: (212) 949-7606
or to such other address as any party may have furnished to the other parties
in writing in accordance with this Section.
Section 11.3 Fees and Expenses.
(a) Whether or not the Merger is consummated, all costs and expenses incurred
in connection with this Merger Agreement and the transactions contemplated by
this Merger Agreement shall be paid by the party incurring such expenses,
except that the parties agree to each pay 50% of the filing fees required under
the HSR Act and the Securities Act and 50% of all printing expenses incurred by
either party.
(b) Within two business days after Parent has given notice of termination of
this Agreement pursuant to the provisions of Section 10.1(e) hereof, or the
Company has given notice of termination of this Agreement (x) pursuant to the
provisions of Section 10.1(f) hereof or (y) following the occurrence of an
event specified in Section 10.1(e)(iv) hereof, the Company shall pay to Parent,
by wire transfer to an account specified by Parent, an amount equal to $15
million.
Section 11.4 Publicity. So long as this Merger Agreement is in effect,
Parent, Sub and the Company agree to consult with each other in issuing any
press release or otherwise making any public statement with respect to the
transactions contemplated by this Merger Agreement, and none of them shall
issue any press release or make any public statement prior to such
consultation, except as may be required by law or by obligations pursuant to
any listing agreement with any national securities exchange. The commencement
of litigation relating to this Agreement or the transactions contemplated
hereby or any proceedings in connection therewith shall not be deemed a
violation of this Section 11.4.
Section 11.5 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Merger
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Merger Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.
A-33
<PAGE>
Section 11.6 Interpretation.
(a) When a reference is made in this Merger Agreement to subsidiaries of
Parent or the Company, the word "subsidiaries" means corporations more than 50%
of whose outstanding voting securities are directly or indirectly owned by
Parent or the Company, as the case may be. The headings contained in this
Merger Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Merger Agreement.
(b) For purposes of this Agreement the promulgation of proposals for, or the
implementation of, federal or state health care legislation shall not
constitute either a Parent Material Adverse Effect or a Company Material
Adverse Effect.
(c) Whenever a representation or warranty herein is made to the "knowledge,"
"best knowledge" or awareness of a party, it shall refer to matters within the
actual knowledge of such party's executive officers, and in case of the
Company, the Senior Management of HCS and HPI, after due investigation of
reasonably available corporate records concerning the subjects discussed
herein.
(d) Notwithstanding any other provision of the Agreement, it shall not be a
Company Material Adverse Effect or a breach of any representation, warranty,
covenant or other provision of this Agreement if between the date hereof and
the Effective Date one or more of the suppliers and/or customers of the Company
listed on Section 11.6(d) of the Company Disclosure Schedule ceases to do
business with the Company or any of its subsidiaries, or changes the terms and
conditions pursuant to which it does business with the Company or its
subsidiaries, because of the transactions contemplated by this Agreement.
Section 11.7 Miscellaneous. This Merger Agreement (including the documents
and instruments referred to herein):
(a) constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof (other than as
provided in the confidentiality agreements between the Company and Parent
dated as of February 22, 1995, and between Lazard Freres & Co., on behalf
of the Company, and Parent dated as of January 11, 1995, as the same may be
amended);
(b) except as provided in the last sentence of Section 8.3(b) and
Sections 3.5, 8.5, 8.6 and 8.7, is not intended to confer upon any other
person any rights or remedies hereunder and shall be binding upon and inure
to the benefit solely of each party hereto, and their respective successors
and assigns;
(c) shall not be assigned by operation of law or otherwise, except that
Sub shall have the right to assign to Parent or any direct wholly-owned
subsidiary of Parent any and all rights and obligations of Sub under this
Merger Agreement; and
(d) shall be governed in all respects, including validity, interpretation
and effect, by the laws of the State of Delaware (without giving effect to
the provisions thereof relating to conflicts of law). This Merger Agreement
may be executed in two or more counterparts which together shall constitute
a single agreement.
A-34
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Merger
Agreement to be signed by their respective officers thereunder duly authorized
all as of the date first written above.
VALUE HEALTH, INC.
<TABLE>
<S> <C>
/s/ ROBERT E. PATRICELLI
--------------------------------------
By: Robert E. Patricelli
----------------------------------
Title: Chief Executive Officer
-------------------------------
ATTEST:
/s/ PAUL M. FINIGAN
- ------------------------------------------
By: Paul M. Finigan
--------------------------------------
Title: Vice President and General Counsel
----------------------------------
VHI MERGER-SUB. CORP.
/s/ WILLIAM McBRIDE
--------------------------------------
By: William McBride
----------------------------------
Title: President and Chief Operating Officer
-------------------------------
ATTEST:
/s/ PAUL M. FINIGAN
- ------------------------------------------
By: Paul M. Finigan
--------------------------------------
Title: Vice President and General Counsel
----------------------------------
DIAGNOSTEK, INC.
/s/ NUNZIO P. DeSANTIS
--------------------------------------
By: Nunzio P. DeSantis
----------------------------------
Title: Chairman/CEO
-------------------------------
ATTEST:
/s/ COURTLANDT G. MILLER
- ------------------------------------------
By: Courtlandt G. Miller
--------------------------------------
Title: Secretary
-----------------------------------
</TABLE>
A-35
<PAGE>
ANNEX B
[LETTERHEAD OF MONTGOMERY SECURITIES]
June 8, 1995
Members of the Board of Directors
Value Health, Inc.
22 Waterville Road
Avon, CT 06001
Gentlemen and Madame:
We understand that Value Health, Inc., a Delaware corporation (the
"Company"), VHI Merger-Sub. Corp., a Delaware corporation and a wholly-owned
subsidiary of the Company ("Acquisition Sub"), and Diagnostek, Inc., a Delaware
corporation ("Target"), have entered into an Agreement and Plan of Merger dated
as of March 27, 1995, as amended on June 4, 1995 (the "Merger Agreement"),
pursuant to which Acquisition Sub will be merged with and into the Company,
which will be the surviving entity (the "Merger"). Pursuant to the Merger, as
more fully described in the form of the Merger Agreement provided to us by the
Company, we understand that each outstanding share of the common stock, $0.01
par value per share, of Target (the "Target Common Stock"), except shares held
by Target or any subsidiary of Target and shares owned by the Company,
Acquisition Sub or any other subsidiary of the Company, will be converted into
the right to receive .4975 shares of the common stock, no par value, of the
Company (the "Company Common Stock"), subject to certain adjustments
(collectively the "Consideration").
You have asked for our opinion as to whether the Consideration to be paid by
Company pursuant to the Merger is fair to the Company from a financial point of
view, as of the date hereof.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to the Company
and Target, including the consolidated financial statements for recent years
and interim periods to March 31, 1995 and certain other relevant financial and
operating data relating to the Company and Target made available to us from
published sources and from the internal records of the Company and Target; (ii)
reviewed the form of the Merger Agreement provided to us by the Company; (iii)
reviewed certain historical market prices and trading volumes of the Company
Common Stock as reported by the New York Stock Exchange and in the over-the-
counter market as reported by the National Association of Securities Dealers
Automated Quotation System and of the Target Common Stock as reported by the
New York Stock Exchange; (iv) compared the Company and Target from a financial
point of view with certain other companies in the health care industry which we
deemed to be relevant; (v) considered the financial terms, to the extent
publicly available, of selected recent business combinations of companies in
the health care industry which we deemed to be comparable, in whole or in part,
to the Merger; (vi) reviewed and discussed with representatives of the
management of the Company and Target certain information of a business and
financial nature regarding the Company and Target, furnished to us by them,
including financial forecasts and related assumptions of the Company and
Target; (vii) made inquiries regarding and discussed the Merger and the Merger
Agreement and other matters related thereto with the Company's counsel; and
(viii) performed such other analyses and examinations as we have deemed
appropriate.
In connection with our review, we have relied upon the accuracy and
completeness of the foregoing information and we have not assumed any
responsibility for independent verification of such information. With respect
to the financial forecasts for the Company and Target provided to us by their
respective managements, except as described herein, we have assumed for
purposes of our opinion that the forecasts have been reasonably prepared on
bases reflecting the best available estimates and judgments of their respective
managements at the time of preparation as to the future financial performance
of the Company and Target and that they provide a reasonable basis upon which
we can form our opinion. With respect to
B-1
<PAGE>
the financial forecasts for Target provided to us by its management, for
purposes of our opinion we have adjusted such forecasts to reflect more
conservative assumptions than those made by management of Target regarding
growth in revenues and results of operations. We have also assumed that there
have been no material changes in the Company's or Target's assets, financial
condition, results of operations, business or prospects since the respective
dates of their last financial statements made available to us. We have relied
on advice of counsel and independent accountants to the Company as to all legal
and financial reporting matters with respect to the Target, the Company, the
Merger and the Merger Agreement, including the legal status and financial
reporting of litigation involving Target. In addition, we have not assumed
responsibility for making an independent evaluation, appraisal or physical
inspection of any assets or liabilities (contingent or otherwise) of the
Company or Target, nor have we been furnished with any such appraisals.
Finally, our opinion is based on economic, monetary and market and other
conditions as in effect on, and the information made available to us as of, the
date hereof.
We have further assumed, with your consent, that the Merger will be
consummated in accordance with the terms described in the form of the Merger
Agreement provided to us by the Company, without any further amendments
thereto, and without waiver by the Company of any of the conditions to its
obligations thereunder.
In the ordinary course of our business, we actively trade the equity
securities of the Company and Target for our own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
Based upon the foregoing and in reliance thereon, it is our opinion that the
Consideration to be paid by Company pursuant to the Merger is fair to Company
from a financial point of view, as of the date hereof.
This opinion is furnished pursuant to our engagement letter dated March 13,
1995, and is for the benefit of the Board of Directors of the Company. Except
as provided in such engagement letter, this opinion may not be used or referred
to by the Company, or quoted or disclosed to any person in any manner without
our prior written consent. In furnishing this opinion, we do not admit that we
are experts within the meaning of the term "experts" as used in the Securities
Act of 1933 and the rules and regulations promulgated thereunder. This opinion
is not intended to be and shall not be deemed to be a recommendation to any
shareholder as to how such shareholder should vote with respect to the Merger.
Very truly yours,
Montgomery Securities
B-2
<PAGE>
ANNEX C
[LETTERHEAD OF LAZARD FRERES & CO. LLC]
New York
June 8, 1995
The Board of Directors
Diagnostek, Inc.
4500 Alexander Boulevard NE
Albuquerque, NM 87107
Dear Members of the Board:
We understand that Diagnostek, Inc. (the "Company") and Value Health, Inc.
("Value Health") have entered into an Agreement and Plan of Merger dated as of
March 27, 1995, as amended on June 4, 1995 (the "Agreement"), pursuant to which
in a merger (the "Merger") each share of common stock of the Company will be
exchanged for 0.4975 of a share of common stock of Value Health (the "Exchange
Ratio"). We further understand that the Merger is intended to be accounted for
as a pooling-of-interests in accordance with generally accepted accounting
principles as described in Accounting Principles Board Opinion Number 16.
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of Company common stock of the Exchange Ratio. In
connection with this opinion, we have:
(i) Analyzed certain historical business and financial information
relating to the Company and Value Health;
(ii) Reviewed various financial forecasts and other data provided to us
by the Company and Value Health relating to their respective businesses;
(iii) Held discussions with members of the senior managements of the
Company and Value Health with respect to the businesses and prospects of
the Company and Value Health, respectively;
(iv) Reviewed public information with respect to certain other companies
in lines of businesses we believe to be generally comparable to the
businesses of the Company and Value Health;
(v) Reviewed the financial terms of certain business combinations
involving companies in lines of businesses we believe to be generally
comparable to those of the Company and Value Health, and in other
industries generally;
(vi) Reviewed the historical stock prices and trading volumes of the
Company's and Value Health's common stock; and
(vii) Conducted such other financial studies, analyses and investigations
as we deemed appropriate.
We have relied upon the accuracy and completeness of the financial and other
information provided by the Company and Value Health, and have not assumed any
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of the
Company or Value Health, nor have we been provided with any such appraisals.
With respect to financial forecasts, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of management of the Company and Value Health as to the future
financial performance of the Company and Value Health, respectively. We assume
no responsibility for and express no view as to such forecasts or the
assumptions on which they are based.
Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. Our opinion does not address the Company's underlying
business decision to effect the Merger. We express no opinion as to what the
value of
C-1
<PAGE>
the common stock of Value Health actually will be when issued to the holders of
Company common stock upon consummation of the Merger.
In rendering our opinion, we have assumed that the Merger will be consummated
on the terms described in the Agreement, without any waiver of any material
terms or conditions by the Company, and that obtaining the necessary regulatory
approvals for the Merger will not have an adverse effect on the Company or
Value Health.
Lazard Freres & Co. LLC is acting as financial advisor to the Company in
connection with the Merger and will receive a fee for our services upon closing
of the Merger. Lazard Freres & Co. LLC has in the past provided, and is
currently providing, financial advisory services to Pfizer Inc. ("Pfizer"). On
May 1, 1994, Value Health and Pfizer entered into a joint venture partnership
to develop specialty disease management programs. Value Health and Pfizer also
have a contractual arrangement to develop value-added programs designed to
improve physician and patient use of Pfizer prescription and medical device
products. In addition, several Pfizer drug products will receive assured
positions on Value Health's prescription drug formularies in return for rebate
arrangements.
Our engagement and the opinion expressed herein are for the benefit of the
Company's Board of Directors and are not on behalf of, and are not intended to
confer rights or remedies upon, Value Health, any stockholders of Value Health
or any other person. However, this opinion may be included in its entirety in
any proxy statement relating to the Merger. This opinion may not, however, be
summarized, excerpted from or otherwise publicly referred to without our prior
written consent, which will not unreasonably be withheld. In addition, we may
not be otherwise publicly referred to without our prior consent, which will not
unreasonably be withheld.
Based on and subject to the foregoing, we are of the opinion that the
Exchange Ratio is fair to the holders of Company common stock from a financial
point of view.
Lazard Freres & Co. LLC
By /s/ Michael B. Solomon
Michael B. Solomon
Managing Director
C-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Value Health is a Delaware corporation. Section 145 ("Section 145") of the
Delaware General Corporation law ("DGCL") provides a Delaware corporation with
broad powers to indemnify its officers and directors in certain circumstances.
Additionally, Section 102(b)(7) of the DGCL permits a Delaware corporation to
include a provision in its certificate of incorporation eliminating or limiting
the personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (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 DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit.
As permitted by Section 102(b)(7) of the DGCL, Article Sixth of Value
Health's Amended and Restated Certificate of Incorporation ("Article Sixth")
provides that:
Each person who is or was or had agreed to become a director, officer,
employee or agent of the corporation, or who is or was serving or who had
agreed to serve at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise (including the heirs, executors, administrators or
estate of such person), shall be indemnified by the corporation to the full
extent permitted by the General Corporation Law of the State of Delaware or
any other applicable laws as presently or hereafter in effect. Without
limiting the generality or the effect of the foregoing, the corporation may
enter into one or more agreements with any person which provide for
indemnification greater or different than that provided in this Article
Sixth. Any repeal or modification of this Article Sixth shall not adversely
affect any right or protection existing hereunder immediately prior to such
repeal or modification.
Article V of Value Health's Amended and Restated Bylaws ("Article V")
provides that:
Section 1. Actions other than by or in the Right of the Corporation. The
corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceedings, had
no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believe to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 2. Actions by or in the Right of the Corporation. The corporation
shall indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request
II-1
<PAGE>
of the corporation as a director, officer, employee or agent of another
corporation, partnership. joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable unless and only
to the extent that the Court of Chancery of the State of Delaware or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnify for such expenses which the Court of Chancery of the
State of Delaware or such other court shall deem proper.
Section 3. Success on the Merits. to the extent that any person described
in Section 1 or 2 of this Article V has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in said
Sections, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith.
Section 4. Specific Authorization. If a claim under Section 1 or 2 of
this Article V is not paid in full by the corporation within thirty days
after a written claim has been received by the corporation, the claimant
may at any time thereafter bring suit against the corporation to recover
the unpaid amount of the claim and, if successful in whole or in part, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the corporation) that
the claimant has not met the standards of conduct which make it permissible
under the General Corporation Law of the State of Delaware for the
corporation to indemnify the claimant for the amount claimed, but the
burden of proving such defense shall be on the corporation. Neither the
failure of the corporation (including its Board of Directors, independent
legal counsel or stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper
in the circumstances because he or she has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Delaware,
nor an actual determination by the corporation (including its Board of
Directors, independent legal counsel or stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the claimant has not met the applicable
standard of conduct. Following any "change in control" of the corporation
of the type required to be reported under Item 1 of Form 8-K promulgated
under the Exchange Act, any determination as to entitlement to
indemnification, with respect to any claim relating in whole or in part to
any period prior to the change in control and with respect to any claim
relating in whole or in part to the change in control or any transaction or
other matters in connection therewith, shall be made by independent legal
counsel selected by those members of the Board of Directors who were
directors immediately prior to such change in control, or it there exists
no such directors, by the claimant, which such independent legal counsel
shall be retained by the Board of Directors on behalf of the corporation.
Section 5. Advance Payment. Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of any person described in said
Section to repay such amount if it shall ultimately be determined that he
is not entitled to indemnification by the corporation as authorized in this
Article V.
Section 6. Non-Exclusivity. The indemnification and advancement of
expenses provided by, or granted pursuant to, the other Sections of this
Article V shall not be deemed exclusive of any other rights to which those
provided indemnification or advancement of expenses may be entitled under
any by-law, agreement, vote of stockholders or disinterested directors' or
otherwise, both as to action is his official capacity and as to action in
another capacity while holding such office.
II-2
<PAGE>
Section 7. Insurance. The board of directors may authorize, by a vote of
the majority of the full board, the corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability
under the provisions of this Article V.
Section 8. Continuation of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article V shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
Section 9. Severability. If any word, clause or provision of this Article
V or any award made hereunder shall for any reason be determined to be
invalid, the provisions hereof shall not otherwise be affected thereby but
shall remain in full force and effect.
Section 10. Intent of Article. The intent of this Article V is to provide
for indemnification and advancement of expenses to the fullest extent
permitted by Section 145 of the General Corporation Law of Delaware. To the
extent that such Section or any successor section may be amended or
supplemented from time to time, this Article V shall be amended
automatically and construed so as to permit indemnification and advancement
of expenses to the fullest extent from time to time permitted by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
2 --Agreement and Plan of Merger, dated as of March 27, 1995, among
Value Health, VHI Merger-Sub Corp. and Diagnostek, Inc., as amended
as of June 4, 1995. (Filed as Annex A to the Proxy Statement-
Prospectus forming a part of this Registration Statement.)
3(a) --Restated Certificate of Incorporation of the Registrant, as
amended. (Filed as Exhibit 3.1, 4.1 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1993 and incorporated herein
by this reference.)
3(b) --Amended and Restated By-laws of the Registrant. (Filed as Exhibit 3
to the Registrant's Current Report on Form 8-K dated February 9,
1994 and incorporated herein by this reference.)
4 --Specimen certificate representing the Common Stock. (Filed as
Exhibit 4.4 to the Registration Statement on Form S-1, Registration
No. 33-39134, and incorporated herein by this reference.)
5 --Opinion of Gibson, Dunn & Crutcher as to the validity of the
securities.
8(a)+ --Opinion of Gibson, Dunn & Crutcher as to tax matters.
8(b)+ --Opinion of Cozen and O'Connor as to tax matters.
10(a) --Amended and Restated 1987 Stock Plan. (Filed as Exhibit 10.1 to the
Registration Statement on Form S-1, Registration Statement No.
33-39134, and incorporated herein by this reference.)
10(b) --1991 Stock Plan, as amended. (Filed as Exhibit 10.2 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1994
and incorporated herein by this reference.)
10(c) --1991 Employee Stock Purchase Plan. (Filed as Exhibit 10.3 to the
Registration Statement on Form S-1, Registration No. 33-39134, and
incorporated herein by this reference.)
10(d) --1991 Non-Employee Director Stock Option Plan, as amended. (Filed as
Exhibit 10.4 to the Registrant's Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by this reference.)
10(e)** --Form of Employment Agreement executed for each of the Registrant's
executive officers. (Filed as Exhibit 10.5 to the Registrant's Form
10-K for the fiscal year ended December 31, 1994 and incorporated
herein by this reference.)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10(f)** --Amended and Restated Employment Agreement dated as of September 1,
1993, by and between the Registrant and Robert E. Patricelli.
(Filed as Exhibit 10.5 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1993 and incorporated herein by this
reference.)
10(g)** --Amended and Restated Employment Agreement dated as of September 1,
1993, by and between the Registrant and William J. McBride. (Filed
as Exhibit 10.6 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1993 and incorporated herein by this reference.)
10(h)** --Amended and Restated Employment Agreement dated as of March 1,
1994, by and between the Registrant and Steven J. Shulman. (Filed
as Exhibit 10.8 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by this reference.)
10(i)** --Amended and Restated Employment Agreement dated as of March 1,
1994, by and between Value Health Sciences, Inc. and Leslie D.
Michelson. (Filed as Exhibit 10.9 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1994 and incorporated herein by
this reference.)
10(j)** --Employment Agreement dated as of March 1, 1994 by and between
ValueRx Pharmacy Program, Inc. and Barry M. Smith. (Filed as
Exhibit 10.10 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by this reference.)
10(k)** --Employment Agreement, dated January 1, 1993, between Preferred
Health Care, Ltd. and David J. McDonnell. (Filed as Exhibit 10(k)
to the Preferred Health Care Ltd. Form 10-K for the fiscal year
ended December 31, 1992 and incorporated herein by this reference.)
10(l) --Registration Rights Agreement dated as of February 22, 1991 by and
among the Registrant, Warburg, Pincus Capital Company, L.P., Robert
E. Patricelli, William J. McBride and Steven J. Shulman. (Filed as
Exhibit 10.12 to the Registration Statement on Form S-1,
Registration No. 33-39134, and incorporated herein by this
reference.)
10(m) --Rights Agreement, dated as of February 24, 1994, between Value
Health, Inc. and Mellon Bank, N.A. (Filed as Exhibit 99.1 to the
Registrant's Current Report on Form 8-K dated February 9, 1994 and
incorporated herein by this reference.)
10(n) --Form of Indemnification Agreement between the Registrant and its
directors and certain of its officers. (Filed as Exhibit 10.13 to
the Registration Statement on Form S-1, Registration No. 33-39134,
and incorporated herein by this reference.)
10(o)* --Agreement and Plan of Merger, dated as of November 4, 1991, among
Registrant, ValueRx Acquisition, Inc., Cost Containment Corporation
of America, Richard D. Ekstrom, Sandra M. Ekstrom, George E.
Harris, IV, Margaret L. Harris, Thomas R. Rippon, Mellon Bank,
N.A., as Trustee, and H. James Rippon, as Trustee. (Filed as
Exhibit 2 to the Registrant's Current Report on Form 8-K dated
November 19, 1991, as amended, File No. 0-19039, and incorporated
herein by this reference.)
10(p) --Stock Purchase Agreement dated October 30, 1992 between ICF
International, Inc. and the Registrant. (Filed as Exhibit 2.2 to
the Registrant's Current Report on Form 8-K dated October 20, 1992,
File No. 0-19039, and incorporated herein by this reference.)
10(q) --Manager Representative Transfer and Facilitation Agreement dated
October 30, 1992 between the Registrant and Lawrence S. Lewin.
(Filed as Exhibit 2.3 to the Registrant's Current Report on Form 8-
K dated October 20, 1992, File No. 0-19039, and incorporated herein
by this reference.)
10(r) --Manager Representative Transfer and Facilitation Agreement dated
October 30, 1992 between the Registrant and Robert J. Rubin. (Filed
as Exhibit 2.4 to the Registrant's Current Report on Form 8-K dated
October 20, 1992, File No. 0-19039, and incorporated herein by this
reference.)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10(s) --Agreement and Plan of Merger dated as of September 23, 1993 among
the Registrant, VH Merger-Sub Corp. and Preferred Health Care Ltd.
(Filed as Exhibit 2.1 to the Registration Statement on Form S-4,
Registration No. 33-71404, and incorporated herein by this
reference.)
10(t) --Stock Incentive Plan, as amended and restated (as of March 17, 1992).
(Filed as Exhibit 10(a) to the Preferred Health Care Ltd. Form 10-K
for the fiscal year ended December 31, 1992 and incorporated herein
by this reference.)
10(u) --Put and Call Option Agreement dated as of March 6, 1990 by and
among Preferred Health Care Ltd., Preferred Health Corporation of
Delaware, CareSys, Inc., and certain stockholders of CareSys, Inc.,
and certain other persons. (Filed as Exhibit 10(h) to the Preferred
Health Care Ltd. Form 10-K for the fiscal year ended December 31,
1992 and incorporated herein by this reference.)
10(v) --Partnership Agreement, dated as of May 1, 1994, between Pfizer
Health Sciences, Inc. and VHI Venturer, Inc. (Filed as Exhibit 1 to
the Registrant's Current Report on Form 8-K dated May 1, 1994, File
No. 0-19039, and incorporated herein by this reference.)
10(w) --Stock Purchase Agreement dated May 18, 1994 by and among Value
Health, Inc., Community Care Network, Inc., and Alliance Healthcare
Foundation, Robert M. Colasanto, Sandra M. Foote, Richard C. Morgan,
George S. Murphy, Nancy B. Plaxico, Douglas J. Reeves and Patrick J.
Sullivan. (Filed as Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated May 18, 1994, File No. 0-19039, and incorporated
herein by this reference.)
13(a) --Value Health, Inc. Annual Report on Form 10-K for the year ended
December 31, 1994.
21 --Subsidiaries of the Registrant. (Filed as Exhibit 21 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1994,
and incorporated herein by this reference.)
23(a) --Consent of Gibson, Dunn & Crutcher (included in Exhibit 5).
23(b) --Consent of Coopers & Lybrand L.L.P.
23(c) --Consent of Deloitte & Touche LLP.
23(d) --Consent of Price Waterhouse.
23(e) --Consent of KPMG Peat Marwick LLP.
</TABLE>
- --------
+ To be Filed by Amendment.
* Confidential Treatment Previously Granted.
** Executive Compensation Plans and Arrangements.
(b) Schedules
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 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.
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.
II-5
<PAGE>
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 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.
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 AVON, STATE OF
CONNECTICUT, ON JUNE 23, 1995.
Value Health, Inc.
/s/ David M. Wurzer
By __________________________________
David M. Wurzer
Vice President, Treasurer
and Chief Financial Officer
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON JUNE 23, 1995. EACH OF THE DIRECTORS AND/OR OFFICERS OF
VALUE HEALTH, INC. WHOSE SIGNATURE APPEARS BELOW HEREBY APPOINTS DAVID M.
WURZER AND PAUL M. FINIGAN, AND EACH OF THEM SEVERALLY AS HIS ATTORNEY-IN-FACT
TO SIGN HIS NAME AND ON HIS BEHALF, IN ANY AND ALL CAPACITIES STATED BELOW, AND
TO FILE WITH THE SECURITIES AND EXCHANGE COMMISSION ANY AND ALL AMENDMENTS,
INCLUDING POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT, MAKING SUCH
CHANGES IN THE REGISTRATION STATEMENT AS APPROPRIATE, AND GENERALLY TO DO ALL
SUCH THINGS IN THEIR BEHALF IN THEIR CAPACITIES AS OFFICERS AND DIRECTORS TO
ENABLE VALUE HEALTH, INC. TO COMPLY WITH THE PROVISIONS OF THE SECURITIES ACT
OF 1933, AND ALL REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Robert E. Patricelli Chairman of the Board, Chief
- ------------------------------------ Executive Officer and
Robert E. Patricelli Director (Principal
Executive Officer)
/s/ William J. McBride President, Chief Operating
- ------------------------------------ Officer and Director
William J. McBride
/s/ Steven J. Shulman Executive Vice President and
- ------------------------------------ Director
Steven J. Shulman
/s/ David J. McDonnell Director
- ------------------------------------
David J. McDonnell, D.S.W.
/s/ Walter J. McNerney Director
- ------------------------------------
Walter J. McNerney
/s/ Rodman W. Moorhead, III Director
- ------------------------------------
Rodman W. Moorhead, III
/s/ Constance B. Newman Director
- ------------------------------------
Constance B. Newman
/s/ John L. Vogelstein Director
- ------------------------------------
John L. Vogelstein
/s/ David M. Wurzer Vice President, Treasurer
- ------------------------------------ and Chief Financial Officer
David M. Wurzer (Principal Financial and
Accounting Officer)
/s/ Hicks B. Waldron Director
- ------------------------------------
Hicks B. Waldron
</TABLE>
II-7
<PAGE>
- --------------------------------------------------------------------------------
PROXY
VALUE HEALTH, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE JULY , 1995
SPECIAL MEETING OF THE STOCKHOLDERS OF VALUE HEALTH, INC.
The undersigned stockholder of Value Health, Inc. ("Value Health") hereby
appoints David M. Wurzer and Paul M. Finigan, and each of them, the lawful
attorneys and proxies of the undersigned, with full powers of substitution and
revocation, to vote on behalf of the undersigned all shares of Value Health
common stock (the "Common Stock") which the undersigned is entitled to vote at
the Special Meeting (the "Special Meeting") of the stockholders of Value Health
to be held on July , 1995 at 10:00 a.m. at the Avon Old Farms Hotel, Routes
10 & 44, Avon, Connecticut 06001 and at any and all adjournments and
postponements thereof. The undersigned hereby acknowledges receipt of the
Notice of Special Meeting and hereby instructs said attorneys and proxies to
vote said shares of Common Stock as indicated hereon.
Please indicate your vote by an "X" in the appropriate box below, sign and
date this Proxy and return promptly in the enclosed envelope.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE
STOCKHOLDER. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, EXECUTED PROXIES WILL BE
VOTED FOR APPROVAL OF THE ISSUANCE OF THE SHARES OF COMMON STOCK AND IN THE
DISCRETION OF THE PROXY HOLDERS AS TO ANY OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE SPECIAL MEETING.
PLEASE MARK, SIGN AND DATE THIS PROXY
AND RETURN IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
----------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR. I plan to attend
I plan to attend the Meeting the Meeting
[_]
----------------
1. Approval of the issuance of shares of Common Stock in connection with an
Agreement and Plan of Merger dated as of March 27, 1995, as amended on June
4, 1995, among Value Health, VHI Merger-Sub. Corp. ("Merger Sub") and
Diagnostek, Inc. ("Diagnostek") pursuant to which (i) Merger Sub will be
merged into Diagnostek, with Diagnostek continuing as the surviving
corporation and becoming a wholly owned subsidiary of Value Health and (ii)
each share of Diagnostek common stock (other than specifically excluded
shares of Diagnostek common stock) will be converted into and represent the
right to receive 0.4975 shares of Common Stock and cash in lieu of
fractional shares of Common Stock.
2. In their discretion to transact such other business as may properly come
before the Special Meeting.
FOR AGAINST ABSTAIN
[_] [_] [_]
-------------------------------------------------------------------------
-------------------------------------------------------------------------
--------------------------------------------
"PLEASE MARK INSIDE BLUE BOXES SO THAT DATA
PROCESSING EQUIPMENT WILL RECORD YOUR VOTES"
--------------------------------------------
2. In their discretion to transact such other business as may properly come
before the Special Meeting.
FOR AGAINST ABSTAIN
[_] [_] [_]
Date: ____________________________________________________________________, 1995
STOCKHOLDER:
________________________________________________________________________________
By: ____________________________________________________________________________
Name:
Title:
STOCKHOLDER (if held jointly):
________________________________________________________________________________
By: ____________________________________________________________________________
Name:
Title:
NOTE: Please sign exactly as your name appears on the stock certificate. If
joint owners, both owners should sign this Proxy. When signing as attorney,
executor, administrator, trustee, guardian or corporate officer, please give
your full title as such. If a corporation, please sign in full corporate name
by the duly authorized officer. If a partnership, please sign in partnership
name by an authorized person.
NUMBER OF SHARES OF COMMON STOCK OWNED:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
DIAGNOSTEK, INC.
4500 ALEXANDER BOULEVARD, N.E.
ALBUQUERQUE, NEW MEXICO 87107
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Courtlandt G. Miller and Miles M. Stuchin,
and each of them acting individually, as the attorney and proxy of the
undersigned with full power of substitution, for and in the name and stead of
the undersigned to attend the Special Meeting of Stockholders of Diagnostek,
Inc. to be held on July , 1995 at 10:00 a.m. at The Penn Club of New York, 30
West 44th Street, New York, New York 10036, and any adjournment or postponement
thereof, and thereat to vote all shares of Common Stock which the undersigned
would be entitled to cast if personally present as indicated herein:
IF THIS PROXY IS PROPERLY EXECUTED, THE SHARES REPRESENTED HEREBY WILL BE
VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO SUCH
DIRECTION IS GIVEN, THE SHARES WILL BE VOTED "FOR" THE PROPOSAL TO APPROVE AND
ADOPT THE AGREEMENT AND PLAN OF MERGER DATED AS OF MARCH 27, 1995, AS AMENDED
ON JUNE 4, 1995, AMONG VALUE HEALTH, INC., VHI MERGER-SUB. CORP. ("SUB"), A
WHOLLY OWNED SUBSIDIARY OF VALUE HEALTH, INC., AND DIAGNOSTEK, INC. THIS PROXY
ALSO DELEGATES AUTHORITY TO VOTE WITH RESPECT TO ANY OTHER BUSINESS WHICH MAY
PROPERLY COME BEFORE THE MEETING.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
-------------
SEE REVERSE
SIDE
-------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE MARK YOUR ++ +
[X] VOTES AS IN THIS + +
EXAMPLE. +++++
PLEASE MARK YOUR CHOICE IN BLUE OR BLACK INK
(1) Proposal to approve and adopt the Agreement and Plan FOR AGAINST ABSTAIN
of Merger, dated as of March 27, 1995, as amended on [_] [_] [_]
June 4, 1995 among Value Health, Inc. ("Value
Health"), VHI Merger-Sub. Corp., a wholly owned
subsidiary of Value Health ("Sub"), and Diagnostek,
Inc. (the "Company"), pursuant to which (i) Sub will
be merged into the Company and the Company will
become a wholly owned subsidiary of Value Health, and
(ii) each outstanding share of the Company common
stock, $0.01 par value per share (other than shares
owned by the Company, Value Health or any of their
respective subsidiaries, all of which will be
canceled), will be converted into and represent the
right to receive 0.4975 shares of Value Health common
stock, without par value.
(2) In their discretion, the proxies are authorized to
vote on such other business as may properly be
brought before the meeting or any adjournment or
postponement thereof.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting
and Proxy Statement of Diagnostek, Inc.
SIGNATURE(S) _________________________________________________ DATE __________
SIGNATURE(S) _________________________________________________ DATE __________
(Please sign exactly as name appears hereon. When signing as an attorney,
executor, administrator, trustee or guardian, please give title as such. If
stockholder is a corporation, please sign in full corporate name by a duly
authorized officer or officers. Where stock is issued in the name of two or
more persons, all such persons should sign).
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY IMMEDIATELY IN THE ENCLOSED
ENVELOPE
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT PAGE NO.
------- ----------------------- --------
<C> <S> <C>
2 --Agreement and Plan of Merger, dated as of March 27, 1995,
among Value Health, VHI Merger-Sub Corp. and Diagnostek,
Inc., as amended as of June 4, 1995. (Filed as Annex A to
the Proxy Statement-Prospectus forming a part of this
Registration Statement.)
3(a) --Restated Certificate of Incorporation of the Registrant,
as amended. (Filed as Exhibit 3.1, 4.1 to the Registrant's
Form 10-K for the fiscal year ended December 31, 1993 and
incorporated herein by this reference.)
3(b) --Amended and Restated By-laws of the Registrant. (Filed as
Exhibit 3 to the Registrant's Current Report on Form 8-K
dated February 9, 1994 and incorporated herein by this
reference.)
4 --Specimen certificate representing the Common Stock.
(Filed as Exhibit 4.4 to the Registration Statement on
Form S-1, Registration No. 33-39134, and incorporated
herein by this reference.)
5 --Opinion of Gibson, Dunn & Crutcher as to the validity of
the securities.
8(a)+ --Opinion of Gibson, Dunn & Crutcher as to tax matters.
8(b)+ --Opinion of Cozen and O'Conner as to tax matters.
10(a) --Amended and Restated 1987 Stock Plan. (Filed as Exhibit
10.1 to the Registration Statement on Form S-1,
Registration Statement No. 33-39134, and incorporated
herein by this reference.)
10(b) --1991 Stock Plan, as amended. (Filed as Exhibit 10.2 to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by this
reference.)
10(c) --1991 Employee Stock Purchase Plan. (Filed as Exhibit 10.3
to the Registration Statement on Form S-1, Registration
No. 33-39134, and incorporated herein by this reference.)
10(d) --1991 Non-Employee Director Stock Option Plan, as amended.
(Filed as Exhibit 10.4 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1994 and incorporated
herein by this reference.)
10(e)** --Form of Employment Agreement executed for each of the
Registrant's executive officers. (Filed as Exhibit 10.5 to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by this
reference.)
10(f)** --Amended and Restated Employment Agreement dated as of
September 1, 1993, by and between the Registrant and
Robert E. Patricelli. (Filed as Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year ended December
31, 1993 and incorporated herein by this reference.)
10(g)** --Amended and Restated Employment Agreement dated as of
September 1, 1993, by and between the Registrant and
William J. McBride. (Filed as Exhibit 10.6 to the
Registrant's Form 10-K for the fiscal year ended December
31, 1993 and incorporated herein by this reference.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT PAGE NO.
------- ----------------------- --------
<C> <S> <C>
10(h)** --Amended and Restated Employment Agreement dated as of
March 1, 1994, by and between the Registrant and Steven J.
Shulman. (Filed as Exhibit 10.8 to the Registrant's Form
10-K for the fiscal year ended December 31, 1994 and
incorporated herein by this reference.)
10(i)** --Amended and Restated Employment Agreement dated as of
March 1, 1994, by and between Value Health Sciences, Inc.
and Leslie D. Michelson. (Filed as Exhibit 10.9 to the
Registrant's Form 10-K for the fiscal year ended December
31, 1994 and incorporated herein by this reference.)
10(j)** --Employment Agreement dated as of March 1, 1994 by and
between ValueRx Pharmacy Program, Inc. and Barry M. Smith.
(Filed as Exhibit 10.10 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1994 and incorporated
herein by this reference.)
10(k)** --Employment Agreement, dated January 1, 1993, between
Preferred Health Care, Ltd. and David J. McDonnell. (Filed
as Exhibit 10(k) to the Preferred Health Care Ltd. Form
10-K for the fiscal year ended December 31, 1992 and
incorporated herein by this reference.)
10(l) --Registration Rights Agreement dated as of February 22,
1991 by and among the Registrant, Warburg, Pincus Capital
Company, L.P., Robert E. Patricelli, William J. McBride
and Steven J. Shulman. (Filed as Exhibit 10.12 to the
Registration Statement on Form S-1, Registration No. 33-
39134, and incorporated herein by this reference.)
10(m) --Rights Agreement, dated as of February 24, 1994, between
Value Health, Inc. and Mellon Bank, N.A. (Filed as Exhibit
99.1 to the Registrant's Current Report on Form 8-K dated
February 9, 1994 and incorporated herein by this
reference.)
10(n) --Form of Indemnification Agreement between the Registrant
and its directors and certain of its officers. (Filed as
Exhibit 10.13 to the Registration Statement on Form S-1,
Registration No. 33-39134, and incorporated herein by this
reference.)
10(o)* --Agreement and Plan of Merger, dated as of November 4,
1991, among Registrant, ValueRx Acquisition, Inc., Cost
Containment Corporation of America, Richard D. Ekstrom,
Sandra M. Ekstrom, George E. Harris, IV, Margaret L.
Harris, Thomas R. Rippon, Mellon Bank, N.A., as Trustee,
and H. James Rippon, as Trustee. (Filed as Exhibit 2 to
the Registrant's Current Report on Form 8-K dated November
19, 1991, as amended, File No. 0-19039, and incorporated
herein by this reference.)
10(p) --Stock Purchase Agreement dated October 30, 1992 between
ICF International, Inc. and the Registrant. (Filed as
Exhibit 2.2 to the Registrant's Current Report on Form 8-K
dated October 20, 1992, File No. 0-19039, and incorporated
herein by this reference.)
10(q) --Manager Representative Transfer and Facilitation
Agreement dated October 30, 1992 between the Registrant
and Lawrence S. Lewin. (Filed as Exhibit 2.3 to the
Registrant's Current Report on Form 8-K dated October 20,
1992, File No. 0-19039, and incorporated herein by this
reference.)
10(r) --Manager Representative Transfer and Facilitation
Agreement dated October 30, 1992 between the Registrant
and Robert J. Rubin. (Filed as Exhibit 2.4 to the
Registrant's Current Report on Form 8-K dated October 20,
1992, File No. 0-19039, and incorporated herein by this
reference.)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT PAGE NO.
------- ----------------------- --------
<C> <S> <C>
10(s) --Agreement and Plan of Merger dated as of September 23,
1993 among the Registrant, VH Merger-Sub Corp. and
Preferred Health Care Ltd. (Filed as Exhibit 2.1 to the
Registration Statement on Form S-4, Registration No. 33-
71404, and incorporated herein by this reference.)
10(t) --Stock Incentive Plan, as amended and restated (as of
March 17, 1992).
(Filed as Exhibit 10(a) to the Preferred Health Care Ltd.
Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by this reference.)
10(u) --Put and Call Option Agreement dated as of March 6, 1990
by and among Preferred Health Care Ltd., Preferred Health
Corporation of Delaware, CareSys, Inc., and certain
stockholders of CareSys, Inc., and certain other persons.
(Filed as Exhibit 10(h) to the Preferred Health Care Ltd.
Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by this reference.)
10(v) --Partnership Agreement, dated as of May 1, 1994, between
Pfizer Health Sciences, Inc. and VHI Venturer, Inc. (Filed
as Exhibit 1 to the Registrant's Current Report on Form 8-
K dated May 1, 1994, File No. 0-19039, and incorporated
herein by this reference.)
10(w) --Stock Purchase Agreement dated May 18, 1994 by and among
Value Health, Inc., Community Care Network, Inc., and
Alliance Healthcare Foundation, Robert M. Colasanto,
Sandra M. Foote, Richard C. Morgan, George S. Murphy,
Nancy B. Plaxico, Douglas J. Reeves and Patrick J.
Sullivan. (Filed as Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated May 18, 1994, File No. 0-
19039, and incorporated herein by this reference.)
13(a) --Value Health, Inc. Annual Report on Form 10-K for the
year ended December 31, 1994.
21 --Subsidiaries of the Registrant. (Filed as Exhibit 21 to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1994, and incorporated herein by this
reference.)
23(a) --Consent of Gibson, Dunn & Crutcher (included in Exhibit
5).
23(b) --Consent of Coopers & Lybrand L.L.P.
23(c) --Consent of Deloitte & Touche LLP.
23(d) --Consent of Price Waterhouse.
23(e) --Consent of KPMG Peat Marwick LLP.
</TABLE>
- --------
+To be Filed by Amendment.
*Confidential Treatment Previously Granted.
**Executive Compensation Plans and Arrangements.
3
<PAGE>
EXHIBIT 5
[OPINION OF GIBSON, DUNN & CRUTCHER]
June 23, 1995
Value Health, Inc.
22 Waterville Road
Avon, Connecticut 06001
Re: Proposed Offering of up to 13,387,413 Shares of Common Stock
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 (the "Registration
Statement") filed by Value Health, Inc., a Delaware corporation (the
"Company"), with the Securities and Exchange Commission (the "Commission") on
June 26, 1995, in connection with the registration under the Securities Act of
1933, as amended (the "Securities Act"), of up to 13,387,413 shares of the
Company's Common Stock, without par value (the "Shares"), to be issued by the
Company in connection with the proposed merger whereby VHI Merger-Sub. Corp., a
wholly-owned subsidiary of the Company, will merge with and into Diagnostek,
Inc., a Delaware corporation ("Diagnostek"), causing Diagnostek to become a
wholly-owned subsidiary of the Company.
As your counsel, we have examined the original, or a photostatic or certified
copy, of such records of the Company, certificates of officers of the Company
and of public officials and such other documents as we have determined relevant
and necessary as the basis for our opinion set forth below. In such
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such copies.
Based upon the foregoing and in reliance thereon, and subject to the
assumptions stated and relying on statements of fact contained in the documents
that we have examined and subject to receipt from the Commission of an order
declaring the Registration Statement effective and compliance with applicable
state securities laws, we are of the opinion that the Shares, when issued and
delivered in the manner described in the Registration Statement, will be
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm appearing on the cover
of the Registration Statement and under the caption "Legal Matters" in the
Prospectus that forms a part of the Registration Statement. In giving this
consent, we do not admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act or the General Rules
and Regulations of the Commission.
Very truly yours,
GIBSON, DUNN & CRUTCHER
<PAGE>
EXH 13 A
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
-----------------
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19039
------------------------------
VALUE HEALTH, INC.
------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1194838
---------------------- ---------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
22 Waterville Road, Avon Connecticut 06001
--------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 678-3400
-----------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Without Par Value
Preferred Stock Purchase Rights, $0.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value, as of March 13, 1995, of Common Stock held by non-
affiliates of the registrant: $1,101,553,065 based on the last reported sale
price on the New York Stock Exchange.
The number of shares of Common Stock, without par value outstanding as of March
13, 1995: 40,583,911.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the Parts
of this Form 10-K indicated:
<TABLE>
<CAPTION>
DOCUMENT FORM 10-K REFERENCE
-------- -------------------
<S> <C>
(1) Value Health, Inc. 1994 Parts II & IV
Annual Report
(2) Definitive proxy statement Part III
for Annual Meeting of
Stockholders to be held
May 4, 1995.
</TABLE>
<PAGE>
VALUE HEALTH, INC.
TABLE OF CONTENTS
________________________________________________________________________________
<TABLE>
<CAPTION>
PART I
Page
----
<S> <C>
Item 1. Business.........................................................1
Item 2. Properties.......................................................9
Item 3. Legal Proceedings................................................9
Item 4. Submission of Matters to a Vote of Security.......................
Holders.......................................................9
Item 4a. Executive Officers of the Registrant.............................9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..........................................11
Item 6. Selected Financial Data.........................................11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................11
Item 8. Financial Statements and Supplementary Data.....................11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................11
PART III
Item 10. Directors and Executive Officers of the Registrant..............12
Item 11. Executive Compensation..........................................12
Item 12. Security Ownership of Certain Beneficial Owners
and Management...............................................12
Item 13. Certain Relationships and Related Transactions..................12
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K......................................13
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
- ------- --------
Value Health, Inc. ("Value Health" or the "Company") provides specialty
managed health care benefit programs and health care information services.
The Company's specialty managed health care benefit programs are designed to
manage costs and maintain quality in selected health care sectors that are of
particular concern to employers due to their size, rapid cost escalation and
potential for overutilization. These areas include prescription drugs,
mental health and substance abuse, and workers' compensation. The
Company's health care information services are based upon the use of clinical
and data analysis to guide health care decision-making. These products
include clinically-based precertification and claims review, provider
profiling, claims cost analysis, evaluation and management of health benefit
providers, disease management and health policy and management consulting.
Value Health was incorporated in Delaware in March 1987 for the purpose of
acquiring and developing specialty managed health care businesses meeting its
strategic objectives. From 1987 to 1993, the Company made several
acquisitions that were accounted for as purchases and included companies in
the prescription drug, mental health and substance abuse, workers'
compensation and information services fields.
On December 14, 1993, the Company completed its merger with Preferred
Health Care Ltd. ("Preferred"), a provider of health care programs for mental
health and substance abuse and workers' compensation and related services.
In this transaction, each share of Preferred common stock was exchanged for
.88 shares of the Company's common stock. The Company issued 10,958,841
shares of its common stock to complete the merger, which was accounted for as
a pooling of interests. All the historical financial statements of the
Company have been restated to include Preferred.
On May 1, 1994, the Company and Pfizer Inc ("Pfizer") entered into a joint
venture partnership to develop specialty disease management programs, with
committed capital of up to $50 million by each partner. The Company also
entered into a multi-year contract with Pfizer to develop value-added
programs designed to improve physician and patient use of Pfizer prescription
and medical device products. Further, several Pfizer drug products will
receive assured positions on Value Health's prescription drug formularies in
return for rebate arrangements.
On June 21, 1994, the Company completed its acquisition of Community Care
Network, Inc. ("CCN"), a provider of services to workers' compensation and
group health markets. The purchase price was $40 million in cash and
contingent consideration of up to $80 million, based upon CCN's earnings
during a twelve month calculation period, which period will end not later
than December 31, 1996.
1
<PAGE>
On August 29, 1994, the Company completed its merger with Prescription Drug
Service, Inc., based in Hauppauge, New York, and its affiliated company
Prescription Drug Service West, Inc. (collectively, "PrescDrug"), based in
Chandler, Arizona. The Company issued 937,178 shares of its common stock in
exchange for all of the outstanding common stock of PrescDrug. The PrescDrug
companies are suppliers of mail service and retail prescription drug benefits
to national, regional and local union, corporate and HMO benefit plans. On
August 31, 1994, the Company acquired by merger all of the outstanding common
stock of RxNet, Inc., ("RxNet") by issuing 256,136 shares of its common stock
for all of the outstanding common stock of RxNet. RxNet is located in
Fresno, California and offers prescription drug card programs to insurers,
self-insured employer groups, third party administrators, and multiple
employer trusts and associations. Both of these transactions were
accounted for as poolings of interests and financial statements for all
periods prior to these combinations have been restated to reflect the
combined operations.
The early acquisitions and operations of the Company through 1990 were
financed principally with stock issuances to Warburg Pincus Capital Company,
L.P. ("Warburg"). Since the Company's initial public offering in 1991,
raising $37.5 million, acquisitions and operations have been financed by the
$160.8 million in proceeds from two public offerings in 1992 together with
internally-generated funds.
The principal operating entities of the Company are ValueRx Pharmacy
Program, Inc. ("ValueRx"), Value Behavioral Health, Inc. ("VBH"), Value
Health Insurance Services Group ("ISG"), Value Health Sciences, Inc. ("VHS"),
and Lewin-VHI, Inc. ("Lewin").
PRODUCTS AND SERVICES
PHARMACY BENEFITS MANAGEMENT
----------------------------
The Company offers the following prescription drug cost and quality
management programs through its ValueRx subsidiary.
MANAGED PRESCRIPTION DRUG BENEFIT PLANS. The Company provides outpatient
---------------------------------------
prescription drug plans which incorporate benefit plan design services, a
network of retail pharmacies, clinically-based utilization review, claims
processing, a mail service prescription option and member prescription drug
support services.
Value Health's prescription drug preferred provider organization includes a
national network of more than 37,000 chain and independent pharmacies serving
over 8,000,000 people as of January 1, 1995. As part of its prescription
drug benefit programs, Value Health employs specialized proprietary claims
administration software which it believes processes claims at a lower cost
than general medical claims systems used by insurance companies and TPAs.
The Value Health system links most network pharmacies through on-line
terminals. The Company gathers information through its software programs to
monitor its customers' drug benefit plans and supplies reports to customers
regarding drug utilization, costs and other information. Under Value
Health's
2
<PAGE>
"ValueFee" prescription drug benefit plans, plan beneficiaries
obtain medications from a network pharmacy which then bills the Company at
previously negotiated rates. Value Health is reimbursed by the plan sponsor
on a per-prescription basis reflecting a discount off the medication's
average wholesale price. In ValueFee arrangements, the Company bears no
financial risk for increases in the number of prescriptions, nor does it
carry any significant risk for price changes because it has already
negotiated costs for the medications. In some of these arrangements,
however, the Company's fees are subject to adjustment depending upon
performance as measured against targeted criteria.
ValueClaim is a managed "major medical" prescription drug benefit program
which requires each plan beneficiary to pay for prescriptions and submit a
paper claim for reimbursement of amounts exceeding a deductible. Value
Health has developed the ValueClaim product to market to employers that
currently pay for prescription drugs through major medical plans.
All of the Company's prescription drug benefit plans are sold on a ValueFee
or ValueClaim basis except for certain administrative services only
contracts, and certain arrangements with one customer. Under contract with
this customer, Value Health agrees to provide prescription drug benefits for
a fixed monthly payment per employee. The Company's benefit plans with this
customer exclude most high-cost injectable drugs and drugs administered by
home infusion therapy.
INTEGRATED MAIL ORDER PROGRAM. Value Health provides a mail order
------------------------------
prescription option as an integrated part of its specialty managed
prescription drug benefit plans. Mail prescription service is typically
provided as a convenience to individuals who prefer to fill prescriptions by
mail. ValueRx's primary mail service facility in Iowa is a state-of-the-art,
fully automated complex that includes an intelligent dispensing system,
advanced material handling techniques and integrated drug utilization review.
PRESCRIPTION DRUG UTILIZATION REVIEW (DURBASE). The Company's DURbase
----------------------------------------------
product is a proprietary computerized drug claims review program which
identifies people at high risk for drug-induced illness. DURbase was
developed with over fifteen years of research and operation, and incorporates
a database of more than eleven million patient records which is updated
frequently with information from the 144 million medical and prescription
claims reviewed annually by the Company. DURbase applies over 200
clinically-based screens to review drug claims and to identify patients at
high risk for drug-induced illness. When such patients are identified, Value
Health communicates by alert letter with the prescribing physicians.
The DURbase product is provided as an integral part of ValueRx's
prescription drug benefit plans, and as a freestanding product charged for on
a per-prescription or per-member basis.
PHYSICIAN PRESCRIPTION PROFILING AND EDUCATION. Value Health provides
----------------------------------------------
programs designed to achieve cost effective prescribing by physicians through
the profiling of prescription drug claims to identify physicians who appear
to use improper prescribing practices, followed by education, or "counter
detailing," of the identified physicians on the use of lower cost drug
therapies.
PRESCRIPTION DRUG FORMULARY. Another program for promoting cost
---------------------------
effective prescribing by physicians involves the adoption of a recommended
list of covered drugs, or formulary, as part of the design of a health
benefit plan.
3
<PAGE>
MENTAL HEALTH, SUBSTANCE ABUSE AND EMPLOYEE ASSISTANCE PROGRAMS
---------------------------------------------------------------
The Company's VBH subsidiary offers the following services to assist its
customers in containing costs and assuring quality in the area of mental
health and substance abuse.
MANAGED MENTAL HEALTH BENEFIT PLANS. The Company offers specially designed
-----------------------------------
mental health and substance abuse programs which incorporate preferred
provider networks, clinically-based utilization review and case management,
benefit design, member support and claims administration services. As part
of the Company's programs, networks are established with psychiatrists,
psychologists, social workers and health care facilities whereby these health
care providers agree to provide services at discounted rates and abide by
plan rules relating to matters such as utilization review, quality assurance
and professional licensing. The Company's utilization review and case
management procedures are applied within its provider networks to give
customers an integrated cost containment solution to mental health care
needs.
VBH's principal product is a comprehensive managed care mental health and
substance abuse program which offers customized plan design, access to VBH's
national preferred provider networks of practitioners and facilities,
telephone-based patient evaluation, referral and concurrent utilization
review by professional clinicians, and claims review and management reporting
and analysis. In connection with the sale of this comprehensive program, VBH
offers two optional program elements - an employee assistance program ("EAP")
and claims payment services.
CASE EVALUATION, PATIENT REFERRAL AND CONCURRENT UTILIZATION REVIEW. Each
--------------------------------------------------------------------
client of the comprehensive program is assigned an individual toll-free
information and referral telephone access number which is available to all
plan beneficiaries 24 hours a day. This evaluation and referral system is
staffed by clinically-trained case managers, most of whom hold a masters or a
doctorate degree in psychology or psychiatric social work or a degree in
nursing and have a minimum of three to five years experience in the
psychiatric and/or substance abuse field. Case managers evaluate each
beneficiary's clinical situation and refer the beneficiary to an appropriate
provider within VBH's network, if possible.
Each inpatient case is assigned to one of VBH's clinical case managers
responsible for reviewing the treatment plan and progress from the time of
initial evaluation and referral through the conclusion of treatment. Working
directly with the assigned provider, the case manager assists in determining
whether the proposed course and setting for treatment is certifiable as
medically necessary and appropriate. The case manager also interacts with
the provider to establish the patient's discharge plan. The case manager is
guided by VBH's proprietary clinical database, which employs protocols
developed by VBH based on established national norms.
CLAIMS REVIEW AND MANAGEMENT REPORTING AND ANALYSIS. Details regarding a
----------------------------------------------------
patient's treatment are entered into an on-line interactive information
system which tracks utilization and cost information. VBH recommends payment
only for treatment which its clinical case manager determines to be
certifiable as medically necessary and appropriate. This information system
is also used to report utilization data to VBH's clients.
4
<PAGE>
ADDITIONAL PROGRAMS AND SERVICES. In connection with the delivery of its
---------------------------------
comprehensive programs, VBH offers as optional components an EAP as well as
claims payment services. The employee assistance program provides employees
and their dependents with short-term counseling sessions for a wide range of
personal and work-related problems. The EAP product is also available on a
stand-alone basis. Also, VBH offers on a stand-alone basis, primarily for
inpatient treatment, the concurrent utilization review and reporting
component of its comprehensive program.
Employers generally contract with VBH for its mental health program under
one of two different payment structures. Under the first payment structure,
the employer typically self-insures its mental health and substance abuse
claims and pays VBH an administrative fee. In some of these arrangements,
the Company's fee is subject to adjustment upward or downward depending upon
performance as measured against targeted criteria. Under the second payment
structure, the Company receives a fixed premium per plan beneficiary and is
responsible for paying all approved claims, thereby bearing the risk that
claims may exceed premiums paid. In these arrangements, the Company uses
cost sharing arrangements with network providers, as well as utilization
review, case management and other techniques to manage its claims risk.
The Company's principal customers for its managed care mental health and
substance abuse programs are large self-insured employers who contract with
VBH to provide the plan on a "carved out" basis separate from the balance of
the customer's health care programs.
VBH's programs utilize a network of approximately 36,000 practitioners
and inpatient facilities nationwide.
MANAGED WORKERS' COMPENSATION, GROUP HEALTH AND RELATED SERVICES
----------------------------------------------------------------
ISG provides managed workers' compensation and group health services.
ISG offers network-based cost management and treatment strategies for medical
and indemnity coverages and work-related injuries. Programs include
comprehensive utilization management, claims administration, disability
management, and health care data analysis. ISG's specialty networks are
designed to control costs and produce improved medical outcomes. In February
1995, the Company announced that CCN entered into marketing agreements with
Northwestern National Life Insurance Company and John Alden Financial
Corporation to offer a health maintenance organization ("HMO") in California
that will be owned and operated by CCN. CCN expects the HMO to begin
operating in Southern California in early 1996, pending regulatory approval.
DISEASE MANAGEMENT PROGRAMS AND CLINICAL REVIEW SERVICES
--------------------------------------------------------
VHS is engaged in the development of comprehensive programs that improve
patient outcomes and control costs by organizing managed care initiatives
around diseases. VHS is also engaged in the development and sale of software
and services designed to assist in the identification and elimination of
inappropriate medical services and the profiling of provider practices.
5
<PAGE>
DISEASE MANAGEMENT SERVICES. VHS is developing disease management
----------------------------
capabilities that integrate the clinical delivery of healthcare with expert
decision support, national guidelines, expert judgment and advanced case
management techniques. Disease management programs under development are
tailored to meet the specific needs of employers, managed care organizations
and provider groups.
MEDICAL REVIEW SYSTEM. VHS has developed a highly differentiated
---------------------
proprietary software product, the Medical Review System ("MRS"), which
employs algorithms based on clinical standards to determine the medical
appropriateness of 34 high-cost inpatient and outpatient procedures. MRS'
artificial intelligence "smart questioning" logic permits nurses and
clinicians to efficiently gather clinical data about a patient over the
telephone, match the data to scoring algorithms, and recommend certification
of a procedure or refer doubtful cases to reviewing physicians.
MRS is used in benefit programs covering over 12 million people. The MRS
software is licensed to insurance carriers, Blue Cross and Blue Shield plans,
and numerous HMOs for an annual license fee.
PRACTICE REVIEW SYSTEM. While MRS permits the pretreatment review of high
----------------------
cost procedures, efficient pre-authorization review of large numbers of lower
cost procedures to identify inappropriate utilization is not practicable.
The Practice Review System ("PRS") adds two new tools: a pre-payment claims
review tool to evaluate the medical necessity and quality of coding for lower
cost procedures, and a post-payment tool for profiling providers.
The pre-payment tool permits payers to challenge or readjust claims for
such factors as procedure code unbundling, physician visit code inflation,
and excessive tests and procedures for individual patients. The post-payment
tool permits payers who are managing provider networks to profile their
providers against a range of criteria to determine those with the highest and
lowest rates of best practices and to understand clinical utilization
patterns for over 200 conditions.
CLINICAL PRODUCT DEVELOPMENT. The VHS team of physicians and research
----------------------------
Ph.D.s also acts as a supporting clinical product development staff for the
Company's other subsidiaries. This staff, together with VBH personnel,
developed the Mental Health Review System, which applies the VHS technology
to the mental health field. This upgraded clinical review system has been
installed for several mental health accounts.
HEALTH POLICY, RESEARCH AND MANAGEMENT CONSULTING SERVICES
----------------------------------------------------------
The Company, through its Lewin subsidiary, provides health policy and
management consulting services to public and private sector organizations.
HEALTH POLICY. Lewin provides policy analysis, program design,
-------------
microsimulation and program evaluation to government agencies, foundations,
purchasers, employers and industry associations.
MANAGEMENT CONSULTING. Services include economic research and analysis,
---------------------
strategic planning, merger and acquisition support, market analysis,
capitation rate setting, network contracting and evaluation of new medical
technologies.
6
<PAGE>
REVENUES
Revenues during the past three fiscal years as percentages of total revenues
were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Prescription Drugs 67.0% 63.8% 61.7%
Mental Health 20.3 23.4 31.2
Insurance Services 6.9 5.2 0.4
Information Services 4.2 5.4 3.4
Other 1.0 1.1 1.7
Investment Income 0.6 1.1 1.6
------ ------ ------
TOTAL REVENUES 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
SALES AND MARKETING
Value Health markets its products through a direct sales force which is
complemented by full-time account representatives who assist in responding to
requests for proposals and closing sales. While most products are sold
directly to self-insured employers, insurance companies, HMOs, PPOs and TPAs,
the Company has developed commission arrangements with regional and local
independent insurance brokers.
MAJOR CUSTOMERS
The Company enters into one-year arrangements with most of its customers.
During the year ended December 31, 1994, no customer accounted for more than
10% of the Company's total revenues.
COMPETITION
Value Health faces competition from many group insurance companies, HMOs,
PPOs and TPAs and other specialty managed care companies. Many of the
Company's competitors are significantly larger and have greater financial
resources than the Company, including several drug manufacturers which have
recently acquired large pharmacy benefits management companies. Value Health
believes that its principal competitive strengths are its ability to control
employer health care costs in targeted specialty sectors, its provider
networks and clinically-based managed care techniques, and its ability to
serve multi-state employers.
INTELLECTUAL PROPERTY
Value Health's software for MRS, DURbase and other products has been
developed internally by the Company and under research and development
agreements with third parties. In addition, the Company acquired licenses
and other rights to certain information which was used in early research and
development activities. The Company claims copyrights to its MRS and DURbase
software and certain related documentation.
7
<PAGE>
GOVERNMENT REGULATION
Many states in which Value Health provides certain specialty benefit
programs and utilization review services require the Company to receive
regulatory approval or licenses in order to conduct business. In order to
maintain licenses and approvals for certain specialty benefit programs, Value
Health must comply with various regulations relating to matters such as
financial reserves and deposits, premium rates, benefit design and
disclosure. Regulations relating to utilization review typically impose
requirements with respect to qualification of personnel, appeal procedures,
confidentiality and other matters relating to utilization review services.
In some cases, more than one regulatory agency in each jurisdiction has
authority over the activities of Value Health. State licensing laws and
other regulations are subject to amendment and to interpretation by
regulatory authorities with broad discretionary powers.
Certain states and the federal government have enacted laws and regulations
that apply to the Company's mail order pharmacy services. Such laws and
regulations typically require registration and, in certain instances, impose
limitations on the exclusive use of mail order pharmacies in employee
benefits programs. The application of these laws and regulations to out-of-
state mail pharmacy services is unclear in some jurisdictions and questions
could arise with respect to compliance by the Company with such laws and
regulations.
ERISA governs aspects of the relationship between employer sponsored health
benefit plans and providers of administrative services to such plans through
a series of complex statutes and regulations that are subject to periodic
interpretation by the Internal Revenue Service and the Department of Labor.
ERISA imposes certain requirements on the manner in which the Company does
business with employers who provide self-insured benefit plans. Ongoing
enforcement activities of the Department of Labor may result in additional
limitations on how the Company serves self-insured employer accounts.
The regulation of managed health care continues to evolve, and the Company
cannot predict the focus of future regulations. In general, regulation of
managed care companies is increasing. For instance, many states either have
adopted, or are now considering adoption of, additional laws and regulations
relating to utilization review, and federal programs addressing control of
health care costs are routinely proposed. Expansion of the Company's
business to additional geographic markets or product lines may subject the
Company to additional state and federal regulation.
The Company believes that it is in compliance in all material respects with
applicable current regulations governing its provision of managed care
services. The Company monitors its compliance with applicable laws and
regulations and works with regulators concerning various compliance issues
that arise from time to time in the course of the licensing and regulatory
review process. There can be no assurance that the Company's future
operations will not be adversely affected by existing or new regulatory
requirements or interpretations.
EMPLOYEES
As of December 31, 1994, the Company and its subsidiaries employed
approximately 4,200 people. The Company has experienced no work stoppages
and believes that its employee relations are good.
8
<PAGE>
ITEM 2. PROPERTIES
- ------- ----------
The Company's principal corporate offices are located in Avon, Connecticut.
The Company also maintains offices in a number of locations throughout the
United States. Subsidiary headquarters are located in the New York City,
Washington, D.C., Phoenix, and Los Angeles areas. The Company leases
approximately 1,295,000 square feet of space and owns approximately 44,000
square feet of space. The Company believes that its facilities are adequate
for its current needs and that suitable additional space will be available as
required.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is not a party to any litigation that would have a material
adverse impact on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1994.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- ------------------------------------
The executive officers of the Company, the age of each, and the period during
which each has served in his present office are as follows:
ROBERT E. PATRICELLI (55) the founder of the Company, has been the Chief
Executive Officer and a director of the Company since its organization and
Chairman of the Board since February 1990. From its inception to September
1993, he served as President of the Company. Mr. Patricelli is a member of the
Institute of Medicine of the National Academy of Sciences, and is a member of
the boards of directors of the United States Chamber of Commerce, Northeast
Utilities, Inc., Hartford Hospital and Wesleyan University.
WILLIAM J. MCBRIDE (50) has been the President and Chief Operating Officer of
the Company since September 1993 after serving as Executive Vice President of
the Company since 1987. He also served as Treasurer from 1988 to February 1994
and has been a director since 1987.
STEVEN J. SHULMAN (43) has been the Executive Vice President of the Company
since September 1993. From 1987 to September 1993, he was Senior Vice President
of the Company and he has been a director of the Company since April 1991. From
October 1990 through April 1991, he also served as the acting President and
Chief Executive Officer of the Company's American PsychManagement, Inc.
subsidiary. Mr. Shulman is also a director of Ramsay Health Care, a psychiatric
hospital operator and Novametrix, a medical device company.
9
<PAGE>
JAMES E. BUNCHER (58) serves as Chairman of the Board, President and Chief
Executive Officer of CCN, which he joined in August of 1992. From January 1992
to August 1992, he was a consultant and a Vice President for TakeCare, Inc., an
HMO. From 1987 to 1992, Mr. Buncher was a general partner of an investment
partnership. From 1982 to 1987, Mr. Buncher was President and Chief Executive
Officer of Republic Health Corporation, a hospital management company, of which
he was a founder and director.
PAUL M. FINIGAN (40) has been Vice President, General Counsel and Secretary
of the Company since 1992. From 1991 to 1992, he was General Counsel and
Secretary of the Company. From 1988 to 1991, Mr. Finigan was Associate General
Counsel and Secretary of the Company.
JACQUELINE KOSECOFF, PH.D. (45) has been a Vice President of the Company
since 1992. She became the President of VHS in November 1992, after serving as
an Executive Vice President from 1990 to 1992, and a Senior Vice President from
1988 to 1990, of VHS.
LAWRENCE S. LEWIN (56) is the Chairman and Chief Executive Officer of Lewin
and has served in that capacity since 1987. Mr. Lewin, who is that company's
founder, also serves as an elected member of the Institute of Medicine, as well
as a trustee of Intermountain Health Care, Inc., a non-profit multi-hospital
system.
LESLIE D. MICHELSON (43) is one of the founders of VHS and has served as
Chairman of the Board or President, and Chief Executive Officer of that company
since 1988.
DAVID G. NOONE (41) has been the President and Chief Executive Officer of ISG
since December 1993. From April 1992 to December 1993, he was President and
Chief Operating Officer of Preferred. From April 1989 to April 1992, he served
as Senior Vice President, Clinical Operations of Preferred.
BARRY M. SMITH (41) has been the Chairman of the Board of ValueRx since
November 1993 and has been the Chief Executive Officer since June 1990. He also
served as President of ValueRx from June 1990 to November 1993 and assumed the
title of President again in January 1995. He was the Vice President of Claims
Administrations for PCS, Inc., a prescription drug claims administrator, from
February 1989 to June 1990.
CHARLTON C. TOOKE (41) has been the President and Chief Executive Officer of
VBH since January, 1995. From December 1993 to January 1995, he was Executive
Vice President of VBH's Western Region. From October 1990 to December 1993, he
was Chief Operating Officer and Executive Director of American PsychManagement
of California. From January 1990 to October 1990, Mr. Tooke was Director of
Sales and Marketing for VHS.
DAVID M. WURZER (36) has been Vice President, Treasurer and Chief Financial
Officer of the Company since February 1994. From September 1993 to February
1994, he was Vice President, Finance and Investor Relations of the Company.
From December 1990 to August 1993, Mr. Wurzer was Director of Operations
Planning and Control of the Company. Prior to joining the Company in 1990, Mr.
Wurzer was a Senior Audit Manager of Coopers & Lybrand.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
The information required is contained in the Value Health, Inc. 1994 Annual
Report ("Annual Report") on pages 30, 47 and 50. All of such information is
incorporated herein by this reference.
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The information required is contained in the Annual Report, on page 30,
under the heading "Summary Of Financial Data". All of such information is
incorporated herein by this reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
The information required is contained in the Annual Report, on pages 27 to
29, under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations". All of such information is
incorporated herein by this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The financial statements, together with the report thereon of Coopers &
Lybrand L.L.P. dated February 22, 1995, appearing on pages 31 to 47 of the
Annual Report are incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There has been no change in or disagreement with the Company's independent
accountants during the Company's two most recent fiscal years.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
DIRECTORS
The information concerning directors of the Company required under this
item is incorporated herein by this reference to the Company's definitive
proxy statement for its annual meeting of stockholders to be held on May 4,
1995, which will be filed with the Commission not later than 120 days after
the close of the Company's fiscal year ended December 31, 1994, under the
heading "Election of Directors".
EXECUTIVE OFFICERS
See Item 4a. above.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information required under this item is incorporated herein by this
reference to the Company's definitive proxy statement for its annual meeting
of stockholders to be held on May 4, 1995, which will be filed with the
Commission not later than 120 days after the close of the Company's fiscal
year ended December 31, 1994, under the heading "Executive Officer
Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The information required under this item is incorporated herein by this
reference to the Company's definitive proxy statement for its annual meeting
of stockholders to be held on May 4, 1995, which will be filed with the
Commission not later than 120 days after the close of the Company's fiscal
year ended December 31, 1994, under the heading "Beneficial Ownership of
Voting Securities".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information required under this item is incorporated herein by this
reference to the Company's definitive proxy statement for its annual meeting
of stockholders to be held on May 4, 1995, which will be filed with the
Commission not later than 120 days after the close of the Company's fiscal
year ended December 31, 1994 under the heading "Certain Transactions".
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) (1) Consolidated Financial Statements
The following consolidated financial statements of the Company and the report of
independent accountants included in the Annual Report are incorporated herein by
reference in Item 8.
<TABLE>
<CAPTION>
PAGE NO. IN
ANNUAL REPORT
-------------
<S> <C>
Consolidated Statements of Operations for the years
ended December 31, 1994, 1993 and 1992 31
Consolidated Balance Sheets as of December 31, 1994 and 1993 32
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1994, 1993 and 1992 34
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1993 and 1992 35
Notes to Consolidated Financial Statements 36
Report of Independent Accountants 47
</TABLE>
<TABLE>
<CAPTION>
PAGE NO. IN
FORM 10-K
---------
<S> <C>
(2) Financial Statement Schedule:
Report of Independent Accountants on Financial Statement Schedule S-1
II. Valuation and Qualifying Accounts S-2
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the notes
thereto.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALUE HEALTH, INC.
DATE: March 28, 1995
BY: /s/ David M. Wurzer
------------------------------------------
David M. Wurzer
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
/s/ Robert E. Patricelli Chairman of the Board, March 28, 1995
- --------------------------- Chief Executive Officer and
Robert E. Patricelli Director (Principal Executive Officer)
President and Chief Operating March 28, 1995
/s/ William J. McBride Officer and Director
- ---------------------------
William J. McBride
/s/ Steven J. Shulman Executive Vice President March 28, 1995
- ------------------------------- and Director
Steven J. Shulman
/s/ David J. McDonnell,D.S.W. Director March 28, 1995
- -------------------------------
David J. McDonnell, D.S.W.
/s/ Walter J. McNerney Director March 28, 1995
- -------------------------------
Walter J. McNerney
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
/s/ Rodman W. Moorhead, III Director March 28, 1995
- -------------------------------
Rodman W. Moorhead, III
/s/ Constance B. Newman Director March 28, 1995
- ---------------------------
Constance B. Newman
/s/ John Vogelstein Director March 28, 1995
- ---------------------------
John Vogelstein
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
------------------------------------
FINANCIAL STATEMENT SCHEDULES
-----------------------------
To the Stockholders and Board of Directors
of Value Health, Inc.:
Our report on the consolidated financial statements of Value Health, Inc. and
Subsidiaries has been incorporated by reference in this Form 10-K from page 47
of the 1994 Annual Report to Stockholders of Value Health, Inc. and
Subsidiaries. In connection with our audits of such financial statements, we
also have audited the related financial statement schedule listed in Item
14(a)(2) of this Form 10-K. We did not audit the financial statements of
Preferred Health Care Ltd. for the years ended December 31, 1993 and 1992 or of
Rx Net, Inc. for the year ended December 31, 1992, which statements reflect
revenues of approximately 16% for the years ended December 31, 1993 and 1992,
and total assets approximately 17% as of December 31, 1993, of the related
consolidated totals. Those financial statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to amounts included for these wholly-owned subsidiaries of Value Health, Inc. in
the above-mentioned schedule, is based solely on the reports of such other
auditors.
In our opinion, based on our audits and reports of other auditors, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
February 22, 1995
<PAGE>
VALUE HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
===============================================================================================================
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER DEDUCTIONS BALANCE AT
BEGINNING COST AND ACCOUNTS- - END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
===============================================================================================================
<S> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1994:
Valuation Allowance For
Deferred Tax Asset $4,307,000 $669,000 $4,976,000
Allowance for Doubtful
Accounts $2,298,000 $6,341,000 $945,000/(5)/ $1,707,000/(2)/ $7,877,000
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, 1993:
Valuation Allowance For
Deferred Tax Asset $2,849,000 $1,458,000 $4,307,000
Allowance for Doubtful
Accounts $1,060,000 $1,267,000 $235,000/(1)/ $264,000/(2)/ $2,298,000
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, 1992:
Valuation Allowance For
Deferred Tax Asset $4,586,000 $1,381,000 $3,118,000/(4)/ $2,849,000
Allowance for Doubtful
Accounts $458,000 $1,058,000 $269,000/(3)/ $725,000/(2)/ $1,060,000
===============================================================================================================
</TABLE>
(1) Acquisition of Square Lake Corporation and Complete Pharmacy Network in
July and November, 1993, respectively.
(2) Write-Off of uncollectible accounts, net of recoveries.
(3) Acquisition of Preferred Works, Inc. in December 1992.
(4) Reduction in Valuation Allowance.
(5) Acquisition of Community Care Network, Inc. in June 1994.
S-2
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
on Form S-4 (File No. ) of our reports dated February 22, 1995, on our
audits of the financial statements and financial statement schedule of Value
Health, Inc. and subsidiaries. We also consent to the reference to our firm
under the caption "Experts".
Coopers & Lybrand L.L.P.
Hartford, Connecticut
June 22, 1995
<PAGE>
EXHIBIT 23(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Joint Proxy Statement--
Registration Statement of Value Health, Inc. on Form S-4 of our report on
Preferred Health Care Ltd. dated February 24, 1994, filed as an exhibit to the
Annual Report on Form 10-K of Value Health, Inc. for the year ended December
31, 1994 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of such Registration Statement.
Deloitte & Touche LLP
Stamford, Connecticut
June 21, 1995
<PAGE>
EXHIBIT 23(d)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Joint Proxy Statement--
Registration Statement of Value Health, Inc. on Form S-4 of our report on Rx
Net, Inc. dated March 19, 1993, filed as an exhibit to the Annual Report on
Form 10-K of Value Health, Inc. for the year ended December 31, 1994.
Price Waterhouse LLP
St. Louis, MO
June 21, 1995
<PAGE>
EXHIBIT 23(e)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Diagnostek, Inc.:
We consent to incorporation by reference in the registration statement on Form
S-4 of Value Health, Inc. of our reports dated June 5, 1995, relating to the
consolidated statement of financial position of Diagnostek, Inc. and
subsidiaries as of March 31, 1995 and 1994, and the related Consolidated
Statements of Earnings, Cash Flows and Changes in Stockholders' Equity for each
of the years in the three-year period ended March 31, 1995, and related
schedule, which reports appear in the March 31, 1995 annual report on Form 10-K
of Diagnostek, Inc., and to the reference to our firm under the heading
"Experts" in the Proxy Statement-Prospectus.
Our report dated June 5, 1995, contains an explanatory paragraph that states
the Company is a defendant in shareholder litigation alleging disclosure
violations, the ultimate outcome of which cannot presently be determined. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
June 23, 1995
