-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P9cFwGcd/8sO2UbhPpGJ8SUz5u0M6eXvBeWOXkHF5PcKccMSYUBqSmwuOG6zasAx pfkhvCUIAINzWWJfcgiTgQ== 0000950123-97-001981.txt : 19970307 0000950123-97-001981.hdr.sgml : 19970307 ACCESSION NUMBER: 0000950123-97-001981 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19970306 SROS: NYSE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHSOURCE INC CENTRAL INDEX KEY: 0000855587 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 020387748 STATE OF INCORPORATION: NH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 SEC ACT: 1934 Act SEC FILE NUMBER: 005-40671 FILM NUMBER: 97551708 BUSINESS ADDRESS: STREET 1: 2 COLLEGE PARK DRIVE CITY: HOOKSETT STATE: NH ZIP: 03106 BUSINESS PHONE: 6032687000 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHSOURCE INC CENTRAL INDEX KEY: 0000855587 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 020387748 STATE OF INCORPORATION: NH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 BUSINESS ADDRESS: STREET 1: 2 COLLEGE PARK DRIVE CITY: HOOKSETT STATE: NH ZIP: 03106 BUSINESS PHONE: 6032687000 SC 14D9 1 SCHEDULE 14D-9 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ HEALTHSOURCE, INC. (NAME OF SUBJECT COMPANY) HEALTHSOURCE, INC. (NAME OF PERSON(S) FILING STATEMENT) COMMON STOCK, PAR VALUE $.10 PER SHARE (TITLE OF CLASS OF SECURITIES) 42221E 10 4 (CUSIP NUMBER OF CLASS OF SECURITIES) JON S. RICHARDSON, ESQ. SPECIAL COUNSEL TO THE PRESIDENT HEALTHSOURCE, INC. TWO COLLEGE PARK DRIVE HOOKSETT, NEW HAMPSHIRE 03106 (603) 268-7000 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICE AND COMMUNICATION ON BEHALF OF THE PERSON(S) FILING STATEMENT) WITH A COPY TO: PAUL T. SCHNELL, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 919 THIRD AVENUE NEW YORK, NEW YORK 10022-3897 (212) 735-3000 ================================================================================ 2 ITEM 1. SECURITY AND SUBJECT COMPANY. The name of the subject company is Healthsource, Inc., a New Hampshire corporation (the "Company"), and the address of the principal executive offices of the Company is Two College Park Drive, Hooksett, New Hampshire 03106. The title of the class of equity securities to which this statement relates is the common stock, par value $.10 per share (the "Company Common Stock" or the "Shares"), of the Company (excluding the related Common Stock Purchase Rights (the "Rights") issued pursuant to the Rights Agreement, dated as of July 29, 1996 (the "Rights Agreement"), between the Company and The Bank of New York, as Rights Agent, which will be redeemed prior to the consummation of the Offer (as defined below)). ITEM 2. TENDER OFFER OF THE PURCHASER. This statement relates to the tender offer by CHC Acquisition Corp., a New Hampshire corporation (the "Purchaser") and an indirect, wholly-owned subsidiary of CIGNA Corporation, a Delaware corporation ("CIGNA"), disclosed in a Tender Offer Statement on Schedule 14D-1, dated March 6, 1997 (the "Schedule 14D-1"), to purchase all of the issued and outstanding Shares, at a price of $21.75 per Share, net to the seller in cash (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase, dated March 6, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with the Offer to Purchase, constitute the "Offer"). The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of February 27, 1997 (the "Merger Agreement"), by and among CIGNA, the Purchaser and the Company. The Merger Agreement provides, among other things, that as soon as practicable after the satisfaction or waiver of the conditions set forth in the Merger Agreement, the Purchaser will be merged with and into the Company (the "Merger," and together with the Offer, the "Transaction"), and the Company will continue as the surviving corporation (the "Surviving Corporation"). A copy of the Merger Agreement is filed herewith as Exhibit 2 and is incorporated herein by reference. As set forth in the Schedule 14D-1, the principal executive offices of CIGNA are located at One Liberty Place, Philadelphia, Pennsylvania 19192-1550 and the principal executive offices of the Purchaser are located at 900 Cottage Grove Road, Bloomfield, Connecticut 06152. ITEM 3. IDENTITY AND BACKGROUND. (a) The name and address of the Company, which is the person filing this statement, are set forth in Item 1 above. (b) Except as set forth in this Item 3(b), to the knowledge of the Company, there are no material contracts, agreements, arrangements or understandings and no actual or potential conflicts of interest between the Company or its affiliates and (i) the Company's executive officers, directors or affiliates or (ii) CIGNA or the Purchaser or their respective executive officers, directors or affiliates. ARRANGEMENTS WITH CIGNA, THE PURCHASER OR THEIR AFFILIATES Confidentiality Agreement The following is a summary of certain material provisions of the Confidentiality Agreement, dated as of January 31, 1997, between the Company and CIGNA (the "Confidentiality Agreement"). This summary does not purport to be complete and is qualified in its entirety by reference to the complete text of the Confidentiality Agreement, a copy of which is filed as Exhibit 1 hereto and is incorporated herein by reference. Capitalized terms not otherwise defined below shall have the meanings set forth in the Confidentiality Agreement. The Confidentiality Agreement contains customary provisions pursuant to which, among other matters, CIGNA agreed to keep confidential all nonpublic, confidential or proprietary information furnished to it by the Company relating to the Company, subject to certain exceptions (the "Confidential Information"), and to use the Confidential Information solely for the purpose of evaluating a possible transaction involving the 1 3 Company and CIGNA. CIGNA has agreed in the Confidentiality Agreement that for a period of 18 months from the date thereof, unless invited in writing by the Company, neither it nor any of its affiliates will, among other things, directly or indirectly, acquire or offer to acquire any securities or assets of the Company or propose any tender or exchange offer, merger or other business combination involving the Company, "solicit" any "proxies" (as those terms are used in the rules of the Securities and Exchange Commission (the "Commission")) or seek to influence the management, policy or conduct of the business affairs of the Company. CIGNA further agreed that, for a period of 18 months from the date of the Confidentiality Agreement, neither CIGNA nor any of its affiliates will employ, without the written consent of the Company, or solicit the employment of any executive officer of the Company, the chief executive officer of any health maintenance organization or insurance subsidiary of the Company or any other management employee of the Company or any of its affiliates with whom CIGNA or its representatives had contact during the negotiations and investigations in connection with a possible transaction between CIGNA and the Company. The Merger Agreement The following is a summary of certain material provisions of the Merger Agreement. This summary does not purport to be complete and is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which is filed as Exhibit 2 hereto and is incorporated herein by reference. Capitalized terms not otherwise defined below shall have the meanings set forth in the Merger Agreement. The Offer. The Merger Agreement provides for the commencement of the Offer not later than the fifth business day from the public announcement of the execution of the Merger Agreement. The Merger Agreement also provides that the Purchaser cannot amend or waive the Minimum Condition (as defined below) or decrease the Offer Price or the number of Shares sought, or amend any other term or condition of the Offer in any manner adverse to the holders of Shares or extend the expiration date of the Offer without the prior written consent of the Company. Notwithstanding the foregoing, the Purchaser has agreed to extend the Offer from time to time until seven months from execution of the Merger Agreement if, and to the extent that, at the initial expiration date of the Offer, or any extension thereof, all conditions to the Offer have not been satisfied or waived. In the event that the Insurance Regulatory Approvals (as defined below) have not been obtained by the end of such initial seven month period and provided that, at the end of such seven month period, no Company Material Adverse Effect (as defined below) has occurred and is continuing, the Company may, in its sole discretion, require the Purchaser to extend the expiration date of the Offer for up to an additional 60 days. In addition, in the event that the Offer Price is increased, the Offer may be extended to the extent required by law in connection with such increase. The obligation of the Purchaser to accept for payment and pay for Shares tendered pursuant to the Offer is subject to the condition that there will be validly tendered and not withdrawn a number of Shares which, together with any Shares owned by CIGNA or the Purchaser, represent at least a majority of the Shares outstanding on a fully diluted basis (the "Minimum Condition"). In addition, the Purchaser is not required to accept for payment or pay for any Shares tendered pursuant to the Offer, and may terminate the Offer and not accept for payment any tendered Shares, if (a) any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), has not expired or been terminated prior to the expiration of the Offer; (b) any approvals or filings under various state and federal laws, rules and regulations governing insurance holding and operating companies, health maintenance organizations, health care services plans, third party administrators, preferred provider plans, providers of utilization review services, or other managed health care organizations, including laws, rules and regulations with respect to the administration of Medicaid and Medicare (the "Insurance Regulatory Approvals") or any other material consent, approval, or authorization required under any federal or state law required to consummate the Offer have not been obtained, except where the failure to have obtained such approvals would not result in a Company Material Adverse Effect (as defined below) and would not result in a violation of law; or (c) at any time on or after February 26, 1997, and before the time of acceptance of Shares for payment pursuant to the Offer any of the following occur: (i) there shall have been any statute, rule, regulation, judgment, order or 2 4 injunction promulgated, entered, enforced, enacted or issued applicable to the Offer or the Merger by any federal or state governmental regulatory or administrative agency, authority, court or legislative body or commission which (A) prohibits the consummation of the Offer or the Merger, (B) prohibits or imposes any material limitations on, CIGNA's or the Purchaser's ownership or operation of all or a material portion of the Company's businesses or assets or the Shares, except for such prohibitions or limitations which would not have a Company Material Adverse Effect, (C) prohibits or makes illegal the acceptance for payment, payment for or purchase of Shares or the consummation of the Offer, or (D) renders the Purchaser unable to accept for payment, pay for or purchase a material portion or all of the Shares; provided, that, the parties shall have used their best efforts to cause any such statute, rule, regulation, judgment, order or injunction to be vacated or lifted; (ii) the representations and warranties of the Company set forth in the Merger Agreement shall not be true and accurate as of the date of consummation of the Offer as though made on or as of such date (except for those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time which need only be true and accurate as of such date or with respect to such period) or the Company shall have breached or failed to perform or comply with any obligation, agreement or covenant required by the Merger Agreement to be performed or complied with by it except, in each case where the failure of such representations and warranties to be true and accurate (without giving effect to any limitation as to "materiality" or "material adverse effect" set forth therein), or the performance or compliance with such obligations, agreements or covenants, do not, individually or in the aggregate, have a Company Material Adverse Effect; (iii) the Merger Agreement shall have been terminated in accordance with its terms; (iv) it shall have been publicly disclosed that any person, entity or "group" (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), shall have acquired beneficial ownership (as determined pursuant to Rule 13d-3 promulgated under the Exchange Act) of more than 30% of the then outstanding Shares, through the acquisition of stock, the formation of a group or otherwise; (v) the Board of Directors of the Company (the "Company Board") shall have withdrawn, modified or changed in a manner adverse to CIGNA or the Purchaser its approval or recommendation of the Offer, the Merger Agreement or the Merger or shall have recommended another proposal or offer or shall have executed an agreement in principle or definitive agreement relating to another proposal or offer or similar business combination with a person or entity other than CIGNA, the Purchaser or their affiliates or the Company Board shall have adopted a resolution to do any of the foregoing; or (iv) there shall have occurred (A) any general suspension of trading in securities on any national securities exchange or in the over-the-counter market, (B) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States (whether or not mandatory), or (C) any limitation (whether or not mandatory) by an United States governmental authority or agency on the extension of credit by banks or other financial institutions, which in the reasonable judgment of CIGNA or the Purchaser, in any such case, and regardless of the circumstances giving rise to such condition, makes it inadvisable to proceed with the Offer and/or with such acceptance for payment or payments. For purposes of the Merger Agreement, "Company Material Adverse Effect" means only (I) any adverse change in, or effect on, the business, financial condition or operations (excluding results of operations and effects of net income) of the Company and its subsidiaries, taken as a whole, that individually or in the aggregate, exceeds, or is reasonably likely to exceed, $67.5 million, or (II) the net income of the Company and its subsidiaries (not taking into account any (A) gains or losses resulting from sales or other dispositions of assets by the Company or any of its subsidiaries (including, without limitation, gains or losses resulting from related severance costs) effected with the prior written consent of CIGNA (which consent will not be unreasonably withheld), and (B) losses resulting from the costs related to the Merger Agreement and the transactions contemplated thereby), determined in accordance with United States generally accepted accounting principles ("GAAP"), from January 1, 1997 through the last full month of operations for which financial information is available prior to the consummation of the Offer being less, on a cumulative basis, than the Targeted Income (as defined below) by an amount in excess of the Allowed Shortfall (as defined below); provided, however, that, in the case of either of (I) or (II) above, the effects of changes that are generally applicable to (i) the health care or HMO industries, (ii) the United States economy or (iii) the United States securities markets shall be excluded from such determination; and provided, further, that any adverse effect on the Company and its subsidiaries resulting from the execution of the Merger Agreement and 3 5 the announcement of the Merger Agreement and the transactions contemplated thereby and any change in value of the Company's marketable securities shall also be excluded from such determination. In addition to the foregoing, the determination of the dollar value or impact of any change or event pursuant to the preceding sentence shall be based solely on the actual dollar value of such change or effect, on a dollar-for-dollar basis, and shall not take into account (i) any multiplier valuation, including, without limitation, any multiple based on earnings or other financial indicia or the Offer Price or (ii) any consequential damages or other consequential valuation. For purposes of the Merger Agreement, (x) "Targeted Income" means, with respect to the following periods, the cumulative monthly net income (in thousands) listed for such periods: January 1997 -- $1,413, February 1997 -- $5,281, March 1997 -- $8,963, April 1997 -- $13,075, May 1997 -- $17,780, June 1997 -- $22,741, July 1997 -- $27,819, August 1997 -- $34,169, September 1997 -- $40,182, October 1997 -- $45,862, November 1997 -- $53,956, and December 1997 -- $61,423, and (y) "Allowed Shortfall" means, for the same period, $5 million of net income per month, on a cumulative basis, plus an aggregate of an additional $10 million of net income. For purposes of considering whether a "Company Material Adverse Effect" has occurred, (A) any adjustment of reserves for hospital provider contracts receivables on the Company's balance sheet as of December 31, 1996 shall be counted only in clause (I) above, and (B) any new reserves for hospital provider contracts receivables established for the period after December 31, 1996 shall be counted only in clause (II) above, unless such new reserves are required to be restated on the Company's balance sheet as of December 31, 1996 under GAAP, in which case such new reserves shall be counted only in clause (I) above. The Merger. The Merger Agreement provides that, subject to the terms and conditions thereof, the Purchaser will be merged with and into the Company, with the Company continuing as the Surviving Corporation and a wholly-owned subsidiary of CIGNA, and each issued and outstanding Share (other than Shares owned by CIGNA, the Purchaser or any other wholly-owned subsidiary of CIGNA or Shares held by shareholders who properly exercise their dissenters' rights under the New Hampshire Business Corporation Act (the "NHBCA")) shall be converted into the right to receive the Offer Price, without interest. The Merger Agreement also provides that (i) the directors of the Purchaser immediately prior to the Effective Time will be the initial directors of the Surviving Corporation and the officers of the Company immediately prior to the Effective Time will be the initial officers of the Surviving Corporation; (ii) the Articles of Incorporation of the Company will be the initial Articles of Incorporation of the Surviving Corporation; and (iii) the By-laws of the Company will be the initial By-laws of the Surviving Corporation. Treatment of Options. The Merger Agreement provides that each option to purchase Shares which has been granted under the Company's option plans will be replaced with a fully vested substitute option to purchase CIGNA's common stock, $1 par value per share ("CIGNA Common Stock"). See "Arrangements with Executive Officers, Directors or Affiliates of the Company--Employee and Director Stock Options." Directors. The Merger Agreement provides that, promptly upon CIGNA's purchase of and payment for Shares which represent at least a majority of the outstanding Shares (on a fully diluted basis), CIGNA will be entitled to designate such number of directors, rounded up to the next whole number, on the Company Board as shall give CIGNA, subject to compliance with Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, representation on the Company Board equal to the product of the total number of directors on the Company Board (giving effect to the directors elected pursuant to this sentence) multiplied by the percentage that the aggregate number of Shares beneficially owned by CIGNA, the Purchaser and any of their affiliates bears to the total number of Shares then outstanding. The Company will, upon request of the Purchaser, use its best efforts to cause CIGNA's designees to be so elected, including by increasing the size of the Company Board or by securing the resignations of incumbent directors. Notwithstanding the foregoing, until the Effective Time, the Company will have on the Company Board at least two directors who were directors of the Company on the date of the Merger Agreement; provided, that, subsequent to the purchase of and payment for Shares pursuant to the Offer, CIGNA will always have its designees represent at least a majority of the entire Company Board. The Merger Agreement also provides that from and after the time, if any, that CIGNA's designees constitute a majority of the Company Board, any amendment of the Merger Agreement, any termination of the Merger Agreement by the Company, any extension of time for performance of any of the obligations of 4 6 CIGNA or the Purchaser, or any waiver of any condition or any of the Company's rights thereunder may be effected only by the action of a majority of the directors of the Company then in office who were directors on the date of the Merger Agreement, which action shall be deemed to constitute the action of the full Company Board; provided, that, if there are no such directors, such actions may be effected by unanimous vote of the entire Company Board. Shareholders' Meeting. Pursuant to the Merger Agreement, the Company will, if required by applicable law in order to consummate the Merger, duly call, give notice of, convene and hold a special meeting of its shareholders as soon as practicable following the acceptance for payment and purchase of Shares by the Purchaser pursuant to the Offer for the purpose of considering and taking action upon the Merger Agreement. The Merger Agreement also provides that the Company will, if required by applicable law in order to consummate the Merger, prepare and file with the Commission a preliminary proxy or information statement relating to the Merger and the Merger Agreement and shall use its best efforts (i) to obtain and furnish the information required to be included by the Commission in the Proxy Statement (as hereinafter defined) and, after consultation with CIGNA, to respond promptly to any comments made by the Commission with respect to the preliminary proxy or information statement and cause a definitive proxy or information statement (the "Proxy Statement") to be mailed to its shareholders and (ii) to obtain the necessary approvals of the Merger and the Merger Agreement by its shareholders. The Merger Agreement also provides that the Company shall include in the Proxy Statement the recommendation of the Company Board that shareholders of the Company vote in favor of the approval of the Merger and the adoption of the Merger Agreement. The Merger Agreement also provides that, if permitted by the NHBCA, in the event that CIGNA, the Purchaser or any other subsidiary of CIGNA shall acquire at least 90% of the outstanding shares of each class of capital stock of the Company, pursuant to the Offer or otherwise, the parties shall take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after such acquisition, without a meeting of the Company's shareholders (a "Short-Form Merger"). Under the NHBCA, as currently in effect, the Merger cannot be accomplished as a Short-Form Merger because the NHBCA requires the parent corporation in such a merger (i.e., the Purchaser) to be the surviving corporation. Representations and Warranties. The Merger Agreement contains representations and warranties of one or both of the parties with respect to, among other things (i) organization, good standing, corporate power and enforceability, (ii) ownership of subsidiaries, (iii) capitalization, (iv) no conflicts, (v) required consents or approvals, (vi) no material misstatements in filings made with the Commission, financial statements and regulatory statements, (vii) no undisclosed liabilities, (viii) absence of material adverse changes, (ix) no litigation, (x) compliance with law, (xi) no liabilities under ERISA, (xii) tax returns filed and taxes paid, (xiii) receipt of fairness opinion from financial advisor, and (xiv) sufficiency of funds to consummate the Merger. In the Merger Agreement, each of CIGNA and the Purchaser also (i) acknowledges that none of the Company, its subsidiaries or any of their respective directors, officers, employees, affiliates, agents, advisors or representatives makes any representation or warranty, either express or implied, as to the accuracy or completeness of any of the information provided or made available to CIGNA, the Purchaser or their agents or representatives, and (ii) agrees, to the fullest extent permitted by law, that none of the Company, its subsidiaries or any of their respective directors, officers, employees, shareholders, affiliates, agents, advisors or representatives shall have any liability or responsibility whatsoever to CIGNA or the Purchaser on any basis (including, without limitation, in contract or tort, under federal or state securities laws or otherwise) based upon any information provided or made available, or statements made, to CIGNA, except that the foregoing limitation shall not apply to the extent the Company makes specific representations and warranties in the Merger Agreement or preclude CIGNA and the Purchaser from seeking any remedy for fraud. The Company has also made a reciprocal acknowledgement and agreement with CIGNA and the Purchaser. Interim Operations. In the Merger Agreement, the Company has covenanted and agreed that, among other things, between the date of the Merger Agreement and prior to the time the Purchaser's designees have been elected to, and constitute a majority of, the Company Board, unless CIGNA otherwise agrees in writing 5 7 and except as otherwise contemplated by the Merger Agreement, (a) the Company and each of its subsidiaries will conduct its business only in the ordinary and usual course and, to the extent consistent therewith, use their best efforts to preserve in all material respects their business organization intact and maintain their existing relations with customers, suppliers, employees and business associates and (b) neither the Company nor any of its subsidiaries will (i) declare, set aside or pay any dividend or other distribution payable in cash, stock or property with respect to its capital stock (other than dividends from any subsidiary of the Company to the Company or any other subsidiary of the Company); (ii) issue or sell any additional shares of, or securities convertible into or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of capital stock of any class of the Company or its subsidiaries, other than Shares reserved for issuance on the date of the Merger Agreement upon exercise of outstanding Rights pursuant to the Rights Agreement, issuances pursuant to the exercise of stock options outstanding on the date of the Merger Agreement, or issuances pursuant to the Company's issued and outstanding 5% Convertible Subordinated Notes due 2003 (the "Company Convertible Notes"); (iii) acquire, sell, lease or dispose of any assets in excess of $5 million, other than in the ordinary and usual course of business; (iv) incur or modify any material debt, other than in the ordinary and usual course of business; (v) redeem, purchase or otherwise acquire directly or indirectly any of its capital stock other than redemption of the outstanding Rights pursuant to the Rights Agreement; (vi) terminate or materially amend any employee benefit plans; (vii) adopt or materially amend any employee benefit plans or amend any employment or severance agreement or (except for certain normal increases in the ordinary and usual course of business) increase in any manner the compensation of any employees; (viii) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the material obligations of any other person (other than subsidiaries of the Company), except in the ordinary and usual course of business; (ix) make any material loans, advances or capital contributions to, or investments in, any other person (other than to subsidiaries of the Company), other than in the ordinary and usual course of business; (x) make capital expenditures in excess of an aggregate of $10 million for the first seven months from the date of the Merger Agreement or an additional $5 million thereafter; (xi) materially change any of the accounting methods used by it unless required by GAAP or applicable law; (xii) settle or compromise any claim (including arbitration) or litigation involving payments by the Company in excess of $1,000,000, individually, which are not subject to insurance reimbursement without the prior written consent of CIGNA, which consent will not be unreasonably withheld, and will consult with CIGNA with respect to settlement or compromise of any claim (including arbitration) or litigation involving less than $1,000,000; (xiii) amend, modify or terminate in any material respect its hospital contracts without the prior written consent of CIGNA, which consent shall not be unreasonably withheld, and provided that CIGNA shall designate a single senior officer with responsibility to provide such consent and such officer shall respond within two business days of any such request and the Company will consult with CIGNA prior to entering into any new hospital contract or agreement; or (ix) authorize or enter into an agreement to do any of the foregoing. Actions Regarding the Rights. The Company has agreed in the Merger Agreement that it shall, in accordance with the terms and provisions of the Rights Agreement and as promptly as practicable on or after the date of the Merger Agreement, take all reasonable actions necessary to cause the (a) postponement of the Distribution Date (as defined in the Rights Agreement) as necessary to prevent the Merger Agreement or the consummation of any of the transactions contemplated thereby, including without limitation, the publication or other announcement of the Offer and the consummation of the Offer and the Merger, from resulting in (i) the distribution of separate Rights certificates, or (ii) the occurrence of a Distribution Date, and (b) redemption of the Rights prior to the consummation of the Offer. On February 27, 1997, the Company Board postponed the Distribution Date until immediately prior to the consummation of the Offer at which time the Rights will be redeemed. 5% Convertible Subordinated Notes. The Merger Agreement provides that, in accordance with the terms of the Indenture, dated as of March 6, 1996 (the "Indenture"), between the Company, as issuer, and The Bank of New York, as trustee (the "Trustee"), with respect to the Company Convertible Notes, within 30 days following the acquisition by Purchaser of beneficial ownership, directly or indirectly, of more than 50% of the Shares, the Company will publish a notice in The Wall Street Journal, notify the Trustee and give written notice to each holder of the Company Convertible Notes, stating, among other things, (i) that a 6 8 Change of Control (as defined in the Indenture) has occurred, (ii) that each holder of the Company Convertible Notes has the right to require the Company to repurchase such holder's Company Convertible Notes at a purchase price in cash in an amount equal to 101% of the principal amount of such Company Convertible Notes, plus accrued and unpaid interest thereon, if any, to the purchase date thereof and (iii) the date on which such Company Convertible Notes shall be purchased which shall be a business day no later than 60 days from the date such notice is mailed. In connection with such repurchases, CIGNA has agreed in the Merger Agreement to contribute to the Company an amount in cash necessary to repurchase all such Company Convertible Notes. No Solicitation. Pursuant to the Merger Agreement, the Company has agreed that neither it nor any of its subsidiaries shall (and the Company shall use its best efforts to cause its officers, directors, employees and investment bankers, attorneys or other agents not to), (i) initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal that constitutes or is reasonably likely to lead to any Acquisition Proposal (as defined below); (ii) engage in negotiations or discussions with, or furnish any information or data to any third party relating to an Acquisition Proposal; or (iii) enter into any agreement with respect to or approve any Acquisition Proposal; provided, however, that the Company and the Company Board may participate in discussions or negotiations (including, as a part thereof, making any counterproposal) with or furnish information to any third party making an unsolicited Acquisition Proposal (a "Potential Acquiror") or approve an unsolicited Acquisition Proposal if the Company Board is advised by its financial advisor that such Potential Acquiror has the financial wherewithal to be reasonably capable of consummating such an Acquisition Proposal, and either (i) the Company Board determines in good faith, after receiving advice from its financial advisor, that such third party has submitted to the Company an Acquisition Proposal which is a Superior Proposal (as defined below), or (ii) the Company Board determines in good faith, based upon advice of its outside legal counsel, that the failure to participate in such discussions or negotiations or to furnish such information or approve an Acquisition Proposal would violate the Company Board's fiduciary duties under applicable law. For purposes of the Merger Agreement, "Acquisition Proposal" means any bona fide proposal, whether in writing or otherwise, made by a third party to acquire beneficial ownership (as defined under Rule 13(d) of the Exchange Act) of all or a material portion of the assets of, or any material equity interest in, the Company or its material subsidiaries pursuant to a merger, consolidation or other business combination, sale of shares of capital stock, sale of assets, tender offer or exchange offer or similar transaction involving the Company or its material subsidiaries. "Superior Proposal" means any bona fide proposal to acquire, directly or indirectly, for consideration consisting of cash and/or securities, more than a majority of the Shares then outstanding or all or substantially all the assets of the Company, and otherwise on terms which the Company Board determines in good faith to be more favorable to the Company and its shareholders than the Offer and the Merger (based on advice of the Company's financial advisor that the value of the consideration provided for in such proposal is superior to the value of the consideration provided for in the Offer and the Merger), for which financing, to the extent required, is then committed or which, in the good faith reasonable judgment of the Company Board, after receiving advice from its financial advisor, is reasonably capable of being financed by such third party. The Merger Agreement also provides that except to the extent such action would violate the Company Board's fiduciary duties under, or otherwise violate, applicable law, the Company will (i) promptly inform CIGNA in writing of any provision of information, as described above, or of any Acquisition Proposal and the identity of the recipient of such information and/or the Potential Acquiror and the terms of such Acquisition Proposal, and (ii) keep CIGNA reasonably informed of the status of any such Acquisition Proposal (including amendments or proposed amendments). The Company has agreed that any non-public information furnished to a Potential Acquiror will be pursuant to a confidentiality agreement substantially similar to the confidentiality provisions of the confidentiality agreement entered into between the Company and CIGNA. In the Merger Agreement, the Company has agreed that the Company Board shall not (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to CIGNA, its approval or recommendation of the Merger Agreement, the Offer or the Merger or (ii) approve or recommend, or propose to approve or recommend, any Acquisition Proposal unless, in each case, the Company Board determines in good faith, after 7 9 receiving advice from its financial advisor, that such Acquisition Proposal is a Superior Proposal or, based upon advice of its outside legal counsel, that the failure to take such action would violate its fiduciary duties under applicable law. Employee Benefits. The Merger Agreement provides that, effective as of the Effective Time and for a two-year period following the Effective Time, those persons who, immediately prior to the Effective Time, were employees of the Company or its subsidiaries will be provided with employee plans and programs which provide benefits that are no less favorable in the aggregate than those provided to such employees immediately prior to the date of the Merger Agreement. As soon as is reasonably practicable (and in any event prior to the consummation of the Offer) and following a review of Parent's employee plans and benefits, the Company will confirm to Parent whether it considers Parent's employee plans and benefits to be no less favorable in the aggregate than the Company's employee plans and benefits. With respect to such benefits, service accrued with the Company by such employees will be recognized for all purposes, except to the extent necessary to prevent duplication of benefits. CIGNA and the Purchaser have also agreed to honor, without modification, all employment and severance agreements and arrangements, as amended through the date of the Merger Agreement, with respect to employees and former employees of the Company as well as additional severance agreements to be entered into after the date of the Merger Agreement and prior to the Effective Time. As soon as practicable following the Effective Time (but in no event later than 30 days following the Effective Time), CIGNA will grant options to purchase 200,000 shares of CIGNA Common Stock to persons who were employees of the Company immediately prior to the Effective Time. See "Arrangements with Executive Officers, Directors or Affiliates of the Company -- Certain Provisions in the Merger Agreement." Directors' and Officers' Insurance and Indemnification. The Merger Agreement provides that (a) from and after the consummation of the Offer, CIGNA will, and will cause the Company (or the Surviving Corporation if after the Effective Time) to, indemnify, defend and hold harmless any current or former officer, director, employee and agent (the "Indemnified Party") of the Company and its subsidiaries against all losses, claims, damages, liabilities, costs and expenses (including attorney's fees and expenses), judgments, fines, losses, and amounts paid in settlement in connection with any actual or threatened action, suit, claim, proceeding or investigation (each a "Claim") to the extent that any such Claim is based on, or arises out of, (i) the fact that such person is or was a director, officer, employee or agent of the Company or any subsidiaries or is or was serving at the request of the Company or any of its subsidiaries as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (ii) the Merger Agreement, or any of the transactions contemplated thereby, in each case to the extent that any such Claim pertains to any matter or fact arising, existing, or occurring prior to or at the Effective Time, regardless of whether such Claim is asserted or claimed prior to, at or after the Effective Time, to the full extent permitted under New Hampshire law or the Company's Articles of Incorporation, By-laws or existing indemnification agreements, including provisions relating to advancement of expenses incurred in the defense of any action or suit; provided, that, in the event any Indemnified Party becomes involved in any capacity in any Claim, then from and after consummation of the Offer, CIGNA will, or will cause the Company (or the Surviving Corporation if after the Effective Time) to, periodically advance to such Indemnified Party its legal and other expenses (including the cost of any investigation and preparation incurred in connection therewith), subject to the provision by such Indemnified Party of an undertaking to reimburse the amounts so advanced in the event of a final non-appealable determination by a court of competent jurisdiction that such Indemnified Party is not entitled thereto; (b) CIGNA and the Company agree that all rights to indemnification and all limitations on liability existing in favor of the Indemnified Party as provided in the Company's Articles of Incorporation and By-laws as in effect as of the Merger Agreement shall survive the Merger and shall continue in full force and effect, without any amendment thereto, for a period of six years from the Effective Time to the extent such rights are consistent with the NHBCA; provided, that, in the event any claim or claims are asserted or made within such six year period, all rights to indemnification in respect of any such claim or claims shall continue until disposition of any and all such claims; provided, further, that any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under New Hampshire law, the Company's Articles of Incorporation or By-laws or such agreements, as the case may be, shall be made by independent legal counsel selected by the Indemnified Party and reasonably acceptable to 8 10 CIGNA; (c) in the event CIGNA or the Purchaser or any of their successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, proper provision shall be made so that the successors and assigns of CIGNA and the Purchaser assume the obligations set forth above and none of the actions described in clauses (i) or (ii) shall be taken until such provision is made; and (d) CIGNA or the Surviving Corporation shall maintain the Company's existing officers' and directors' liability insurance policy for a period of not less than six years after the Effective Date; provided, that, CIGNA may substitute therefor policies of substantially similar coverage and amounts containing terms no less advantageous to the covered former directors or officers. Shareholder Litigation. The Merger Agreement provides that in connection with any litigation which may be brought against the Company or its directors relating to the transactions contemplated thereby, the Company will keep CIGNA and its counsel informed of the status of such litigation, to the extent CIGNA is not otherwise a party thereto. The Company has also agreed that it will consult with CIGNA prior to entering into any settlement or compromise of any such shareholder litigation and will not enter into any such settlement or compromise involving the payment of money in excess of $1 million (to the extent not subject to insurance reimbursement) without CIGNA's prior written consent. Further Assurances. In the Merger Agreement, each of the parties agrees to use its respective best efforts to take, or cause to be taken, all action, 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 which efforts shall include, without limitation, (a) CIGNA and the Purchaser proffering their willingness to accept an order or orders providing for the divestiture by CIGNA and the Purchaser of such of the Company's assets and businesses (or, in lieu thereof, approximately equivalent assets and businesses of CIGNA and the Purchaser) which do not represent in the aggregate assets with a fair market value greater than $67.5 million as are necessary to permit CIGNA and the Purchaser otherwise fully to consummate the Offer and the Merger and the transactions contemplated by the Merger Agreement, including an offer to hold separate such assets and businesses pending any such divestiture or pending the receipt of any required regulatory approvals; (b) CIGNA and the Purchaser using their best efforts to prevent any preliminary or permanent injunction or other order by a court of competent jurisdiction or Governmental Entity (as defined in the Merger Agreement) relating to consummating the transactions contemplated by the Merger Agreement, including, without limitation, under the antitrust laws and with respect to the Insurance Regulatory Approvals, and, if issued, to appeal any such injunction or order through the appellate court or body for the relevant jurisdiction, provided that CIGNA shall not be obligated to continue pursuing any particular litigation or action following the issuance of any preliminary injunction with respect thereto; and (c) CIGNA and the Purchaser using their best efforts to satisfy any objections of, and accept any conditions imposed by, any Governmental Entity in connection with any Insurance Regulatory Approval, except where such objection or condition would result in costs or liabilities to the Company and CIGNA, taken together (and aggregated with any loss incurred in connection with a disposition of assets pursuant to clause (a) above at less than fair market value), in excess of $67.5 million; provided, however, that notwithstanding the foregoing, during the sixty day period following the date of the Merger Agreement, CIGNA and Purchaser will only be obligated to use commercially reasonable efforts to obtain all Insurance Regulatory Approvals. If at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of the Merger Agreement, the parties thereto shall take or cause to be taken all such necessary action, including, without limitation, the execution and delivery of such further instruments and documents as may be reasonably requested by the other party for such purposes or otherwise to consummate and make effective the transactions contemplated thereby. CIGNA has agreed to file all applications on Form A (or equivalent form) necessary to obtain the Insurance Regulatory Approvals within 12 business days from the date of the Merger Agreement. Conditions to the Merger. The Merger Agreement provides that the respective obligations of each party to effect the Merger shall be subject to the satisfaction, at or prior to the Effective Time, of the following conditions: (a) if required by applicable law and the Articles of Incorporation, the Merger Agreement shall 9 11 have been approved and adopted by the requisite vote of the Company's shareholders; (b) any waiting period applicable to the Merger under the HSR Act shall have expired or been terminated; (c) all Insurance Regulatory Approvals shall have been obtained, except where the failure to do so would not have a Company Material Adverse Effect; (d) no statute, rule, regulation, order, decree or injunction shall have been enacted, promulgated or issued by any Governmental Entity or court which prohibits consummation of the Merger; and (e) CIGNA, the Purchaser or their affiliates shall have purchased Shares pursuant to the Offer. The Merger Agreement provides that the obligation of the Company to effect the Merger is further subject to the conditions that the representations and warranties of CIGNA and the Purchaser shall be true and accurate, except where the failure to be so true and accurate would not have a CIGNA Material Adverse Effect (as hereinafter defined), and that CIGNA and the Purchaser shall have performed in all material respects all of their respective obligations under the Merger Agreement. For purposes of the Merger Agreement, "CIGNA Material Adverse Effect" means only any adverse change in, or effect on, the business, financial condition, operations or results of operations of CIGNA and its subsidiaries, taken as a whole that, individually or in the aggregate, exceeds, or is reasonably likely to exceed, $67.5 million; provided, however, that the effects of changes that are generally applicable to (i) the healthcare or HMO industries, (ii) the United States economy, or (iii) the United States securities markets shall be excluded from such determination. In addition to the foregoing, the determination of the dollar value or impact of any change or event pursuant to the preceding sentence shall be based solely on the actual dollar value of such change or effect, on a dollar-for-dollar basis, and shall not take into account (i) any multiplier valuation, including, without limitation, any multiple based on earnings or other financial indicia or (ii) any consequential damages or other consequential valuation. The Merger Agreement also provides that the obligations of CIGNA and the Purchaser to effect the Merger are further subject to the conditions that the Company's representations and warranties shall be true and accurate, except where the failure to be so true and accurate would not have a Company Material Adverse Effect, and that the Company shall have performed in all material respects all of its obligations under the Merger Agreement; provided, however, that these conditions shall cease if the Purchaser shall have accepted for payment and paid for Shares validly tendered pursuant to the Offer. Termination. The Merger Agreement provides that it may be terminated at any time prior to the Effective Time: (a) by mutual consent of CIGNA and the Company; (b) by either the Company or CIGNA and the Purchaser (i) if the Shares shall not have been purchased pursuant to the Offer on or prior to seven months from the execution of the Merger Agreement; provided, however, that the Company may, in its sole discretion, extend such termination date for up to an additional 60 days in the event that the Insurance Regulatory Approvals shall not have been obtained by the end of such initial seven month period and provided that, at the end of such seven month period, no Company Material Adverse Effect shall have occurred and be continuing; and provided, further, that a party may not terminate the Merger Agreement pursuant to this clause (i) if such party's failure to fulfill any obligation under the Merger Agreement was the cause of, or resulted in, the failure of CIGNA or the Purchaser to purchase the Shares on or prior to such date or (ii) if any Governmental Entity shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Merger Agreement or prohibiting CIGNA from acquiring or holding or exercising rights of ownership of the Shares except such prohibitions which would not have a Company Material Adverse Effect, and such order, decree, ruling or other action shall have become final and non-appealable; (c) by the Company (i) if prior to the purchase of Shares pursuant to the Offer, either (A) a third party shall have made an Acquisition Proposal that the Company Board determines in good faith, after consultation with its financial advisor, is a Superior Proposal, or (B) the Company Board shall have withdrawn, or modified or changed in a manner adverse to CIGNA or the Purchaser its approval or recommendation of the Offer, the Merger Agreement or the Merger, (ii) if CIGNA or the Purchaser shall have terminated the Offer, or the Offer shall have expired, without CIGNA or the Purchaser purchasing any Shares; provided, that, the Company may not terminate the Merger Agreement pursuant to this clause (ii) if the Company is in willful breach of the Merger Agreement or (iii) if, due to an occurrence that if occurring after the commencement of the Offer would result in a failure to satisfy any of the conditions to completion of the Offer, CIGNA, the Purchaser or any of their affiliates shall have failed to commence the Offer on or prior to five business days following the date of the initial public announcement of the Offer, provided, that, the Company may not terminate the Merger Agreement pursuant to this clause 10 12 (iii) if the Company is in willful breach of the Merger Agreement; or (d) by CIGNA and the Purchaser (i) if, prior to the purchase of Shares pursuant to the Offer, the Company Board shall have withdrawn, modified or changed in a manner adverse to CIGNA or the Purchaser its approval or recommendation of the Offer, the Merger Agreement or the Merger or shall have recommended an Acquisition Proposal or shall have executed an agreement in principle or definitive agreement relating to an Acquisition Proposal or similar business combination with a person or entity other than CIGNA, the Purchaser or their affiliates or (ii) if, due to an occurrence that if occurring after the commencement of the Offer would result in a failure to satisfy any of the conditions to completion of the Offer, CIGNA, the Purchaser or any of their affiliates shall have failed to commence the Offer on or prior to five business days following the date of the initial public announcement of the Offer; provided, that, CIGNA may not terminate the Merger Agreement pursuant to this clause (ii) if CIGNA or the Purchaser is in willful breach of the Merger Agreement. Effect of Termination; Termination Fee. The Company has agreed to pay to CIGNA a termination fee of $45 million if: (a) the Merger Agreement is terminated pursuant to the provisions described in clauses (c)(i) or (d)(i) under "Termination" above, or (b) the Merger Agreement is terminated for any reason (other than as a result of a material breach by CIGNA or the Purchaser that resulted in the termination of the Merger Agreement or a willful breach by CIGNA or the Purchaser of their obligations under the Merger Agreement) at any time after an Acquisition Proposal has been made by a third party (a "Third Party Acquiror") and, within one year after such a termination, the Company completes either (i) a merger, consolidation or other business combination with any such Third Party Acquiror (or another party who makes an Acquisition Proposal at a time when the Company is in discussions with any such Third Party Acquiror), or (ii) the sale of 50% or more (in voting power) of the voting securities of the Company or of 40% or more (in market value) of the assets of the Company and its subsidiaries, on a consolidated basis to any such Third Party Acquiror (or another party who makes an Acquisition Proposal at a time when the Company is in discussions with any such Third Party Acquiror). Amendment. The Merger Agreement provides that it may be amended, modified and supplemented in any and all respects, whether before or after any vote of the shareholders of the Company, by written agreement of the parties thereto, by action taken by their respective Boards of Directors at any time prior to the date of closing with respect to any of the terms contained therein; provided, however, that after the approval of the Merger Agreement by the shareholders of the Company, no such amendment, modification or supplement shall reduce or change the consideration payable in the Merger or adversely affects the rights of the Company's shareholders under the Merger Agreement without the approval of such shareholders. Shareholder Agreement Concurrently with the execution of the Merger Agreement, the Purchaser and CIGNA entered into a Tender Agreement and Irrevocable Proxy (the "Shareholder Agreement") with Norman C. Payson, M.D. (the "Shareholder"), the Company's President and Chief Executive Officer and a member of the Company Board, with respect to the 4,332,760 Shares owned by the Shareholder. The following is a summary of the material provisions of the Shareholder Agreement. This summary does not purport to be complete and is qualified in its entirety by reference to the complete text of the Shareholder Agreement, a copy of which is filed as Exhibit 3 hereto and is incorporated herein by reference. Capitalized terms not otherwise defined below shall have the meanings set forth in the Shareholder Agreement. Pursuant to the Shareholder Agreement, the Shareholder has agreed to tender all Shares owned by him in the Offer and CIGNA and the Purchaser have agreed to accept for payment and pay for such Shares subject to the terms and conditions of the Offer. Pursuant to the Shareholder Agreement, the Shareholder has also granted to CIGNA an irrevocable proxy to vote his Shares in connection with any meeting of the Company's shareholders, or in connection with any written consent of the Company's shareholders, (i) in favor of the Merger, the execution and delivery by the Company of the Merger Agreement and the approval and adoption of the Merger and the terms thereof and each of the other actions contemplated by the Merger Agreement and the Shareholder Agreement and any actions required in furtherance thereof; (ii) against any action or agreement that would impede, interfere 11 13 with, or prevent the Offer or the Merger; and (iii) except as otherwise agreed to in writing in advance by CIGNA, against the following actions (other than the Offer, the Merger and the transactions contemplated by the Merger Agreement and the Shareholder Agreement): (I) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company or any of its subsidiaries (including any transaction contemplated by an Acquisition Proposal); (II) any sale, lease or transfer of a material amount of the assets or business of the Company or its subsidiaries, or any reorganization, restructuring, recapitalization, special dividend, dissolution, liquidation or winding up of the Company or its subsidiaries; and (III) any change in the present capitalization of the Company including any proposal to sell any material equity interest in the Company or any amendment of the Articles of Incorporation of the Company. Such irrevocable proxy shall terminate on the termination of the Shareholder Agreement. During the term of the Shareholder Agreement, the Shareholder has agreed that he will not (i) transfer to any person any or all of his Shares (except to the Purchaser pursuant to the Offer); or (ii) except for the proxy granted to Purchaser, grant any proxies or powers of attorney, deposit any of his Shares into a voting trust or enter into a voting agreement, understanding or arrangement with respect to such Shares. The Shareholder Agreement does permit the Shareholder to transfer his Shares to any family member, certain entities owned by or formed for the benefit of the Shareholder or his family members, and certain successors to the Shareholder; provided, that in the case of any such transfer, the transferee executes an agreement to be bound by the terms of the Shareholder Agreement, or terms substantially identical thereto. Until the termination of the Shareholder Agreement, the Shareholder has agreed to comply with the provisions of the section of the Merger Agreement described above under "The Merger Agreement-No Solicitation" to the extent applicable to the Shareholder in his capacity as a director or officer of the Company. The foregoing does not prevent the Shareholder from taking any actions that the Company is permitted to take in accordance with such section of the Merger Agreement. The Shareholder Agreement, and all rights and obligations of the parties thereunder, terminates upon the earlier of (a) the date upon which CIGNA shall have purchased and paid for all of the Shareholder's Shares in accordance with the Offer and (b) the date on which the Merger Agreement is terminated. ARRANGEMENTS WITH EXECUTIVE OFFICERS, DIRECTORS OR AFFILIATES OF THE COMPANY Consulting Agreement Concurrently with the execution of the Merger Agreement, CIGNA entered into a consulting agreement (the "Consulting Agreement") with Dr. Payson (the "Consultant"). The following is a summary of the material provisions of the Consulting Agreement. This summary does not purport to be complete and is qualified in its entirety by reference to the complete text of the Consulting Agreement, a copy of which is filed as Exhibit 4 hereto and is incorporated herein by reference. Capitalized terms not otherwise defined below shall have the meanings set forth in the Consulting Agreement. The Consulting Agreement has a term of nine months, commencing on the date of the consummation of the Offer. During the term, the Consultant will perform such services relating to the business of CIGNA as the Consultant and the President of CIGNA HealthCare (or his designee) shall mutually agree. The Consulting Agreement requires the Consultant to provide up to 120 hours of consulting services per month during the first six months of the term of the Consulting Agreement and up to 80 hours per month for the remainder of the term. For a nine month period following the consummation of the Offer, the Consultant will be subject to a covenant not to compete against CIGNA or the Company or their respective subsidiaries. The Consultant has also agreed that during the term of the Consulting Agreement and for a period of one year following the termination of the Consulting Agreement, he will not (i) induce any employee of CIGNA, the Company or any of their respective affiliates to leave such employment or to accept any other employment or position, or (ii) assist any other person in hiring any such employee. The foregoing does not, however, prevent the Consultant from responding to or addressing inquiries initiated by employees of CIGNA, the Company or any of their respective affiliates or from hiring any such employees who make such initial contact. 12 14 In the Consulting Agreement, CIGNA and the Consultant have agreed not to make any statement, observation or opinion, or communicate any information (whether oral or written), that materially disparages the reputation or business of the other. The Consulting Agreement also provides for a mutual release of claims between the Consultant, on the one hand, and CIGNA, the Purchaser, the Company and their respective affiliates, on the other hand. Pursuant to the Consulting Agreement, the Consultant will receive $100,000 per month for the nine month term of the Consulting Agreement and is entitled to reimbursement of ordinary and appropriate business expenses. The Consulting Agreement further provides that the Consultant is entitled to welfare benefits generally available to senior executive officers of CIGNA and access to a corporate airplane, with the right to purchase such airplane at the book value thereof. The Consultant will also receive a cash payment of $25,000 to purchase office equipment as well as reimbursement of office and staffing expenses up to $200,000 per year. The Consulting Agreement further provides that, notwithstanding anything to the contrary, CIGNA will take all necessary action to cause any Company stock options held by the Consultant or his successors to remain freely exercisable until, and expire no earlier than, the tenth anniversary of the grant of such options without regard to the termination of the Consulting Agreement, termination of the Consultant's employment with the Company, the Consultant's death or disability or the cessation of the Consultant's services to CIGNA. Employment Agreements Dr. Middleton. ln January 1995, Dr. Middleton entered into a five year employment agreement with the Company pursuant to which he serves as President of Healthsource South, Inc., and more recently as President and Chief Executive Officer of Healthsource South Carolina, Inc., at a current annual salary (including stipend) of $350,700 and is also eligible to receive an annual performance bonus. The employment agreement is terminable by the Company or Dr. Middleton without cause on 60 days' notice and provides for a severance benefit of $300,000 plus two months' base pay for each year completed under the agreement, up to a maximum of 12 months, in the event of termination without cause by the Company, or $500,000 plus two months' base pay for each year since 1991, up to a maximum of 12 months, in the event Dr. Middleton terminates his employment within 90 days following a change of control of the Company. The transactions contemplated by the Merger Agreement will constitute a change in control of the Company for purposes of the agreement. Mr. Zubretsky. In June 1996, Mr. Zubretsky entered into an employment agreement with the Company under which he serves as the Chief Financial Officer of the Company, at a current annual salary of $375,000 and is eligible to receive a performance bonus. The agreement expires December 31, 1997, subject to annual renewal. If Mr. Zubretsky's employment is terminated by the Company without cause or if the Company does not renew the agreement, Mr. Zubretsky becomes entitled to continue to receive his base salary for a two year period, so long as he complies with noncompetition and nondisclosure provisions contained in the agreement. Further, if Mr. Zubretsky's employment is terminated by the Company (or by Mr. Zubretsky if his authority or status with the Company is reduced) within 180 days following a change in control of the Company, then Mr. Zubretsky becomes entitled to continue to receive his base salary for a three year period. Other Agreements. Mr. Schneider has a severance arrangement with the Company. Mr. Schneider's arrangement provides that if his employment is terminated by the Company without cause or by Mr. Schneider if, following a change in control of the Company, his duties or compensation are adversely altered, he becomes entitled to receive his base salary for a two year period. Mr. Chin has a severance arrangement with the Company pursuant to which Mr. Chin becomes entitled to receive six months of base salary if his employment is terminated for cause, and one year of base salary if his employment is terminated without cause. Dr. Salmon has a severance arrangement with the Company providing that if Dr. Salmon's employment is terminated by the Company with or without cause, or if his duties and responsibilities are materially altered, he becomes entitled to one year of salary continuation, plus an additional month of salary continuation for each year of employment with the Company, plus an amount equal to his eligible bonus. 13 15 Severance Agreements The Merger Agreement provides that the Company will enter into severance agreements with 29 of the Company's officers (the "Severance Agreements") prior to the Merger. The Severance Agreements will provide that severance benefits will be paid to the officer if his or her employment is terminated by the officer for good reason or by the Company other than for cause, in either case within two years following the consummation of the Offer. Dr. Payson will receive severance benefits upon the consummation of the Offer since his employment with the Company will be terminated at such time. Severance benefits under the Severance Agreements will include a lump sum cash payment equal to the sum of the officer's current base salary plus maximum annual incentive bonus, multiplied by a factor. The factor will equal: 3 for Dr. Payson, Mr. Schneider and Mr. Zubretsky; 2 for Mr. Chin, Mr. Moses, Dr. Middleton, Mr. Richardson and Dr. Salmon; 1.5 for Mr. Greczyn, Ms. Lencki, Mr. Pearce and Mr. Slater; and 1 for 17 additional officers. Severance benefits also include the payment of a pro rata portion of the officer's target bonus for the current year, continuation of medical and welfare benefits for a number of years following termination of employment equal to the multiple described above, office and secretarial services for the same period of time, outplacement and financial planning services for one year following termination of employment, a cash payment reimbursing the officer for any liabilities in respect of any taxes or excise taxes in respect of Section 4999 of the Code (the "Parachute Tax"), if applicable, and reimbursement of legal fees reasonably incurred by the officer in connection with enforcing his or her rights under a Severance Agreement or in respect of the Parachute Tax. Assuming that the following officers of the Company are terminated from employment immediately following the Merger, and assuming the Merger occurs on June 30, 1997, each such officer would be entitled to a lump sum cash payment (excluding from such amount any reimbursements in respect of the Parachute Tax, if any) equal to the following: Dr. Payson, $2,475,000, Mr. Schneider, $1,677,000; Mr. Zubretsky, $1,500,000, Dr. Middleton, $946,890 and Dr. Salmon, $643,750. Employee and Director Stock Options The Company maintains the 1994 Stock Option Plan, the 1991 Non-Qualified Stock Option Plan, the 1992 Director Stock Option Plan and the 1996 Non-Employee Director Stock Option Plan (collectively, the "Option Plans"). The Option Plans provide for the grants of stock options to purchase Shares to certain employees and non-employee directors of the Company ("Options"). The Merger Agreement provides that the Company will amend all outstanding Options, if necessary, to provide that such Options will be fully vested and exercisable. Any Options held by members of the Company Board who are not full-time employees of the Company will remain outstanding until the earlier of the expiration of the term of such Option or the third anniversary of the Effective Time, without regard to any earlier termination from service as a member of the Company Board. The Merger Agreement further provides that CIGNA will adopt a stock option plan and replace each option with a fully vested substitute option to purchase CIGNA Common Stock (each, a "Substitute Option"). Each Substitute Option will be for a number of shares of CIGNA Common Stock equal to the number of Shares subject to the corresponding Option, multiplied by the Option Ratio (as defined below) and will have an exercise price per share equal to the exercise price per share of the Option, divided by the Option Ratio. All other terms and conditions of each Substitute Option will be substantially the same as the terms and conditions of the corresponding Option, except that (regardless of the actual date of termination of employment of the Optionholder) each such Substitute Option will expire no earlier than the date the Option would expire if the holder would have remained continuously employed by the Company until such date. The Option Ratio will equal the Offer Price divided by the average closing price per share of CIGNA Common Stock on the New York Stock Exchange (the "NYSE") for the five consecutive trading days ending immediately prior to the date of the Merger Agreement. 14 16 Set forth below is a table indicating, as of February 28, 1997, the number of outstanding Options held by executive officers and directors of the Company (and exercise price thereof) and the number of options to acquire CIGNA Common Stock ("CIGNA Options") (and exercise price thereof) that each such person is eligible to receive in the Merger. On March 5, 1997, the last full trading day prior to the commencement of the Offer, the reported closing sales price per share of CIGNA Common Stock on the NYSE was $151.625.
EXERCISE NUMBER OF PRICE EXERCISE PRICE COMPANY OF COMPANY NUMBER OF SUBSTITUTE OF SUBSTITUTE CIGNA DIRECTORS OPTIONS OPTIONS CIGNA OPTIONS OPTIONS - -------------------------------------- --------- ---------- -------------------- ------------------- Merwyn Bagan, M.D., M.P.H............. 15,000 $16.78 2,073 $121.3584 15,000 18.70 2,073 135.2848 45,000 25.16 6,220 182.0196 Paul D. Baron, M.D.................... 15,000 5.317 2,073 38.4657 15,000 10.62 2,073 76.8519 15,000 16.78 2,073 121.3584 15,000 18.70 2,073 135.2848 45,000 25.16 6,220 182.0196 Robert H. Bilbro...................... 15,000 16.78 2,073 121.3584 15,000 18.70 2,073 135.2848 45,000 25.16 6,220 182.0196 Robert S. Cathcart, III, M.D.......... 2,000 10.62 276 76.8519 15,000 16.78 2,073 121.3584 15,000 18.70 2,073 135.2848 45,000 25.16 6,220 182.0196 J. Harold Chandler.................... 15,000 18.70 2,073 135.2848 45,000 25.16 6,220 182.0196 Daniel F. Eubank, M.D................. 15,000 16.78 2,073 121.3584 15,000 18.70 2,073 135.2848 45,000 25.16 6,220 182.0196 Robert A. Leipold, M.D................ 15,000 10.62 2,073 76.8519 15,000 16.78 2,073 121.3584 15,000 18.70 2,073 135.2848 45,000 25.16 6,220 182.0196 David W. Schall, M.D.................. 15,000 10.62 2,073 76.8519 15,000 16.78 2,073 121.3584 15,000 18.70 2,073 135.2848 45,000 25.16 6,220 182.0196
EXECUTIVE OFFICERS - -------------------------------------- Charles M. Schneider.................. 32,000 10.52 4,423 76.1068 60,000 15.20 8,293 109.9280 100,000 22.83 13,822 165.1271 50,000 22.83 6,911 165.1271 150,000 41.94 20,734 303.4142 50,000 14.71 6,911 106.4192 200,000 14.16 27,645 102.4403 Joseph M. Zubretsky................... 50,000 14.71 6,911 106.4409 200,000 14.16 27,645 102.4403
15 17
EXERCISE PRICE NUMBER OF OF EXERCISE PRICE COMPANY COMPANY NUMBER OF SUBSTITUTE OF SUBSTITUTE CIGNA EXECUTIVE OFFICERS OPTIONS OPTIONS CIGNA OPTIONS OPTIONS - ------------------------------------ ---------- --------- -------------------- ------------------- Norman C. Payson, M.D.*............. 200,000 $ 10.52 27,645 $ 76.1068 200,000 15.20 27,645 109.9280 2,000,000 19.83 276,453 143.4236 200,000 22.83 27,645 165.1271 200,000 41.94 27,645 303.4142 200,000 14.16 27,645 102.4403 Richard B. Salmon, M.D., Ph.D....... 32,000 10.52 4,423 76.1068 32,000 15.20 4,423 109.9280 40,000 22.83 5,529 165.1271 35,000 41.94 4,837 303.4142 57,500 14.16 7,948 102.4403 Robert Chin......................... 8,000 11.10 1,105 80.3245 12,000 15.20 1,658 109.9280 40,000 22.83 5,529 165.1271 30,000 41.94 4,146 303.4142 32,000 14.16 4,423 102.4403 Francis G. Middleton, M.D.*......... 60,000 7.50 8,293 54.2224 60,000 15.20 8,293 109.9280 100,000 22.83 13,822 165.1271 100,000 41.94 13,822 303.4142 110,000 14.16 15,204 102.4403
- --------------- * Drs. Payson and Middleton are also directors of the Company. Deferred Compensation Plan Certain officers of the Company and members of the Company Board are eligible to participate in a deferred compensation plan maintained by the Company (the "Deferred Compensation Plan"). Under the plan, eligible officers of the Company may elect to defer salary and bonus, and eligible members of the Company Board may elect to defer retainer fees, in each case until termination of employment or termination of service as a director, as the case may be. The transactions contemplated by the Merger Agreement will constitute a "change in control" under the Deferred Compensation Plan and, therefore, if any participant's employment or service as a director terminates within two years of such event, such participant's deferred compensation account will be credited with interest at a preferred rate (as set forth in the Deferred Compensation Plan) and immediately distributed. Certain Provisions in the Merger Agreement As described above, the Merger Agreement provides that, during the two year period following the Effective Time, employees of the Company will receive employee benefits that are no less favorable in the aggregate than those provided to such employees immediately prior to the date of the Merger Agreement. With respect to such benefits, service accrued with the Company and its subsidiaries by such employees will be recognized for all purposes except to the extent necessary to prevent duplication of benefits. The Merger Agreement further provides that CIGNA honor, without modification, all employment and severance agreements with employees and former employees of the Company. In addition, within 30 days after the Effective Time, CIGNA is required to grant stock options to purchase no less than 200,000 shares of CIGNA Common Stock to employees of the Company. The allocation of such options will be determined by CIGNA after consultation with Dr. Payson. Such stock options will have an exercise price per share equal to the closing price per share of CIGNA Common Stock on the date of grant and have a term of ten years. 16 18 The Merger Agreement also provides for CIGNA to, and to cause the Company (or the Surviving Corporation if after the Effective Time) to, indemnify, defend and hold harmless, among other persons, the Company's officers and directors against claims, losses, and liability arising out of, among other things, (i) the fact that such person was a director or officer of the Company or (ii) the Merger Agreement or any of the transactions contemplated thereby, in each case, to the full extent permitted under New Hampshire law or the Company's Articles of Incorporation or By-laws or the Company's existing indemnification agreements. CIGNA has also agreed in the Merger Agreement that all rights to indemnification and all limitations on liability provided to directors and officers in the Company's Articles of Incorporation and By-laws as in effect as of the date of the Merger Agreement shall survive the Merger and shall continue in full force and effect, without any amendment thereto, for a period of six years from the Effective Time to the extent such rights are consistent with the NHBCA. Additionally, CIGNA has agreed that either it or the Surviving Corporation will maintain the Company's existing officers' and directors' liability insurance policy for a period of not less than six years after the Effective Date; provided, that, CIGNA may substitute therefor policies of substantially similar coverage and amounts containing terms no less advantageous to the covered directors or officers. See "The Merger Agreement -- Directors' and Officers' Insurance and Indemnification." Item 4. The Solicitation or Recommendation. (a) Recommendation of the Company Board The Company Board has unanimously approved the Merger Agreement, the Offer and the Merger, and has determined that the Offer and the Merger are fair to and in the best interests of the Company's shareholders, and unanimously recommends that the Company's shareholders accept the Offer and tender their Shares in the Offer. A letter to the Company's shareholders communicating the Company Board's recommendation and a press release announcing the execution of the Merger Agreement are filed herewith as Exhibits 6 and 7, respectively, and are incorporated herein by reference. (b) Background; Reasons for the Company Board's Recommendation Background Beginning in the summer of 1996, as a result of changes in the managed care industry and the Company's strategic position, the Company's management, in periodic consultation with the Company's directors, began to explore various possible strategic alternatives to improve long-term shareholder value. These strategic alternatives generally included, among others, a significant change in the Company's growth plans and acquisitions strategy, divestitures of various operating subsidiaries, joint ventures with financial partners to partially divest various subsidiaries, a stock buyback, a leveraged recapitalization, a business combination involving the Company, and the sale of the Company. In the summer and fall of 1996, the Company's management, after consulting with the Company's financial advisor, Bear, Stearns & Co. Inc. ("Bear Stearns"), identified and reviewed a list of leading candidates that might be expected to have an interest in potentially engaging in one or more of the above strategic transactions with the Company. Thereafter, the Company's CEO or financial advisor had a number of informal discussions and meetings with these parties (including several discussions that were initiated by such parties) to assess the feasibility of the Company's strategic alternatives and the potential level of interest of such parties in pursuing one or more of these alternatives. As a result of this process, two of such parties ultimately expressed an interest in exploring a possible business combination with the Company and entered into confidentiality agreements with the Company. After several meetings with one of these parties, such party advised the Company that it was not in a position to further pursue discussions concerning a business combination. The second party (the "Other Party") determined, based on these initial contacts, to continue discussions. Beginning in November 1996, certain senior officers of the Company and the Other Party and their respective financial advisors had a number of meetings and telephone conversations to discuss on a preliminary 17 19 basis a possible business combination of the Company and the Other Party. In connection with such preliminary discussions, the Company provided certain financial and operating information to the Other Party. Over the next two months, discussions between the Company's and the Other Party's management and financial advisors progressed through various meetings and telephone calls during which the parties discussed, among other things, their respective operations, the Company's financial projections and potential operating synergies. In mid-January 1997, a meeting was arranged between the CEOs of CIGNA and the Company. That meeting occurred on January 27, 1997. No specific proposals were made by either party at that meeting, although CIGNA and the Company indicated a willingness to have further discussions to explore the possibility of an acquisition of the Company by CIGNA. On January 31, 1997, CIGNA and the Company entered into the Confidentiality Agreement. After the execution of the Confidentiality Agreement, the Company provided certain requested financial and operating information to CIGNA. On February 3, 1997, the Other Party, acting through its financial advisor, submitted a verbal preliminary indication of interest to explore combining with the Company in a merger, pursuant to which the Company's shareholders would receive between $20 and $22 per Share in consideration consisting of a combination of cash, common stock and/or mandatorily convertible preferred stock. On February 4, 1997, senior officers of the Company and CIGNA, and their respective financial advisors, met to conduct preliminary due diligence on the Company. The Company provided CIGNA with certain materials describing the Company, its operations and projected results of operations. During the evening of February 7, 1997, Dr. Payson met with the Other Party's Chairman and Chief Executive Officer in New York City. At that meeting, the parties discussed the Other Party's preliminary indication of interest and various issues relating to a possible combination between the Other Party and the Company. On February 9, 1997, the Company Board held a special meeting and analyzed and reviewed, with the Company's management and the Company's legal and financial advisors, among other things, the Other Party's preliminary indication of interest and various strategic, financial and legal considerations concerning a possible transaction with the Other Party or with CIGNA. No decision was reached by the Company Board at the meeting, but it was the consensus of the directors that the Company's management and legal and financial advisors should continue to hold discussions with the Other Party and pursue discussions with CIGNA. On February 10, 1997, at the request of the Company, CIGNA advised the Company that CIGNA's preliminary indication of interest for a business combination with the Company would involve a wide per share price range, and that, among other things, further due diligence and review would be necessary in order for such range to be narrowed. On or about February 12, 1997, at the Company's direction, the Company's financial advisor provided the Other Party with a draft term sheet outlining the potential structure of a transaction. On February 13 and 14, 1997, CIGNA conducted additional due diligence on the business, operations and financial performance of the Company, that included meetings in Manchester, New Hampshire. At the end of such meetings, CIGNA indicated to the Company that its review of the Company to date suggested that CIGNA would consider exploring a possible acquisition of the Company at a per share price in the range of $20 to $22 per Share in cash, although CIGNA was not prepared to make a formal proposal at such time. CIGNA delivered to the Company a due diligence request list on February 15, 1997 and thereafter the Company began providing additional information about the Company to CIGNA and its advisors. Numerous telephone calls between representatives of CIGNA and the Company regarding due diligence and requests for information were made between February 20 and February 25 and, during that period, CIGNA continued its review of the Company. 18 20 On February 16, 1997, the CEOs of the Company and the Other Party met to discuss issues concerning how the combined entity might operate, as well as certain issues relating to the terms of a possible combination. Beginning on February 21, 1997, the Company's legal and financial advisors commenced negotiations with CIGNA's legal and financial advisors with respect to the terms of a possible merger agreement. Additionally, CIGNA's legal counsel distributed to the Company's legal counsel a draft of the Shareholder Agreement providing, among other things, that certain unspecified shareholders would tender, or cause to be tendered, all of the Shares owned by them and would agree to vote all of their Shares in favor of the Offer and the Merger. On February 22, 1997, at the Company's request, in a telephone call and letter from CIGNA, CIGNA indicated that it was working towards proposing an acquisition of the Company for a purchase price ranging from $20 to $22 per Share in cash. In the letter, CIGNA also advised that its ability to submit such a proposal would be contingent upon approval by CIGNA's board of directors at a meeting scheduled to be held on February 26, 1997, confirmatory due diligence which CIGNA anticipated completing prior to such board meeting, and negotiation of the definitive form of the Merger Agreement and related agreements. Later on February 22, 1997, the Company Board held a special meeting to analyze and review, with the advice and assistance of the Company's financial and legal advisors, among other things, certain strategic, financial and legal considerations concerning a possible transaction with CIGNA, the terms of CIGNA's most recent indication of interest, the potential impact on the Company's shareholders of a transaction with CIGNA at the prices being suggested by CIGNA, and the terms and conditions of the most recent draft of the Merger Agreement. The Company's management and its legal and financial advisors also reported to the Company Board on the status of the discussions with the Other Party. No decision was reached by the Company Board at the meeting, but it was the consensus of the directors that the Company's management and the Company's legal and financial advisors should continue to hold discussions with CIGNA and the Other Party and report back to the Company Board once management was prepared to make a recommendation. On February 23, 1997, certain senior officers of the Company met in Chicago with certain senior officers of the Other Party. At the meeting, the parties discussed various issues relating to a possible combination of the Other Party and the Company. On February 25, 1997, the Other Party, through its financial advisor, submitted a preliminary, non-binding proposal to combine with the Company in a merger pursuant to which the Company's shareholders would receive $21 per Share of stated consideration consisting of a combination of cash (45%) and the Other Party's common stock (55%) or, if agreed to by the Company and the Other Party, 27.5% in common stock of the Other Party and 27.5% in mandatorily convertible preferred stock of the Other Party. The Other Party's proposal assumed a fixed exchange ratio, subject to a potential adjustment if the Other Party's stock price decreased by more than 20%. The Other Party's proposal was subject to numerous conditions, including, among other things, shareholder approval, due diligence, and the Company's agreement, effective immediately, not to solicit any competing transactions. On several occasions following receipt of the Other Party's proposal, the Company's financial advisor advised senior management of the Other Party and the Other Party's financial advisor that the Other Party's proposal was inadequate in a number of respects, including price, and that the Other Party should make its best and final proposal. During the evening of February 25, 1997, representatives of the Company and the Company's legal and financial advisors met with representatives of CIGNA and CIGNA's legal and financial advisors to continue negotiating the terms and conditions of the Merger Agreement and the Shareholder Agreement. Certain terms of the Consulting Agreement were also negotiated. At that meeting, CIGNA indicated that, subject to, among other things, the satisfaction of open issues relating to the terms and conditions of the Merger Agreement, it would be willing to propose purchasing all of the Shares at a price of $21 per Share in cash. After further negotiations, such proposed price was increased to $21.75 per Share, subject to, among other things, the 19 21 satisfactory resolution of the open issues relating to the terms and conditions of the Merger Agreement, the Shareholder Agreement and the Consulting Agreement, and the approval of the Company Board and CIGNA's board of directors. During the afternoon of February 26, 1997, the Company Board held a special telephonic meeting. At such meeting, the Company Board was advised by the Company's financial and legal advisors of the status of possible transactions with CIGNA and the Other Party. No decision was reached by the Company Board at the meeting, but it was the consensus of the directors that the Company's management and legal and financial advisors should continue to negotiate with CIGNA, confirm whether or not the Other Party was prepared to improve its proposal and report back to the Company Board. During the evening of February 26, 1997, the Company's legal and financial advisors met with representatives of CIGNA and CIGNA's legal and financial advisors to negotiate the remaining issues in the Merger Agreement and the Shareholder Agreement, and negotiations concerning the terms of the Consulting Agreement also continued. Such negotiations continued through February 27, 1997 and, by the evening of February 27, 1997, the Company and CIGNA agreed upon forms of a definitive Merger Agreement, and Dr. Payson and CIGNA agreed upon the forms of a definitive Shareholder Agreement and Consulting Agreement. On the evening of February 27, 1997, the Company Board held a special telephonic meeting to review, with the advice and assistance of the Company's financial and legal advisors, the final proposed terms and conditions of the proposed Merger Agreement. At such meeting, the Company's financial advisor provided an oral opinion (which was subsequently confirmed in writing) that, as of the date of the Merger Agreement, the Offer and the Merger, are fair, from a financial point of view, to the shareholders of the Company, and the Company's legal counsel advised the Company Board of the recent material changes made to the Merger Agreement. The Company Board was also informed that earlier that day, during telephone calls between the Company's financial advisor and the Other Party's management and financial advisor, the Other Party elected not to amend or modify its previous proposal despite several requests by the Company's financial advisor that the Other Party put forth its best and final proposal. Following the Company Board's review of the final terms of the Offer and the Merger, the Company Board unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, are fair to and in the best interests of the Company's shareholders, approved the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, authorized the execution and delivery of the Merger Agreement, recommended that the Company's shareholders accept the Offer and tender their Shares pursuant to the Offer, and recommended that the Company's shareholders approve and adopt the Merger Agreement. The Company Board also approved postponing the Distribution Date (as defined in the Rights Agreement) to immediately prior to the consummation of the Offer at which time the Rights will be redeemed. Later on the evening of February 27, 1997, the Company and CIGNA executed and delivered the Merger Agreement, CIGNA, the Purchaser and Dr. Payson executed and delivered the Shareholder Agreement, and CIGNA and Dr. Payson executed and delivered the Consulting Agreement. On the morning of February 28, 1997, the Company and CIGNA issued press releases announcing the execution of the Merger Agreement. Reasons for the Transaction; Factors Considered by the Company Board In approving the Offer, the Merger, the Merger Agreement and the other transactions contemplated thereby and recommending that all holders of Shares accept the Offer and tender their Shares pursuant to the Offer, the Company Board considered a number of factors including: 1. the presentations and views expressed by management of the Company (at the meetings of the Company Board held on February 22, 1997, February 26, 1997 and February 27, 1997 and at previous meetings of the Company Board) regarding, among other things: (a) the financial condition, results of operations, cash flows, business and prospects of the Company, including the prospects of the Company if it remains independent; (b) the strategic alternatives available to the Company; (c) the fact that in view 20 22 of the discussions held with various parties, including the Other Party, management of the Company believed it was unlikely that any other party would propose an acquisition or strategic business combination that, taken as a whole, would be more favorable to the Company and its shareholders than the Offer and the Merger; and (d) the recommendation of the Merger by the management of the Company; 2. the presentation of Bear Stearns at the meetings of the Company Board held on February 22, 1997, February 26, 1997 and February 27, 1997 and the opinion of Bear Stearns, expressed orally at the February 27, 1997 meeting (and subsequently confirmed in writing), to the effect that, as of February 27, 1997, the Offer and the Merger are fair, from a financial point of view, to the Company's shareholders. The full text of the opinion of Bear Stearns, dated as of March 6, 1997, which sets forth the assumptions made, matters considered and limitations on the review undertaken by Bear Stearns, is attached hereto as Exhibit 5 and is incorporated herein by reference. Shareholders are urged to read the opinion of Bear Stearns carefully in its entirety for assumptions made, matters considered and the limits of the review undertaken by Bear Stearns; 3. the historical market prices and the recent trading activity of the Shares, including the fact that the Offer Price represents a premium of approximately 29% over the reported closing price of the Shares on the NYSE on the last full trading day preceding the public announcement of the execution of the Merger Agreement; 4. the extensive arms-length negotiations between the Company and CIGNA leading to the belief of the Company Board that $21.75 per Share represented the highest price per Share that could be negotiated with CIGNA; 5. the history of the Company's discussions with the Other Party, including, without limitation, (i) the fair and ample opportunity provided to the Other Party to submit a proposal to the Company, (ii) that the proposal made by the Other Party on February 25, 1997 contemplated the acquisition of the Company for $21 per Share in stated consideration which would consist of no more than 45% cash with the remainder to be in the form of shares of common stock or mandatorily preferred stock of the Other Party, (ii) that the stock component of the Other Party's proposal would subject the Company's shareholders to the risks and uncertainties associated with equity securities, (iii) the highly conditional nature of the proposal, and (iv) that, following repeated requests by the Company's financial advisor to the Other Party and its financial advisor that the Other Party submit its best and final proposal, the Other Party elected not to amend or modify its proposal; 6. the results of the inquiries made by the Company's management and financial advisor to major companies in the managed health care and related industries, regarding a possible strategic alliance, partnership, business combination, acquisition or similar transaction with the Company; 7. that the Offer and the Merger provides for a prompt cash tender offer for all Shares to be followed by a merger for the same consideration, thereby enabling the Company's shareholders to obtain the benefits of the transaction in exchange for their Shares at the earliest possible time; 8. that, in the Merger Agreement, CIGNA and the Purchaser have agreed to honor all employment and severance agreements and arrangements with respect to employees and former employees of the Company, and that, effective as of the Effective Time and for a two-year period thereafter, the Company's employees will be provided with employee benefits that are no less favorable in the aggregate than those provided to such employees prior to the date of execution of the Merger Agreement; 9. other provisions of the Offer and the Merger Agreement, including the parties' representations, warranties and covenants, the conditions to their respective obligations, and the limited ability of CIGNA and the Purchaser to terminate the Offer or the Merger Agreement; 10. the regulatory approvals required to consummate the Merger, including, among others, anti-trust and insurance regulatory approvals, the favorable prospects for receiving such approval and CIGNA's agreements in the Merger Agreement with respect to seeking to obtain such approval; 21 23 11. the business reputation and capabilities of CIGNA and its management, and CIGNA's financial strength, including its ability to finance the Offer; 12. the fact that pursuant to the Merger Agreement, the Company Board has the right to participate in discussions or negotiations (including, as apart thereof, making any counterproposal) with or furnish information to third parties making an unsolicited Acquisition Proposal or approve an unsolicited Acquisition Proposal if the Company Board is advised by its financial advisor that such acquiror has the financial wherewithal to be reasonably capable of consummating such an Acquisition Proposal and the Company Board determines in good faith, after receiving advice from its financial advisor, that such third party has submitted to the Company an Acquisition Proposal which is a Superior Proposal, or, the Company Board determines in good faith, based upon the advice of its outside legal counsel, that the failure to participate in such discussions or negotiations or to furnish such information or to approve such an Acquisition Proposal would violate the Company Board's fiduciary duties; 13. the fact that pursuant to the Merger Agreement, the Company Board has the right, upon payment to CIGNA of a $45 million termination fee, to terminate the Merger Agreement if prior to the purchase of Shares, either (a) a third party shall have made an Acquisition Proposal that the Company Board determines in good faith, after consultation with its financial advisor, is a Superior Proposal, or (B) the Company Board shall have withdrawn, or modified or changed in a manner adverse to CIGNA or the Purchaser its recommendation of the Offer, the Merger Agreement or the Merger; 14. that the strategic fit between the Company and CIGNA offers the opportunity for substantial synergies; 15. the current and anticipated status of the managed health care industry in the United States, including increasing competition, limited pricing flexibility, anti-managed care initiatives and the continuing need for mass and volume to obtain better health care costs and allow lower premiums and appropriate operating and profit margins; 16. the likelihood of continued consolidation in the managed health care sector and the possibility that changes in the industry, depending on their nature, could be disadvantageous to the Company; and 17. the belief that the combined company would be better able to respond to the needs of consumers and customers, the increased competitiveness of the health care industry, and the opportunities that changes in the health care industry might bring. The foregoing discussion of information and factors considered and given weight by the Company Board is not intended to be exhaustive. In view of the variety of factors considered in connection with its evaluation of the Offer and the Merger, the Company Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determinations and recommendations. In addition, individual members of the Company Board may have given different weights to different factors. Item 5. Persons Retained, Employed or to be Compensated. Pursuant to the terms of a letter agreement, dated February 7, 1997 (the "Bear Stearns Letter Agreement"), the Company retained Bear Stearns, in part, to assist the Company as its exclusive financial advisor in considering the desirability and feasibility of effecting various strategies for maximizing the Company's value to its shareholders, including, among other things, a merger or sale of the Company (a "Transaction"). The Company agreed in the Bear Stearns Letter Agreement that at such time as Bear Stearns renders an opinion (the "Opinion") with respect to the fairness, from a financial point of view, to the Company's shareholders, of any Transaction, the Company will pay to Bear Stearns a cash fee of $1,000,000, $250,000 of which will be payable at the time Bear Stearns renders the Opinion and the balance of $750,000 will be payable at the time the Company enters into a definitive agreement with respect to a Transaction. If a 22 24 Transaction is consummated, the Company will pay to Bear Stearns a cash fee of $12,500,000 immediately upon such consummation, less any fees paid by the Company in connection with the rendering of the Opinion. The Company has also agreed to reimburse Bear Stearns for all reasonable out-of-pocket expenses incurred by Bear Stearns (including fees and disbursements of counsel, and of other consultants and advisors retained by Bear Stearns) in connection with the matters contemplated by the Bear Stearns Letter Agreement, and to indemnify Bear Stearns (and its officers, directors, employees, controlling persons and agents) against certain liabilities arising out of or in connection with Bear Stearns' engagement. In addition, the Company has agreed that if a Transaction is not consummated, but the Company receives a "break-up" fee or any other payment as a result of the termination of any Transaction, the Company will pay to Bear Stearns 15% of any such fee or payment (provided that such payment to Bear Stearns cannot exceed $5,000,000) less any payments made to Bear Stearns in connection with the rendering of the Opinion. Bear Stearns has provided certain investment banking services to the Company from time to time for which it has received customary compensation. Bear Stearns has also in the past provided financial advisory and financing services to CIGNA unrelated to the Offer and the Merger and has received fees for the rendering of such services. Bear Stearns may from time to time effect transactions and hold positions in securities of the Company and CIGNA. Except as disclosed herein, neither the Company nor any person acting on its behalf has employed, retained or compensated any person to make solicitations or recommendations to the Company's shareholders with respect to the Offer or the Merger. Item 6. Recent Transactions and Intent with Respect to Securities. (a) Except as set forth on Schedule II hereto, no transactions in the Shares have been effected during the past 60 days by the Company or, to the best of the Company's knowledge, by any executive officer, director, affiliate or subsidiary of the Company. (b) To the best knowledge of the Company, all of its executive officers, directors, affiliates and subsidiaries currently intend to tender pursuant to the Offer all Shares held of record or beneficially owned by them (other than Shares issuable upon exercise of stock options and Shares, if any, which if tendered could cause such persons to incur liability under the provisions of Section 16(b) of the Exchange Act). Item 7. Certain Negotiations and Transactions by the Subject Company. (a) Except as set forth in this Schedule 14D-9, the Company is not engaged in any negotiation in response to the Offer which relates to or would result in (i) an extraordinary transaction, such as a merger or reorganization, involving the Company or any subsidiary of the Company; (ii) a purchase, sale or transfer of a material amount of assets by the Company or any subsidiary of the Company; (iii) a tender offer for or other acquisition of securities by or of the Company; or (iv) any material change in the present capitalization or dividend policy of the Company. (b) Except as described in Item 3(b) and Item 4 above (the provisions of which are hereby incorporated by reference), there are no transactions, board resolutions, agreements in principle or signed contracts in response to the Offer which relate to or would result in one or more of the matters referred to in paragraph (a) of this Item 7. Item 8. Additional Information to be Furnished. The Information Statement attached as Schedule I hereto is being furnished in connection with the possible designation by the Purchaser, pursuant to the Merger Agreement, of certain persons to be appointed to the Company Board other than at a meeting of the Company's shareholders. 23 25 Item 9. Material to be Filed as Exhibits. Exhibit 1 Confidentiality Agreement, dated January 31, 1997, between Healthsource, Inc. and CIGNA Corporation. Exhibit 2 Agreement and Plan of Merger, dated as of February 27, 1997, by and among Healthsource, Inc., CIGNA Corporation and CHC Acquisition Corp. (including Schedule 5.4(b) thereto). Exhibit 3 Tender and Irrevocable Proxy, dated as of February 27, 1997, by and among CIGNA Corporation, CHC Acquisition Corp. and Norman C. Payson, M.D. Exhibit 4 Consulting Agreement, dated as of February 27, 1997, between CIGNA Corporation and Norman C. Payson, M.D. Exhibit 5 Opinion of Bear, Stearns & Co. Inc. dated as of March 6, 1997.* Exhibit 6 Letter to Shareholders of Healthsource, Inc. dated March 6, 1997.* Exhibit 7 Press Release issued by Healthsource, Inc. on February 28, 1997. Exhibit 8 Employment Agreement, dated as of July 30, 1993, between Healthsource, Inc. and Robert Chin. Exhibit 9 Employment Agreement, dated as of January 1, 1995, between Healthsource, Inc. and Francis G. Middleton, M.D. Exhibit 10 Employment Agreement, dated as of June 25, 1996, between Healthsource, Inc. and Joseph M. Zubretsky. Exhibit 11 Employment Agreement, dated as of July 19, 1996, between Healthsource, Inc. and Charles M. Schneider. Exhibit 12 Employment Agreement, dated as of February 14, 1997, between Healthsource, Inc. and Richard B. Salmon, M.D., Ph.D. Exhibit 13 Healthsource, Inc. Deferred Compensation Plan for Selected Employees, effective October 15, 1995. Exhibit 14 Healthsource, Inc. 1991 Non-Qualified Stock Option Plan. Exhibit 15 Healthsource, Inc. 1992 Director Stock Option Plan. Exhibit 16 Healthsource, Inc. 1994 Stock Option Plan. Exhibit 17 Healthsource, Inc. 1996 Non-Employee Director Stock Option Plan.
- --------------- * Included in copies of Schedule 14D-9 mailed to shareholders. 24 26 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: March 6, 1997 HEALTHSOURCE, INC. By: /s/ NORMAN C. PAYSON -------------------------------------- Name: Norman C. Payson, M.D. Title: President and Chief Executive Officer 25 27 SCHEDULE I INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER GENERAL This Information Statement is being mailed on or about March 6, 1997 as part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") of Healthsource, Inc., a New Hampshire corporation (the "Company"), to the holders of record of shares of common stock, par value $.10 per share, of the Company (the "Common Stock" or the "Shares"). You are receiving this Information Statement in connection with the possible election of persons designated by CIGNA (as defined below) to a majority of the seats on the Board of Directors of the Company (the "Company Board"). On February 27, 1997, the Company, CIGNA Corporation, a Delaware corporation ("CIGNA"), and CHC Acquisition Corp., a New Hampshire corporation and an indirect, wholly-owned subsidiary of CIGNA ("Purchaser"), entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which (i) CIGNA will cause the Purchaser to commence a tender offer (the "Offer") for all outstanding Shares at a price of $21.75 per Share, net to the seller in cash and (ii) the Purchaser will be merged with and into the Company (the "Merger"). As a result of the Offer and the Merger, the Company will become a wholly-owned subsidiary of CIGNA. The Merger Agreement provides that, promptly after the purchase of a majority of the outstanding Shares pursuant to the Offer, CIGNA shall be entitled to designate directors (the "CIGNA Designees") on the Company Board as will give CIGNA representation proportionate to its ownership interest. The Merger Agreement requires the Company to take such action as CIGNA may request to cause the CIGNA Designees to be elected to the Company Board under the circumstances described therein. This Information Statement is required by Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1 thereunder. You are urged to read this Information Statement carefully. You are not, however, required to take any action. Capitalized terms used herein and not otherwise defined shall have the meaning set forth in the Schedule 14D-9. The information contained in this Information Statement concerning CIGNA and the Purchaser has been furnished to the Company by CIGNA. The Company assumes no responsibility for the accuracy or completeness of such information. RIGHT TO DESIGNATE DIRECTORS; THE CIGNA DESIGNEES The Merger Agreement provides that, subject to compliance with applicable law, promptly upon the purchase of and payment by CIGNA for Shares pursuant to the Offer which represent at least a majority of the outstanding Shares (on a fully diluted basis), CIGNA will be entitled to designate such number of directors (the "CIGNA Designees"), rounded up to the next whole number, on the Company Board as is equal to the product of the total number of directors on the Company Board (determined after giving effect to the directors elected pursuant to this sentence) multiplied by the percentage that the aggregate number of Shares beneficially owned by Purchaser, CIGNA and any of their affiliates bears to the total number of Shares then outstanding. The Company will promptly, upon the request of Purchaser, use its best efforts to cause the CIGNA Designees to be so elected, including, if necessary, increasing the size of the Company Board or seeking the resignations of one or more existing directors. Notwithstanding the foregoing, until the Effective Time of the Merger, the Company Board will have at least two directors who are directors on the date of execution of the Merger Agreement. I-1 28 Set forth below is certain information with respect to the initial CIGNA Designees: William M. Pastore Age 48 Senior Vice President, National Service Organization, CIGNA HealthCare since December 1995. Prior to that, Mr. Pastore served as Vice President, Director of National Servicing for Citicorp from 1971 until 1995. W. Allen Schaffer, M.D. Age 45 Senior Vice President, Managed Care Operations, CIGNA HealthCare since November 1994. Prior to that, Dr. Schaffer served as Senior Vice President and National Medical Director, CIGNA HealthCare beginning in May 1993. Dr. Schaffer also served as the Vice President, Professional Affairs for Aetna Life and Casualty from 1992 until 1993 and the Vice President, Quality Management & Training from 1990 until 1992. Joseph M. Fitzgerald Age 52 Senior Vice President, Underwriting Operations, CIGNA HealthCare since May 1992. Prior to that, Mr. Fitzgerald served as Senior Vice President and Chief Financial Officer, Employee Benefits Division from February 1991 until May 1992 and Senior Vice President, National Accounts, Employee Benefits Division from June 1990 until February 1991. H. Edward Hanway Age 45 President of CIGNA HealthCare since February 1996. Prior to that, Mr. Hanway served as President of CIGNA International from March 1994 until February 1996 and President of CIGNA International, Property & Casualty from February 1989 until March 1994. CIGNA has informed the Company that each of the individuals listed above has consented to act as a director, if so designated. If necessary, CIGNA may choose additional or other CIGNA Designees, subject to the requirements of Rule 14f-1. Based solely on the information set forth in the Offer to Purchase, none of the CIGNA Designees (i) is currently a director of, or holds any position with, the Company, (ii) has a familial relationship with any directors or executive officers of the Company, or (iii) to the best knowledge of CIGNA, beneficially owns any securities (or any rights to acquire such securities) of the Company. The Company has been advised by CIGNA that, to the best of CIGNA's knowledge, none of the CIGNA Designees has been involved in any transactions with the Company or any of its directors, officers, or affiliates which are required to be disclosed pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), except as may be disclosed herein or in the Schedule 14D-9. DIRECTORS OF THE COMPANY The following table sets forth certain information with respect to the current directors of the Company as of February 28, 1997. Merwyn Bagan, M.D., M.P.H. Director since 1985 Age 61 Dr. Bagan has served as the Chairman of the Board of the Company since 1985. Dr. Bagan served as President of Healthsource New Hampshire, Inc. from 1985 until July 1993. He is a board certified neurosurgeon and practiced for 23 years in Concord and Manchester, New Hampshire prior to his retirement in July 1993. He subsequently earned an M.P.H. degree and presently works as a consultant in international I-2 29 health. Dr. Bagan is a past President of both the New Hampshire Medical Society and the American Association of Neurological Surgeons. Paul D. Baron, M.D. Director since 1985 Age 56 Dr. Baron has served as a director of the Company since 1985. He is a board certified anatomic and clinical pathologist and has practiced for 22 years, the last 17 at Concord Hospital in Concord, New Hampshire. Dr. Baron is the Chairman of the Department of Pathology at Concord Hospital. Robert H. Bilbro, M.D. Director since 1994 Age 56 Dr. Bilbro has served as a director of the Company since May 1994 and since 1987 has served as President and Chairman of the Board of Directors of Healthsource Health Plans, Inc. ("HSHP"). Dr. Bilbro is engaged in the practice of internal medicine and cardiology with Raleigh Medical Group, P.A., Raleigh, North Carolina, where he has practiced for 24 years. He was nominated by the Company Board pursuant to the agreement under which the Company acquired HSHP in March 1994. Robert S. Cathcart, III, M.D. Director since 1993 Age 58 Dr. Cathcart has served as a director of the Company since May 1993 and as President of Healthsource South Carolina, Inc. since May 1992. Dr. Cathcart is a board certified general surgeon with Surgical Associates of Charleston, South Carolina, P.A. and has practiced for 25 years in Charleston, South Carolina. J. Harold Chandler Director since 1995 Age 48 Mr. Chandler has served as a director of the Company since June 1995. Mr. Chandler is President and Chief Executive Officer and a director of Provident Companies, Inc. ("Provident") and various of its subsidiaries. Prior to joining Provident in 1993, he served as President of NationsBank MidAtlantic Banking Group. Mr. Chandler currently serves as a director of AmSouth Bancorporation and Herman Miller Inc. DANIEL F. EUBANK, M.D. Director since 1985 Age 49 Dr. Eubank has served as a director of the Company since 1985. Since January 1995, Dr. Eubank has been the Director of the Residency Program at Concord Hospital. Dr. Eubank was a Partner in Concord Family Medicine from 1983 to 1995. He is board certified in family medicine and has practiced for 17 years in the Concord, New Hampshire area. ROBERT A. LEIPOLD, M.D. Director since 1985 Age 46 Dr. Leipold has served as a director of the Company since 1985 and as President of Healthsource New Hampshire, Inc. from 1993 to 1996. Dr. Leipold is a board certified obstetrician/gynecologist with Garrison Medical Professional Association and has practiced for 17 years in Dover, New Hampshire. I-3 30 FRANCIS G. MIDDLETON, M.D. Director since 1989 Age 57 Dr. Middleton has served as President and Chief Executive Officer of Healthsource South Carolina, Inc. since October 1996 and as President of Healthsource South, Inc. since January 1995. He previously served as Medical Director of Healthsource South Carolina, Inc. from 1986 to January 1995. Until July 1991, Dr. Middleton practiced medicine in Charleston, South Carolina as a specialist in internal medicine and infectious disease. NORMAN C. PAYSON, M.D. Director since 1985 Age 48 Dr. Payson has served as President and Chief Executive Officer of the Company since 1985. Dr. Payson has been in the HMO field since 1975, first as a practicing physician and director of an HMO quality program. By 1980, Dr. Payson had assumed a full-time position as Chief Executive Officer of a large physician group practice and as Medical Director for a related HMO company. DAVID W. SCHALL, M.D. Director since 1989 Age 53 Dr. Schall has been a director of the Company since September 1989 and the President of Healthsource Maine, Inc. since 1986. Since January 1994, Dr. Schall has been employed as President, Chief Executive Officer and Chief Operating Officer and a Director of Bowdoin Medical Group and as Managing Partner of Bowdoin Medical Group Associates. He is board certified in family medicine and practiced for 25 years in Brunswick, Maine prior to his retirement from private practice in November 1996. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information with respect to the current executive officers of the Company as of February 28, 1997. Robert Chin Chief Information Officer Age 37 Mr. Chin has served as Chief Information Officer of the Company since August 1993. Mr. Chin is responsible for the Company's information services and technology development functions. Prior to joining the Company, Mr. Chin served as Chief Information Officer at Tufts Associated Health Plan from 1985 to 1993 and as Systems Manager at Harvard Community Health Plan from 1977 to 1985. Francis G. Middleton, M.D. President, Healthsource South, Inc. Age 57 Dr. Middleton has served as President and Chief Executive Officer of Healthsource South Carolina, Inc. since October 1996 and as President of Healthsource South, Inc. since January 1995. He previously served as Medical Director of Healthsource South Carolina, Inc. from 1986 to January 1995. Until July 1991, Dr. Middleton practiced medicine in Charleston, South Carolina as a specialist in internal medicine and infectious disease. I-4 31 Norman C. Payson, M.D. President and Chief Executive Officer Age 48 Dr. Payson has served as President and Chief Executive Officer of the Company since 1985. Dr. Payson has been in the HMO field since 1975, first as a practicing physician and director of an HMO quality program. By 1980, Dr. Payson had assumed a full-time position as Chief Executive Officer of a large physician group practice and as Medical Director for a related HMO company. Richard B. Salmon, M.D., Ph.D. Senior Vice President for Medical Affairs Age 47 Dr. Salmon has served as corporate medical director of the Company since October 1994 and served as Medical Director for Healthsource New Hampshire, Inc. from 1991 to 1994. Dr. Salmon is responsible for medical management issues on a company-wide basis. Before joining the Company, Dr. Salmon served as medical director for another New Hampshire HMO and was a family practice physician. Charles M. Schneider Executive Vice President and Chief Operating Officer Age 51 Mr. Schneider has served as Chief Operating Officer of the Company since January 1997 and as Executive Vice President since October 1993. Prior thereto, he served as Vice President for Development of the Company from February 1991 to October 1993 and as Director of Business Development of Healthsource New Hampshire, Inc. from April 1990 to February 1991. Before joining the Company in April 1990, Mr. Schneider served as Chief Executive Officer of a New England hospital, and previously held several senior healthcare management positions. JOSEPH M. ZUBRETSKY Chief Financial Officer Age 40 Mr. Zubretsky has served as Chief Financial Officer since July 1996. Prior to joining the Company, Mr. Zubretsky was with Coopers & Lybrand LLP's National Insurance Practice based in Hartford, Connecticut from 1981 through July 1996, where he had been a partner since 1990. I-5 32 EXECUTIVE COMPENSATION Summary Compensation Table. The following Summary Compensation Table sets forth for the fiscal years ended December 31, 1996, 1995 and 1994 information as to the total compensation received by each of the Chief Executive Officer and the four highest paid executive officers who received total compensation in excess of $100,000 in all capacities. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ---------- -------------------------------------------------- SECURITIES OTHER UNDERLYING NAME AND ANNUAL STOCK PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION OPTIONS(2) ----- --------- --------- ------------- ---------- Norman C. Payson, M.D................... 1996 $ 548,754 --(3) $ 25,550(4) 200,000 President and Chief Executive 1995 483,081 --(3) 10,000(4) 200,000 Officer 1994 387,604 --(3) 10,000(4) 2,200,000(5) Sally W. Crawford(6).................... 1996 349,531 $ 65,000 10,000(7) -- Former Chief Operating Officer 1995 324,233 65,000 42,063(7) 100,000 1994 289,530 28,500 10,000(7) 100,000 Charles M. Schneider.................... 1996 360,968 206,743 62,484(9) 250,000(10) Executive Vice President and 1995 322,884 165,000(8) 26,127(9) 150,000 Chief Operating Officer 1994 210,865 21,500 -- 150,000(10) Francis G. Middleton, M.D............... 1996 348,133 65,000 1,412 110,000 President and Chief Executive Officer, 1995 305,384 25,000 -- 100,000 Healthsource South Carolina, Inc. and President, Healthsource South, Inc. Joseph M. Zubretsky (11)................ 1996 143,750 150,000 47,089(12) 250,000(13) Chief Financial Officer
- --------------- (1) Includes amounts deferred pursuant to the Company's 401(k) Plan. (2) Includes options granted in 1997 for services rendered in 1996. (3) Dr. Payson declined a cash bonus. (4) Includes $15,500 for personal use of the Company airplane in 1996 and $10,000 for automobile expenses in 1996, 1995 and 1994. (5) Includes options to purchase 2,000,000 shares granted to Dr. Payson in May 1994 in connection with the adoption of the 1994 Stock Option Plan by shareholders at the 1994 Annual Meeting of Shareholders. (6) Ms. Crawford resigned effective December 31, 1996. (7) Includes $10,000 for automobile expenses in 1996, 1995 and 1994 and $32,063 for unused vacation time in 1995. (8) Includes $100,000 for relocation bonus. (9) Includes $51,890 for relocation expenses, $4,850 for personal use of the Company airplane, $1,160 for country club dues and $4,583 for automobile expenses in 1996. Also includes $11,577 for unused vacation time and $14,550 for relocation expenses in 1995. (10) Includes options to purchase 50,000 shares granted to defray relocation expenses in each of 1996 and 1994. (11) Mr. Zubretsky joined the Company in July 1996. (12) Relocation expenses. (13) Includes options to purchase 50,000 shares granted to defray relocation expenses. I-6 33 Shown in the table below is information on stock options granted to the President and Chief Executive Officer and to the four other named executive officers shown in the Summary Compensation Table who received options to purchase Shares for fiscal year 1996. OPTION GRANTS FOR FISCAL YEAR 1996
% OF TOTAL NUMBER OF OPTIONS SHARES GRANTED TO UNDERLYING EMPLOYEES GRANT DATE EXERCISE GRANT DATE OPTIONS IN 1996 CLOSING PRICE EXPIRATION PRESENT NAME GRANTED(1) (1,721,794) PRICE $/Sh DATE VALUE(2) - ------------------------------ ---------- ------------------ ---------- --------- ---------- ---------- Norman C. Payson, M.D......... 200,000 11.6% $12.87 $ 14.16(3) 2/9/07 $1,161,800 President and Chief Executive Officer Sally W. Crawford(5).......... -- -- -- -- -- -- Former Chief Operating Officer Charles M. Schneider.......... 200,000 11.6% 12.87 14.16(3) 2/9/07 1,161,800 Executive Vice President and 50,000 2.9% 13.37 14.71(4) 7/16/06 273,650 Chief Operating Officer Francis G. Middleton, M.D..... 110,000 6.4% 12.87 14.16(3) 2/9/97 638,990 President and Chief Executive Officer, Healthsource South Carolina, Inc. and President, Healthsource South, Inc. Joseph M. Zubretsky(6)........ 200,000 11.6% 12.87 14.16(3) 2/9/07 1,161,800 Chief Financial Officer 50,000 2.9% 13.37 14.71(4) 7/16/06 273,650
- --------------- (1) Options granted on February 9, 1997 for services rendered in 1996 fiscal year. Options are exercisable after February 9, 1999. (2) Based on the Black-Scholes option pricing model adapted for use in valuing employee stock options. Assumptions made for the named executives are for grants expiring on February 9, 2007: expected option term of six years; risk-free interest rate of 6.25%; annual dividend rate of zero; and annualized volatility of 38.2%. Assumptions for grants expiring on July 16, 2006 are: expected option term of six years; risk-free interest rate of 6.57%; annual dividend rate of zero; and annualized volatility of 31.5%. (3) Exercise price is 110% of the closing price of the Company's Common Stock on February 7, 1997. (4) Exercise price is 110% of the closing price of the Company's Common Stock on July 16, 1996. (5) Ms. Crawford resigned effective December 31, 1996. (6) Mr. Zubretsky joined the Company in July 1996. I-7 34 Shown in the table below, with respect to the President and Chief Executive Officer and the four other named executive officers shown in the Summary Compensation Table, are exercised and unexercised options to purchase Shares granted in fiscal year 1996 and prior years pursuant to the Company's stock option plans. AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND 1996 FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES DECEMBER 31, 1996(1) DECEMBER 31, 1996(2) ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------------- ----------- ------------ ----------- ------------- ----------- ------------- Norman C. Payson, M.D........... -- -- 1,240,000 1,560,000 $ 521,000 -- President and Chief Executive Officer Sally W. Crawford(3)............ -- -- 80,000 180,000 -- -- Former Chief Operating Officer Charles M. Schneider............ -- -- 122,000 320,000 83,360 -- Executive Vice President and Chief Operating Officer Francis G. Middleton, M.D....... -- -- 140,000 180,000 337,800 -- President and Chief Executive Officer, Healthsource South Carolina, Inc. and President, Healthsource South, Inc. Joseph M. Zubretsky(4).......... -- -- -- 50,000 -- -- Chief Financial Officer
- --------------- (1) Does not include options granted in 1997 for services rendered in 1996. (2) Based upon the closing share price of $13.125 for the Company's Common Stock on December 31, 1996. Does not include options granted in 1997 for services rendered in 1996. (3) Ms. Crawford resigned effective December 31, 1996. (4) Mr. Zubretsky joined the Company in July 1996. COMPENSATION OF DIRECTORS Each director of the Company (except Drs. Payson and Middleton) currently receives a $25,000 annual director's fee plus $1,000 per meeting of the Company Board and $1,000 for each committee meeting attended. The Company also reimbursed the directors for their travel expenses and Drs. Schall, Cathcart and Bilbro for lost practice time in travel to meetings. Pursuant to the Company's 1996 Non-Employee Director Stock Option Plan (the "1996 Director Plan"), each non-employee director of the Company received, at no cost, options to purchase 45,000 shares of the Common Stock of the Company after the 1996 annual meeting of shareholders. Each option granted under the 1996 Director Plan is exercisable for a period of ten (10) years and vests and becomes exercisable as to 15,000 shares on the date of each succeeding annual meeting during which the director continues to serve as such with the Company. The exercise price of options granted under the 1996 Director Plan was set at one hundred ten percent (110%) of the fair market value of the shares on the date of grant and no option granted thereunder may be exercised after the expiration of ten years from the date of grant. Vested options are exercisable provided that the option holder remains a director of the Company. In the event of the death, retirement or permanent and total disability of a director, such director may exercise vested options through the date of expiration of the option. In the event of termination of a director's service on the Company Board for other reasons, such director's options will terminate within 30 days of the date of termination of service and all then outstanding options that have been vested will be exercisable during such period. I-8 35 See "Item 3 -- Agreements with Executive Officers, Directors or Affiliates of the Company -- Employee and Director Stock Options" in the Schedule 14D-9 for a description of the treatment of director options in connection with the Merger. CERTAIN TRANSACTIONS BETWEEN MANAGEMENT AND THE COMPANY AND ITS SUBSIDIARIES Dr. Middleton. ln January 1995, Dr. Middleton entered into a five year employment agreement with the Company pursuant to which he serves as President of Healthsource South, Inc., and more recently as President and Chief Executive Officer of Healthsource South Carolina, Inc., at a current annual salary (including stipend) of $350,700 and is also eligible to receive an annual performance bonus. Under this agreement, Dr. Middleton conducts development activities for the Company throughout the southern United States. The employment agreement is terminable by the Company or Dr. Middleton without cause on 60 days' notice and provides for a severance benefit of $300,000 plus two months' base pay for each year completed under the agreement, up to a maximum of 12 months, in the event of termination without cause by the Company, or $500,000 plus two months' base pay for each year since 1991, up to a maximum of 12 months, in the event Dr. Middleton terminates his employment within 90 days following a change of control of the Company. Dr. Middleton is also eligible to receive stock options under the Company's employee stock option plans. Mr. Zubretsky. In June 1996, Mr. Zubretsky entered into an employment agreement with the Company under which he serves as the Chief Financial Officer of the Company, at a current annual salary of $375,000 and is eligible to receive a performance bonus. The agreement expires December 31, 1997, subject to annual renewal. If Mr. Zubretsky's employment is terminated by the Company without cause or if the Company does not renew the agreement, Mr. Zubretsky becomes entitled to continue to receive his base salary for a two year period, so long as he complies with noncompetition and nondisclosure provisions contained in the agreement. Further, if Mr. Zubretsky's employment is terminated by the Company (or by Mr. Zubretsky if his authority or status with the Company is reduced) within 180 days following a change in control of the Company, then Mr. Zubretsky becomes entitled to continue to receive his base salary for a three year period. Other Agreements. Mr. Schneider has a severance arrangement with the Company. Mr. Schneider's arrangement provides that if his employment is terminated by the Company without cause or by Mr. Schneider if, following a change in control of the Company, his duties or compensation are adversely altered, he becomes entitled to receive his base salary for a two year period. Mr. Chin has a severance arrangement with the Company pursuant to which Mr. Chin becomes entitled to receive six months of base salary if his employment is terminated for cause, and one year of base salary if his employment is terminated without cause. Dr. Salmon has a severance arrangement with the Company providing that if Dr. Salmon's employment is terminated by the Company with or without cause, or if his duties and responsibilities are materially altered, he becomes entitled to one year of salary continuation, plus an additional month of salary continuation for each year of employment with the Company, plus an amount equal to his eligible bonus. Dr. Leipold. In May 1995, the Company made a 7-year term loan in the principal amount of $1,547,910 to Garrison Medical Professional Association ("Garrison"), the group with which Dr. Leipold practices medicine and is a shareholder. The loan currently bears interest at a rate of 7.25% which is adjustable on each anniversary of the loan to a rate one percent below the reported prime rate of interest. The loan is secured by certain real estate and accounts receivable of Garrison. The maximum principal amount of the loan outstanding at any time during 1996 was $1,471,442. As of December 31, 1996, $1,353,416 in principal amount remained outstanding under the loan. Mr. Schneider. In June 1996, the Company loaned $400,000 to Mr. Schneider to temporarily cover the cost of relocating from Chattanooga, Tennessee to Company headquarters in Hooksett, New Hampshire. The loan bears interest at 6% per annum and remained outstanding at December 31, 1996. Mr. Chandler/Provident Transaction. Mr. Chandler serves as President and Chief Executive Officer of Provident. Effective May 1, 1995, the Company purchased the assets of the group health, HMO and third party administration business of Provident for a purchase price of $131 million in cash and $100 million face amount of 6.25% cumulative preferred stock (the "Provident Transaction"). In conjunction with the I-9 36 Provident Transaction, the Company and Provident entered into agreements under which the Company provides certain administrative services to Provident's retained stop-loss business and Provident's disability products; the Company also agreed to obtain computer services from Provident's Chattanooga, Tennessee data processing center for the acquired Provident business for a minimum of two years. In September 1996, the Company and Provident settled for approximately $2.8 million certain claims and accounting issues arising out of the Provident Transaction and amended the stop-loss servicing agreement between them. In October 1996, the Company also purchased approximately 72 acres of land in Chattanooga from Provident for a purchase price of $2.8 million. Mr. Chandler joined the Company's Board of Directors pursuant to the Provident Transaction agreements after the completion of the Provident Transaction. On March 6, 1996, the Company redeemed the $100 million face amount of preferred stock issued in the Provident Transaction and the Company no longer has an obligation to nominate a Provident representative to the Company's Board of Directors. Participating Physician Agreements. Each physician director of the Company, other than Drs. Payson, Bagan and Middleton, provided medical services as a participating physician to one of the Company's HMOs during 1996. Each such director's participating physician agreement conformed with the standard agreements for all participating physicians in the respective HMOs. See "Item 3 -- Agreements with Executive Officers, Directors or Affiliates of the Company -- Severance Agreements" in the Schedule 14D-9 for a description of certain employee severance arrangements. MEETINGS AND COMMITTEES OF THE COMPANY BOARD There were nine meetings of the Company Board held during 1996. All directors attended at least 75% of the total number of meetings of the Company Board and of all committees of the Company Board on which they serve. The Audit Committee reviews the examination reports of state and federal regulatory agencies and the reports of the independent auditors. Directors Baron and Eubank serve on this committee. The Audit Committee met three times during 1996. The Compensation Committee determines the compensation of executive officers and stock options to be granted to employees of the Company. Directors Bagan, Baron, Chandler and Leipold serve on this committee. The Compensation Committee met twice during 1996. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than ten percent of the issued and outstanding Shares, to file with the SEC and the New York Stock Exchange initial reports of ownership and reports of changes in beneficial ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, all Section 16(a) filing requirements applicable to the officers, directors and greater than ten percent beneficial owners were complied with during 1996, other than with respect to one sale transaction by Dr. Bilbro and with respect to one option award transaction to Dr. Schall. STOCK OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS The following table sets forth, as of February 28, 1997, certain information as to those persons who were beneficial owners of more than 5% of the 63,795,517 Shares issued and outstanding as of such date and as to the shares of Common Stock beneficially owned by each of the executive officers and by all the Company's executive officers and directors as a group. I-10 37
NUMBER OF SHARES PERCENTAGE BENEFICIALLY OF CLASS NAME OF BENEFICIAL OWNER OWNED(1) OUTSTANDING - ----------------------------------------------------------------------- ------------ ----------- Norman C. Payson, M.D. President and Chief Executive Officer Two College Park Drive Hooksett, NH 03106................................................... 5,612,760 8.6 % Franklin Resources, Inc. 777 Mariners Island Blvd. San Mateo, CA 94403-7777(2).......................................... 6,838,466 10.7 % Massachusetts Financial Services Company 500 Boylston Street Boston, MA 02116-3741(3)............................................. 7,609,233 11.9 % Southeastern Asset Management, Inc. 6075 Poplar Avenue, Suite 900 Memphis, TN 38119(4)................................................. 3,350,900 5.3 % Charles M. Schneider................................................... 152,000 * Joseph M. Zubretsky.................................................... -- * Francis G. Middleton, M.D.............................................. 271,000 * Robert Chin............................................................ 36,000 * Richard B. Salmon, M.D., Ph.D.......................................... 102,000 * All Executive Officers and Directors as a Group (14 persons)(5)........ 7,394,737 11.2 %
- --------------- * Less than 1%. (1) The listed figures include options exercisable within 60 days to purchase 1,280,000, 152,000, 160,000, 36,000, 80,000, and 1,995,000, shares held by Dr. Payson, Mr. Schneider, Dr. Middleton, Mr. Chin, Dr. Salmon, and all directors and executive officers as a group, respectively. (2) Franklin Resources, Inc. ("FRI") is considered a "beneficial owner" of the Company's Common Stock through its ownership of all of the outstanding capital stock of Templeton Global Advisors Limited, Templeton Management Limited, Templeton Investment Management Limited and Franklin Advisers, Inc., registered investment advisers. The Company is advised, FRI, its principal shareholders and each advisory subsidiary disclaim any economic or beneficial ownership in any of the Company securities. (3) Massachusetts Financial Services Company ("MFS"), a registered investment advisor, is considered the "beneficial owner" of the Company's Common Stock. As sponsor of various mutual fund entities, the Company is advised that 4,397,110 (6.9%) shares and 3,051,930 (4.8%) shares of Company Common Stock are held by MFS Series Trust II -- MFS Emerging Growth Fund and other non-reporting entities, respectively. (4) Southeastern Asset Management, Inc. ("Southeastern"), a registered investment advisor and its Chairman of the Board, in the event he could be deemed to be a controlling person of Southeastern, advise the Company that all of the Company Common Stock reported herein are owned by Southeastern's investment advisory clients and none are owned directly or indirectly by Southeastern or its Chairman as to which both parties disclaim any beneficial ownership in any of the Company's securities. (5) Includes 145,629 shares owned by spouses and minor children of directors and executive officers and shares held or owned by custodians for the benefit of such minors, officers or directors, as to which beneficial ownership may be disclaimed. I-11 38 SCHEDULE II CERTAIN TRANSACTIONS IN SHARES OF COMMON STOCK OF THE COMPANY EFFECTED DURING THE PAST 60 DAYS The following table shows the options granted to executive officers of the Company during the past 60 days. Each such option was granted on February 9, 1997 by the Compensation Committee of the Company Board after a preliminary recommendation made at the January 1997 Compensation Committee meeting consistent with the Company's history of granting management options in February of each year.
EXECUTIVE NUMBER OF OPTIONS EXERCISE OFFICER GRANTED PRICE --------------------------------- ------------------ ------ Robert Chin 32,000 $14.16 Francis G. Middleton, M.D. 110,000 14.16 Norman C. Payson, M.D. 200,000 14.16 Richard B. Salmon, M.D., Ph.D. 57,500 14.16 Charles M. Schneider 200,000 14.16 Joseph M. Zubretsky 200,000 14.16
II-1 39 EXHIBIT INDEX Exhibit 1 Confidentiality Agreement dated January 31, 1997, between Healthsource, Inc. and CIGNA Corporation. Exhibit 2 Agreement and Plan of Merger, dated as of February 27, 1997, by and among Healthsource, Inc., CIGNA Corporation and CHC Acquisition Corp. (including Schedule 5.4(b) thereto). Exhibit 3 Tender and Irrevocable Proxy, dated as of February 27, 1997, by and among CIGNA Corporation, CHC Acquisition Corp. and Norman C. Payson, M.D. Exhibit 4 Consulting Agreement, dated as of February 27, 1997, between CIGNA Corporation and Norman C. Payson, M.D. Exhibit 5 Opinion of Bear, Stearns & Co. Inc. dated as of March 6, 1997. Exhibit 6 Letter to Shareholders of Healthsource, Inc. dated March 6, 1997. Exhibit 7 Press Release issued by Healthsource, Inc. on February 28, 1997. Exhibit 8 Employment Agreement, dated as of July 30, 1993, between Healthsource, Inc. and Robert Chin. Exhibit 9 Employment Agreement, dated as of January 1, 1995, between Healthsource, Inc. and Francis G. Middleton, M.D. Exhibit 10 Employment Agreement, dated as of June 25, 1996, between Healthsource, Inc. and Joseph M. Zubretsky. Exhibit 11 Employment Agreement, dated as of July 19, 1996, between Healthsource, Inc. and Charles M. Schneider. Exhibit 12 Employment Agreement, dated as of February 14, 1997, between Healthsource, Inc. and Richard B. Salmon, M.D., Ph.D. Exhibit 13 Healthsource, Inc. Deferred Compensation Plan for Selected Employees, effective October 15, 1995. Exhibit 14 Healthsource, Inc. 1991 Non-Qualified Stock Option Plan. Exhibit 15 Healthsource, Inc. 1992 Director Stock Option Plan. Exhibit 16 Healthsource, Inc. 1994 Director Stock Option Plan. Exhibit 17 Healthsource, Inc. 1996 Non-Employee Stock Option Plan.
EX-99.1 2 CONFIDENTIALITY AGREEMENT 1 CONFIDENTIALITY AGREEMENT DATED AS OF JANUARY 31, 1997 In connection with the consideration of a possible transaction (the "Transaction") between CIGNA CORPORATION ("CIGNA") and HEALTHSOURCE, INC. ("Healthsource"), Healthsource has or will furnish certain financial and other information (the "Evaluation Material") to CIGNA. In consideration of the receipt of the Evaluation Material from Healthsource and for CIGNA's agreement to the terms of this Confidentiality Agreement, CIGNA agrees, as set forth below, to keep the Evaluation Material and analyses derived from the Evaluation Material ("Analysis") confidential, and both parties agree to the other matters contained herein. CIGNA agrees that the Evaluation Material will be used solely for purposes of determining whether and under what terms and conditions it may have an interest in negotiating or concluding a Transaction with Healthsource. CIGNA further agrees to keep the Evaluation Material and Analysis confidential and not to disclose the Evaluation Material and Analysis to any person except as otherwise provided in this Confidentiality Agreement. For purposes of this Confidentiality Agreement, the term "person" includes, without limitation, any corporation, company, partnership, limited liability company, individual or other entity. CIGNA may disclose the Evaluation Material and Analysis to its directors, officers, employees, agents, and consultants (collectively "Representatives") who, CIGNA determines, in the exercise of reasonable judgment, need to know such information for the purpose of considering whether to negotiate or conclude a Transaction with Healthsource, provided that such persons are made aware of the confidentiality of the information, and the limitations on its use. CIGNA shall assume responsibility for the breach of this Agreement by its Representatives. For purposes of this Confidentiality Agreement, "Evaluation Material" means documents and information furnished by Healthsource to CIGNA or its Representatives, orally, in writing, or by inspection of documents and all analyses, compilations, forecasts, studies, summaries, notes, data and other documents and materials in whatever form maintained, whether prepared by CIGNA, its Representatives or others, to the extent such documents or materials contain or reflect, any such information. The term "Evaluation Material" does not apply to information which (a) is or becomes generally available to the public other than as a result of disclosure by CIGNA (or its Representatives) in violation of this Confidentiality Agreement, (b) was available to CIGNA on a non-confidential basis from a source other than Healthsource or its employees, agents or consultants 1 2 prior to receipt in accordance with this agreement, or (c) becomes available to CIGNA on a non-confidential basis from a source other than Healthsource or its employees, agents or consultants provided that CIGNA does not know that such source is prohibited from disclosing such information to CIGNA by a contractual or legal obligation. CIGNA agrees not to disclose to any person, other than its Representatives, any Evaluation Material, the fact that Evaluation Material has been made available to CIGNA, the fact that either party is discussing a possible transaction with the other or with any other person, or any fact concerning the discussions or negotiations (including the existence or status thereof), except pursuant to a subpoena (after immediate prior notice to the other party so that the other party may seek an appropriate protective order) and then only after using such disclosing party's best efforts to maintain the continuing confidentiality of all such information required to be so disclosed. Upon request, CIGNA will promptly deliver to Healthsource, or destroy, all Evaluation Material furnished by Healthsource, without retaining any copies. Upon request, CIGNA will also instruct all Representatives to deliver to Healthsource or destroy, all Evaluation Material furnished by CIGNA to such Representatives. Upon request, CIGNA will furnish Healthsource a letter stating that the Evaluation Material has been returned or destroyed. CIGNA acknowledges that neither Healthsource nor its Representatives, agents or controlling persons makes any express or implied representation or warranty as to the accuracy or completeness of the Evaluation Material or any other information provided to CIGNA by Healthsource. CIGNA and its Representatives agree that no such person will have any liability to CIGNA or any of its Representatives with respect to the Evaluation Material on any basis (including, without limitation, in contract, tort, under federal or state securities laws or otherwise), except pursuant to the final, executed Transaction documents, if any, and neither CIGNA nor its Representatives will make any claims whatsoever against such persons, with respect to or arising out of the Transaction, whether as a result of this Agreement, any other written or oral expression with respect to the Transaction, CIGNA's participation in evaluating the possible Transaction or any procedures therefor, CIGNA's review of Healthsource, the use of the Evaluation Material by CIGNA or its Representatives, any errors therein or omissions from the Evaluation Material, or otherwise, except pursuant to the final, executed Transaction documents, if any. CIGNA and its Representatives further agree that they are not entitled to rely on the accuracy or completeness of the Evaluation Material and that only such representations or warranties, if any, contained in the final, executed, transaction documents, if any, shall have any binding effect. CIGNA further acknowledges that nothing in this Confidentiality 2 3 Agreement precludes Healthsource from furnishing Evaluation Material to other persons or parties. CIGNA agrees that, for a period of eighteen (18) months from the date of this Agreement, unless specifically invited in writing by Healthsource, neither CIGNA nor any of CIGNA's affiliates, will in any manner, directly or indirectly, effect or seek, offer, propose (whether publicly or otherwise) or take any other action to effect, or cause or participate in, or in any way assist, advise or encourage any other person to effect, seek, or offer or propose (whether publicly or otherwise) to effect or participate in, (i) any acquisition of the securities (or beneficial ownership thereof as such term is used in the Securities Exchange Act of 1934) or assets of Healthsource, or rights or options to acquire the same (except that the foregoing shall not prohibit CIGNA, in the ordinary course of its investment activities for third-party or fiduciary accounts, from trading or beneficially owning securities of Healthsource; provided neither CIGNA nor its Affiliates shall exercise any voting control over such third-party shares in a manner intended to influence the management or operations of Healthsource); (ii) any tender or exchange offer, merger or other business combination involving Healthsource (including with a third-party); (iii) any recapitalization, restructuring, liquidation, dissolution, purchase or sale of a substantial portion of the assets of, or other extraordinary transaction with respect to Healthsource; (iv) any "solicitation" of "proxies" (as such terms are used in the rules of the Securities and Exchange Commission) to vote, or seek to advise or influence any person or entity with respect to the voting of, any voting securities of Healthsource or any action to elect or remove directors of, or to influence the management, policy or conduct of the business affairs of Healthsource, or (v) any action which would likely cause Healthsource to be required to make a public announcement regarding any of the types of matters set forth in (i) - (iv) above, nor will CIGNA enter into any arrangement or understanding with any third-party to accomplish any of the foregoing. During such period, unless specifically invited as provided above, CIGNA further agrees not to approach or request Healthsource (or its directors, officer, employees or agents), directly or indirectly, to amend or waive any provision of this paragraph (including this sentence). If at any time during such period, CIGNA is approached by a third-party concerning its or such third-party's participation in a transaction or activity described in (i) - (iv) above, CIGNA will promptly inform Healthsource of the nature of each contact and the identities of the third-parties involved. CIGNA will not take any action during such period, unless specifically invited as provided above, to communicate (either publicly or privately) with Healthsource shareholders. CIGNA agrees that neither CIGNA nor any of its Affiliates will, for a period of eighteen (18) months from the date of this Confidentiality Agreement, without the prior written consent of the Healthsource, (i) employ or solicit the 3 4 employment of any executive officer of Healthsource (as defined under the 1934 Act), or the CEO of any HMO or insurance subsidiary of Healthsource, nor (ii) employ or solicit the employment of any other management employee of Healthsource or any of its Affiliates with whom CIGNA or its Representatives had contact during the negotiations and investigations of the Transaction, provided that this clause (ii) shall not prevent CIGNA from hiring any such other management employee who approaches CIGNA on his own initiative without direct or indirect solicitation by CIGNA other than through an advertisement in a newspaper or magazine. CIGNA agrees that all of its communications with Healthsource with respect to the Evaluation Material and any potential Transaction, will be conducted solely with Norman C. Payson, M.D. or his designees. The parties agree that a breach of any material provision of this Agreement by either of them would result in irreparable harm to the non-breaching party, that any remedy at law is inadequate because damages are not fully ascertainable, and accordingly, in the event of any breach or threatened breach of any material provision of this Agreement by a party (or its Representative), the non-breaching party shall have the right to seek immediate injunctive relief to prevent the breach in addition to any other remedies available at law or in equity. CIGNA agrees to advise its Representatives who receive the Evaluation Material, that the Untied States securities laws prohibit any person who has material, non-public information concerning the matters which are the subject of this Agreement from purchasing or selling securities of Healthsource (and options, warrants and rights relating thereto) or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. You acknowledge that if Healthsource determines to pursue a Transaction, it may establish procedures and guidelines ("Procedures") for the submission of proposals with respect to any Transaction with or involving Healthcare. If CIGNA determines to submit a proposal, CIGNA and its Representatives agree to act in accordance with the Procedures and to be bound by the terms and conditions that may be established pursuant to the Procedures. The Parties agree that unless and until a definitive transaction agreement is executed by the parties, no contract or agreement providing for a Transaction with the parties shall be deemed to exist. The parties agree that neither party will be under any legal obligation of any kind whatsoever with respect to any such Transaction by virtue of this Confidentiality Agreement or by virtue of any oral or written expression with respect to such a Transaction made by any of its 4 5 officers or Representatives. CIGNA agrees that Healthsource will have the right in its sole discretion, without giving any reason therefor, at any time to terminate the discussions with CIGNA concerning a possible Transaction, to elect not to pursue any such Transaction, or to pursue the Transaction without your involvement. This paragraph may only be modified by a written instrument signed by both parties and referencing this paragraph specifically. If it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that any term or provision hereof is invalid or unenforceable, (i) the remaining terms and provision hereof shall be unimpaired and shall remain in full force and effect and (ii) the invalid or unenforceable provision or term shall be replaced by a term or provision that is valid, enforceable and that comes closest to expressing the intention of such invalid or unenforceable term or provision. This Agreement embodies the entire agreement and understanding of the parties hereto and supersedes any and all prior agreements, arrangements and understandings relating to the matters provided for herein. No alteration, waiver, amendment, change or supplement hereto shall be binding or effective unless the same is set forth in a written instrument signed by a duly authorized representative of each party and expressly so altering or waiving such Agreement. All notices required or permitted to be given under this Agreement shall be given by personal delivery or by overnight courier service (signature required) as follows, or to such other address as may be subsequently provided: If to the Company: CIGNA Corporation One Liberty Place 1650 Market Street Philadelphia, PA 19192 Attn: Robert Rose Vice-President - Strategic Growth and Development FAX No.: (215) 761-3399 With a copy to: CIGNA Corporation One Liberty Place 1650 Market Street Philadelphia, PA 19192 Attn: Thomas J. Wagner, Esq. General Counsel FAX No.: (215) 761-5519 5 6 If to Healthsource: Healthsource, Inc. Two College Park Drive Hooksett, NH 03106 Attn: Norman C. Payson, M.D. President & CEO Fax No.: (603) 268-7905 With a copy to: Healthsource, Inc. Two College Park Drive Hooksett, NH 03106 Attn: Jon S. Richardson Special Counsel to the President Fax No.: (603) 268-7905 This Agreement shall be governed by the internal substantive law of the State of New Hampshire without regard to choice of law principles. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in duplicate original copies as of the date stated above. HEALTHSOURCE, INC. By: /s/ Joseph M. Zubretsky -------------------------- Joseph M. Zubretsky Chief Financial Officer CIGNA CORPORATION By: /s/ Robert L. Rose -------------------------- Robert L. Rose Vice President 6 EX-99.2 3 AGREEMENT AND PLAN OF MERGER 1 AGREEMENT AND PLAN OF MERGER by and among CIGNA CORPORATION CHC ACQUISITION CORP. and HEALTHSOURCE, INC. February 27, 1997 2 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of February 27, 1997 (this "Agreement"), by and among CIGNA Corporation, a Delaware corporation ("Parent"), CHC Acquisition Corp., a New Hampshire corporation and a wholly-owned, indirect subsidiary of Parent (the "Purchaser"), and Healthsource, Inc., a New Hampshire corporation (the "Company"). WHEREAS, the Boards of Directors of Parent, the Purchaser and the Company have approved, and deem it advisable and in the best interests of their respective shareholders to consummate, the acquisition of the Company by Parent and the Purchaser upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I THE OFFER AND MERGER Section 1 The Offer. (a) As promptly as practicable (but in no event later than five business days from the public announcement of the execution hereof), the Purchaser shall commence (within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) an offer (the "Offer") to purchase for cash any and all of the issued and outstanding shares of Common Stock, par value $.10 per share (referred to herein as either the "Shares" or "Company Common Stock"), of the Company (excluding the related Common Stock Purchase Rights (the "Rights") issued pursuant to the Rights Agreement between the Company and The Bank of New York, dated as of July 29, 1996 (the "Rights Agreement") which will be redeemed prior to the consummation of the Offer), at a price of $21.75 per Share, net to the seller in cash (such price, or such higher price per Share as may be paid in the Offer, being referred to herein as the "Offer Price"). The Purchaser shall, on 3 the terms and subject to the prior satisfaction or waiver of the conditions of the Offer (except that the Minimum Condition (as hereinafter defined) may not be waived), accept for payment and pay for Shares tendered as soon as it is legally permitted to do so under applicable law. The obligations of the Purchaser to accept for payment and to pay for any and all Shares validly tendered on or prior to the expiration of the Offer and not withdrawn shall be subject only to there being validly tendered and not withdrawn prior to the expiration of the Offer, that number of Shares which, together with any Shares beneficially owned by Parent or the Purchaser, represent at least a majority of the Shares outstanding on a fully diluted basis (the "Minimum Condition") and the other conditions set forth in Annex A hereto. The Offer shall be made by means of an offer to purchase (the "Offer to Purchase") containing the terms set forth in this Agreement, the Minimum Condition and the other conditions set forth in Annex A hereto. The Purchaser shall not amend or waive the Minimum Condition and shall not decrease the Offer Price or decrease the number of Shares sought, or amend any other term or condition of the Offer in any manner adverse to the holders of the Shares or extend the expiration date of the Offer without the prior written consent of the Company (such consent to be authorized by the Board of Directors of the Company or a duly authorized committee thereof). Notwithstanding the foregoing, the Purchaser shall, and Parent agrees to cause the Purchaser to, extend the Offer from time to time until seven months from execution of this Agreement (as such time may be extended pursuant to Section 7.1(b)(i) hereof) if, and to the extent that, at the initial expiration date of the Offer, or any extension thereof, all conditions to the Offer have not been satisfied or waived. In addition, the Offer Price may be increased and the Offer may be extended to the extent required by law in connection with such increase in each case without the consent of the Company. (b) As soon as practicable on the date the Offer is commenced, Parent and the Purchaser shall file with the United States Securities and Exchange Commission (the "SEC") a Tender Offer Statement on Schedule 14D-1 with respect to the Offer (together with all amendments and supplements thereto and including the exhibits thereto, the "Schedule 14D-1"). The Schedule 14D-1 will include, as exhibits, the Offer to Purchase and a form of 2 4 letter of transmittal and summary advertisement (collectively, together with any amendments and supplements thereto, the "Offer Documents"). The Offer Documents will comply in all material respects with the provisions of applicable federal securities laws and, on the date filed with the SEC and on the date first published, sent or given to the Company's shareholders, shall not 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 were made, not misleading, except that no representation is made by Parent or the Purchaser with respect to information supplied by the Company in writing for inclusion in the Offer Documents. Each of Parent and the Purchaser further agrees to take all steps necessary to cause the Offer Documents to be filed with the SEC and to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. Each of Parent and the Purchaser, on the one hand, and the Company, on the other hand, agrees promptly to correct any information provided by it for use in the Offer Documents if and to the extent that it shall have become false and misleading in any material respect and the Purchaser further agrees to take all steps necessary to cause the Offer Documents as so corrected to be filed with the SEC and to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. The Company and its counsel shall be given a reasonable opportunity to review the initial Schedule 14D-1 before it is filed with the SEC. In addition, Parent and the Purchaser agree to provide the Company and its counsel in writing with any comments or other communications that Parent, the Purchaser or their counsel may receive from time to time from the SEC or its staff with respect to the Offer Documents promptly after the receipt of such comments or other communications. Section 2 Company Actions. (a) The Company hereby approves of and consents to the Offer and represents that the Board of Directors, at a meeting duly called and held, has (i) approved this Agreement and the transactions contemplated hereby, including the Offer and the Merger (as defined in Section 1.4) (collectively, the "Transactions"), which approvals constitute approval of this Agreement, the 3 5 Offer and the Merger for purposes of Section 293-A:11.01 of the New Hampshire Business Corporation Act (the "NHBCA"), (ii) resolved to recommend that the shareholders of the Company accept the Offer, tender their Shares thereunder to the Purchaser and approve and adopt this Agreement and the Merger; provided, that such recommendation may be withdrawn, modified or amended only as provided in Section 5.5(b) hereof, and (iii) approved the redemption of the Rights prior to the consummation of the Offer according to the provisions of the Rights Agreement. (b) As promptly as practicable following the commencement of the Offer and in all events not later than 10 business days following such commencement, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 (together with all amendments and supplements thereto and including the exhibits thereto, the "Schedule 14D-9") which shall, subject to the fiduciary duties of the Company's directors under applicable law and to the provisions of this Agreement, contain the recommendation referred to in clause (ii) of Section 1.2(a) hereof. The Schedule 14D-9 will comply in all material respects with the provisions of applicable federal securities laws and, on the date filed with the SEC and on the date first published, sent or given to the Company's shareholders, shall not 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 were made, not misleading, except that no representation is made by the Company with respect to information supplied by Parent or the Purchaser in writing for inclusion in the Offer Documents. The Company further agrees to take all steps necessary to cause the Schedule 14D-9 to be filed with the SEC and to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. Each of the Company, on the one hand, and Parent and the Purchaser, on the other hand, agrees promptly to correct any information provided by it for use in the Schedule 14D-9 if and to the extent that it shall have become false and misleading in any material respect and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and to be disseminated to holders of the Shares, in each case as and to the extent required 4 6 by applicable federal securities laws. Parent and its counsel shall be given a reasonable opportunity to review the initial Schedule 14D-9 before it is filed with the SEC. In addition, the Company agrees to provide Parent, the Purchaser and their counsel in writing with any comments or other communications that the Company or its counsel may receive from time to time from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments or other communications. (c) In connection with the Offer, the Company will promptly furnish or cause to be furnished to the Purchaser mailing labels, security position listings and any available listing or computer file containing the names and addresses of the record holders of the Shares as of a recent date, and shall furnish the Purchaser with such additional information (including updated lists of holders of Shares and their addresses, mailing labels and lists of security positions) and such other assistance as the Purchaser or its agents may reasonably request in communicating the Offer to the record and beneficial shareholders of the Company. Except for such steps as are necessary to disseminate the Offer Documents, Parent and the Purchaser shall hold in confidence the information contained in any of such labels and lists and the additional information referred to in the preceding sentence, will use such information only in connection with the Offer, and, if this Agreement is terminated, will upon request of the Company deliver or cause to be delivered to the Company all copies of such information then in its possession or the possession of its agents or representatives. Section 3 Directors. (a) Promptly upon the purchase of and payment for Shares by Parent or any of its subsidiaries which represent at least a majority of the outstanding shares of Company Common Stock (on a fully diluted basis), Parent shall be entitled to designate such number of directors, rounded up to the next whole number, on the Board of Directors of the Company as is equal to the product of the total number of directors on such Board (giving effect to the directors designated by Parent pursuant to this sentence) multiplied by the percentage that the aggregate number of Shares beneficially owned by the Purchaser, Parent and any of their affiliates bears 5 7 to the total number of shares of Company Common Stock then outstanding. The Company shall, upon request of the Purchaser, use its best efforts promptly either to increase the size of its Board of Directors (which, pursuant to the Company's Articles of Incorporation, has a maximum number of 15 directors) or, at the Company's election, secure the resignations of such number of its incumbent directors as is necessary to enable Parent's designees to be so elected to the Company's Board, and shall cause Parent's designees to be so elected. Notwithstanding the foregoing, until the Effective Time (as defined in Section 1.5 hereof), the Company shall retain as members of its Board of Directors at least two directors who are directors of the Company on the date hereof (the "Company Designees"); provided, that subsequent to the purchase of and payment for Shares pursuant to the Offer, Parent shall always have its designees represent at least a majority of the entire Board of Directors. The Company's obligations under this Section 1.3(a) shall be subject to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. The Company shall promptly take all actions required pursuant to such Section 14(f) and Rule 14f-1 in order to fulfill its obligations under this Section 1.3(a), including mailing to shareholders the information required by such Section 14(f) and Rule 14f-1 as is necessary to enable Parent's designees to be elected to the Company's Board of Directors. Parent or the Purchaser will supply the Company any information with respect to either of them and their nominees, officers, directors and affiliates required by such Section 14(f) and Rule 14f-1. (b) From and after the time, if any, that Parent's designees constitute a majority of the Company's Board of Directors, any amendment of this Agreement, any termination of this Agreement by the Company, any extension of time for performance of any of the obligations of Parent or the Purchaser hereunder, any waiver of any condition or any of the Company's rights hereunder or other action by the Company hereunder may be effected only by the action of a majority of the directors of the Company then in office who were directors of the Company on the date hereof, which action shall be deemed to constitute the action of the full Board of Directors; provided, that if there shall be no such directors, such actions may be effected by unanimous vote of the entire Board of Directors of the Company. 6 8 Section 4 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.5 hereof), the Company and the Purchaser shall consummate a merger (the "Merger") pursuant to which (a) the Purchaser shall be merged with and into the Company and the separate corporate existence of the Purchaser shall thereupon cease, (b) the Company shall be the successor or surviving corporation in the Merger (the "Surviving Corporation") and shall continue to be governed by the laws of the State of New Hampshire, and (c) the separate corporate existence of the Company with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. Pursuant to the Merger, (x) the Articles of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Articles of Incorporation, and (y) the By-laws of the Company, as in effect immediately prior to the Effective Time, shall be the By-laws of the Surviving Corporation until thereafter amended as provided by law, the Articles of Incorporation and such Bylaws. The Merger shall have the effects set forth in the NHBCA. Section 5 Effective Time. On the date of the Closing (as defined in Section 1.6 hereof) (or on such other date as the parties may agree), the parties shall file such certificates of merger, articles of merger or other appropriate documents (in any such case, the "Certificates of Merger") executed in accordance with the relevant provisions of the NHBCA, and shall make all other filings, recordings and publications required by the NHBCA with respect to the Merger. The Merger shall become effective on the date specified in the Certificates of Merger, which specified time shall be the same in each Certificate of Merger (the time the Merger becomes effective is hereinafter referred to as the "Effective Time"). Section 6 Closing. The closing of the Merger (the "Closing") will take place at 10:00 a.m. on a date to be specified by the parties, which shall be no later than the second business day after satisfaction or waiver of all of the conditions set forth in Article VI hereof (the "Closing Date"), at the offices of O'Melveny & Myers LLP, 153 East 53rd Street, New York, New York 10022, 7 9 unless another date or place is agreed to in writing by the parties hereto. Section 7 Directors and Officers of the Surviving Corporation. The directors of the Purchaser at the Effective Time shall, from and after the Effective Time, be the directors of the Surviving Corporation until their successors shall have been duly elected or appointed or qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Articles of Incorporation and By-laws. The officers of the Company at the Effective Time shall, from and after the Effective Time, be the officers of the Surviving Corporation until their successors shall have been duly elected or appointed or qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Articles of Incorporation and By-laws. Section 8 Shareholders' Meeting. (a) If required by applicable law in order to consummate the Merger, the Company, acting through its Board of Directors, shall, in accordance with applicable law: (i) duly call, give notice of, convene and hold a special meeting of its shareholders (the "Special Meeting") as soon as practicable following the acceptance for payment and purchase of Shares by the Purchaser pursuant to the Offer for the purpose of considering and taking action upon this Agreement; (ii) prepare and file with the SEC a preliminary proxy or information statement relating to the Merger and this Agreement and use its best efforts (x) to obtain and furnish the information required to be included by the SEC in the Proxy Statement (as hereinafter defined) and, after consultation with Parent, to respond promptly to any comments made by the SEC with respect to the preliminary proxy or information statement and cause a definitive proxy or information statement (the "Proxy Statement") to be mailed to its shareholders and (y) to obtain the necessary approvals of the Merger and this Agreement by its shareholders; and 8 10 (iii) subject to the fiduciary obligations of the Board under applicable law as advised by independent counsel, include in the Proxy Statement the recommendation of the Board that shareholders of the Company vote in favor of the approval of the Merger and the adoption of this Agreement. (b) Parent agrees that it will provide the Company with the information concerning Parent and the Purchaser required to be included in the Proxy Statement and will vote, or cause to be voted, all of the Shares then owned by it, the Purchaser or any of its other subsidiaries and affiliates in favor of the approval of the Merger and the adoption of this Agreement. Section 9 Merger Without Meeting of Shareholders. Notwithstanding Section 1.8 hereof, if permitted by the NHBCA, in the event that Parent, the Purchaser or any other subsidiary of Parent shall acquire at least 90% of the outstanding shares of each class of capital stock of the Company, pursuant to the Offer or otherwise, the parties hereto agree to take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after such acquisition, without a meeting of shareholders of the Company. Section 10 Convertible Notes. In accordance with the terms of the Indenture, dated as of March 6, 1996 (the "Indenture"), between the Company, as issuer, and The Bank of New York, as trustee (the "Trustee"), with respect to the Company's 5% Convertible Subordinated Notes due 2003 (the "Company Convertible Notes"), within 30 days following the acquisition by Purchaser of beneficial ownership, directly or indirectly, of more than 50% of the Shares, the Company shall, in accordance with the Indenture, publish a notice in The Wall Street Journal, notify the Trustee and give written notice to each holder of the Company Convertible Notes, stating, among other things, (i) that a Change of Control (as defined in the Indenture) has occurred, (ii) that each holder of the Company Convertible Notes has the right to require the Company to repurchase such holder's Company Convertible Notes at a purchase price in cash in an amount equal to 101% of the principal amount of such Company Convertible Notes, plus accrued and unpaid interest thereon, if any, to the purchase date thereof and (iii) the date on which 9 11 such Company Convertible Notes shall be purchased which shall be a business day no later than 60 days from the date such notice is mailed. Parent shall contribute to the Company an amount in cash necessary to repurchase all such Company Convertible Notes. ARTICLE II CONVERSION OF SECURITIES Section 1 Conversion of Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holders of any shares of Company Common Stock or common stock of the Purchaser (the "Purchaser Common Stock"): (a) Purchaser Common Stock. Each issued and outstanding share of the Purchaser Common Stock shall be converted into and become one fully paid and nonassessable share of common stock of the Surviving Corporation. (b) Cancellation of Parent-Owned Stock. Any shares of Company Common Stock owned by Parent, the Purchaser or any other wholly owned Subsidiary (as defined in Section 3.1 hereof) of Parent shall be cancelled and retired and shall cease to exist and no consideration shall be delivered in exchange therefor. (c) Exchange of Shares. Each issued and outstanding share of Company Common Stock (other than Shares to be cancelled in accordance with Section 2.1(b) hereof and any Dissenting Shares (if applicable and as defined in Section 2.3 hereof)), shall be converted into the right to receive the Offer Price, payable to the holder thereof, without interest (the "Merger Consideration"), upon surrender of the certificate formerly representing such share of Company Common Stock in the manner provided in Section 2.2 hereof. All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration therefor upon the surrender of such certificate in accordance with Section 10 12 2.2 hereof, without interest, or to perfect any rights of appraisal as a holder of Dissenting Shares (as hereinafter defined) that such holder may have pursuant to Section 293-A:13.02 of the NHBCA. Section 2 Exchange of Certificates. (a) Paying Agent. Parent shall designate a bank or trust company reasonably acceptable to the Company to act as agent for the holders of shares of Company Common Stock in connection with the Merger (the "Paying Agent") to receive the funds to which holders of shares of Company Common Stock shall become entitled pursuant to Section 2.1(c) hereof. Prior to the Effective Time, Parent shall take all steps necessary to deposit or cause to be deposited with the Paying Agent such funds for timely payment hereunder. Such funds shall be invested by the Paying Agent as directed by Parent or the Surviving Corporation. (b) Exchange Procedures. As soon as reasonably practicable after the Effective Time but in no event more than three business days thereafter, the Paying Agent shall mail to each holder of record of a certificate or certificates, which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates"), whose shares were converted pursuant to Section 2.1 hereto into the right to receive the Merger Consideration (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for payment of the Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each share of Company Common Stock formerly represented by such Certificate and the Certificate so surrendered shall forthwith be cancelled. If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate is 11 13 registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such tax either has been paid or is not applicable. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive the Merger Consideration in cash as contemplated by this Section 2.2. (c) Transfer Books; No Further Ownership Rights in Company Common Stock. At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of shares of Company Common Stock on the records of the Company. From and after the Effective Time, the holders of Certificates evidencing ownership of shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares, except as otherwise provided for herein or by applicable law. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Article II. (d) Termination of Fund; No Liability. At any time following one year after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any interest received with respect thereto) which had been made available to the Paying Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the Merger Consideration payable upon due surrender of their Certificates, without any interest thereon. Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying Agent shall be liable to any holder of a Certificate for Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 12 14 Section 3 Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, Shares outstanding immediately prior to the Effective Time and held by a holder who has not voted in favor of the Merger or consented thereto in writing and who has demanded appraisal for such Shares in accordance with the NHBCA ("Dissenting Shares") shall not be converted into a right to receive the Merger Consideration, unless such holder fails to perfect or withdraws or otherwise loses his or her right to appraisal. A holder of Dissenting Shares shall be entitled to receive payment of the appraised value of such Shares held by him or her in accordance with the provisions of Section 293-A:13.25 of the NHBCA, unless, after the Effective Time, such holder fails to perfect or withdraws or loses his or her right to appraisal, in which case such Shares shall be treated as if they had been converted as of the Effective Time into a right to receive the Merger Consideration, without interest thereon. Section 4 Company Option Plans. (a) As soon as practicable following the date of this Agreement, the Company shall take such actions as may be required to effect the following: (i) adjust the terms of all outstanding options to purchase Company Common Stock held by all current and former employees and directors of the Company ("Company Employee Stock Options") and the terms of each applicable stock option plan maintained by the Company ("Company Employee Stock Plans"), to provide that at the Effective Time, each individual Company Employee Stock Option outstanding immediately prior to the Effective Time shall be fully vested and exercisable; (ii) further adjust the terms of each Company Employee Stock Option held by any person who immediately prior to the Effective Time served as a member of the Board of Directors of the Company (and who was not also a full-time employee of the Company) to provide that such Company Employee Stock Option shall remain exercisable for a period ending on the first to occur of (A) the third anniversary of the Effective Time and (B) the original expiration 13 15 date of such option, determined without regard to any termination (for any reason whatsoever) from service as a member of the Board of Directors of the Company; and (iii) make such other changes to the Company Employee Stock Plans and Company Employee Stock Options as it deems appropriate to give effect to the Merger (subject to the approval of Parent, which shall not be unreasonably withheld). (b) As soon as practicable following the date of this Agreement, Parent shall take such actions as may be required to adopt a plan ("Parent Stock Option Plan") under which Parent will grant options ("Substitute Options") to purchase shares of Parent common stock, par value $1.00 per share ("Parent Common Stock") to replace any Company Employee Stock Options that are outstanding at the Effective Time, which plan will include, but not be limited to, the terms and conditions described in Section 2.4(c) below. (c) Pursuant to the Parent Stock Option Plan each current and former director and employee of the Company who holds one or more unexercised Company Employee Stock Options at the Effective Time ("Eligible Grantee") shall, subject to the terms and conditions set forth below, automatically receive a grant as of the Effective Time of one or more Substitute Options in replacement of his or her Company Employee Stock Options. Each Substitute Option granted to an Eligible Grantee pursuant to this Section 2.4(b) shall: (i) be for a number of shares of Parent Common Stock equal to the number of shares of Company Common Stock subject to the Company Employee Stock Option, multiplied by the Option Ratio (as defined below), rounded down to the next whole number of shares; (ii) be for a per share exercise price equal to the exercise price for the shares of Company Common Stock otherwise purchasable pursuant to such Company Employee Stock Option divided by the Option Ratio, rounded to the nearest hundredth of a cent; 14 16 (iii) be immediately exercisable upon the Eligible Grantee's execution of the Option Agreement (referred to below) and, except as provided in Section 2.4(a)(ii) with respect to current and former directors of the Company (and regardless of the actual date of termination of employment of the Eligible Grantee with the Company, Parent or any subsidiary of the Parent), shall expire no earlier than the date the Company Employee Stock Option would expire if the Eligible Grantee would have remained continuously employed by the Company until such date; and (iv) otherwise be subject to substantially the same terms and conditions as applicable to the Company Employee Stock Option. For purposes of this Section 2.4, "Option Ratio" shall mean the Offer Price divided by the average closing price per share of Parent Common Stock on the New York Stock Exchange for the five consecutive trading days ending immediately prior to the date of this Agreement. (d) As soon as practicable after the Effective Time, Parent shall deliver to the holders of Company Employee Stock Options, appropriate notices setting forth such holders' rights pursuant to the Parent Stock Option Plan, and the Option Agreements (based upon a form reasonably satisfactory to the Company, such form to be delivered to the Company at least 10 days prior to the purchase of any shares pursuant to the Offer), evidencing the grants of such Substitute Options and the provisions of this Section 2.4. Execution of the Option Agreement by Eligible Grantee shall result in the replacement of his or her Company Employee Stock Options with Substitute Options as described above and immediate cancellation of all of the Eligible Grantee's rights under the Company Employee Stock Options. (e) Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery upon exercise of the Substitute Options issued in accordance with this Section 2.4. At the Effective Time, Parent shall file a registration statement on Form S-8 (or any successor or other appropriate form) with the SEC with respect to the shares of Parent Common Stock subject to 15 17 such Substitute Options and shall use its best efforts to maintain the effectiveness of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such Substitute Options remain outstanding. With respect to those individuals who subsequent to the Merger are subject to the reporting requirements under Section 16(a) of the Exchange Act with respect to Parent, where applicable, Parent shall administer the Parent Stock Plan assumed pursuant to this Section 2.4 in a manner that complies with Rule 16b-3 promulgated under the Exchange Act to the extent the applicable Company Stock Plan complied with such rule prior to the Merger. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as otherwise disclosed to Parent and Purchaser in a letter delivered to it at or prior to the execution hereof (the "Company Disclosure Letter"), the Company represents and warrants to Parent and Purchaser as follows: Section 1 Organization. Each of the Company and its Subsidiaries (as hereinafter defined) is a corporation or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted, except where failure to be so existing and in good standing or to have such power and authority would not have a Company Material Adverse Effect (as hereinafter defined). Each of the Company and its Subsidiaries is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified, licensed and in good standing or to be so qualified or licensed would not have a Company Material Adverse Effect. The Company has heretofore delivered to Parent a complete and correct copy of each of its Articles of Incorporation and By-Laws, as currently in effect, and 16 18 has heretofore made available to Parent a complete and correct copy of the Articles of Incorporation and By-Laws of each of its Subsidiaries, as currently in effect. As used in this Agreement, the word "Subsidiary" means, with respect to any party, any corporation, partnership or other entity or organization, whether incorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner (excluding such partnerships where such party or any Subsidiary of such party do not have a majority of the voting interest in such partnership) or (ii) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries. As used in this Agreement, "Company Material Adverse Effect" means only (I) any adverse change in, or effect on, the business, financial condition or operations (excluding results of operations and effects of net income) of the Company and its Subsidiaries, taken as a whole, that individually or in the aggregate, exceeds, or is reasonably likely to exceed, $67.5 million, or (II) the net income of the Company and its Subsidiaries (not taking into account any (A) gains or losses resulting from sales or other dispositions of assets by the Company or any of its Subsidiaries (including, without limitation, gains or losses resulting from related severance costs) effected with the prior written consent of Parent (which consent will not be unreasonably withheld), and (B) losses resulting from the costs related to this Agreement and the transactions contemplated hereby), determined in accordance with United States generally accepted accounting principles ("GAAP"), from January 1, 1997 through the last full month of operations for which financial information is available prior to the consummation of the Offer being less, on a cumulative basis, than the Targeted Income (as defined below) by an amount in excess of the Allowed Shortfall (as defined below); provided, however, that, in the case of either of (I) or (II) above, the effects of changes that are generally applicable to (i) the health care or HMO industries, (ii) the United States economy or (iii) the United States securities markets shall be excluded from such determination; and provided, further, that any adverse effect on the 17 19 Company and its Subsidiaries resulting from the execution of this Agreement and the announcement of this Agreement and the transactions contemplated hereby and any change in value of the Company's marketable securities shall also be excluded from such determination. In addition to the foregoing, the determination of the dollar value or impact of any change or event pursuant to the preceding sentence shall be based solely on the actual dollar value of such change or effect, on a dollar-for-dollar basis, and shall not take into account (i) any multiplier valuation, including, without limitation, any multiple based on earnings or other financial indicia or the Offer Price or (ii) any consequential damages or other consequential valuation. For purposes hereof, (x) "Targeted Income" shall mean, for any period, the cumulative monthly net income from January 1, 1997 set forth on Schedule 3.1 hereto, and (y) "Allowed Shortfall" shall mean, for the same period, $5 million of net income per month, on a cumulative basis, plus an aggregate of an additional $10 million of net income. For purposes of considering whether a "Company Material Adverse Effect" has occurred, (A) any adjustment of reserves for hospital provider contracts receivables on the Company's balance sheet as of December 31, 1996 shall be counted only in clause (I) above, and (B) any new reserves for hospital provider contracts receivables established for the period after December 31, 1996 shall be counted only in clause (II) above, unless such new reserves are required to be restated on the Company's balance sheet as of December 31, 1996 under GAAP, in which case such new reserves shall be counted only in clause (I) above. Section 2 Capitalization. (a) As of the date hereof, the authorized capital stock of the Company consists of 800,000,000 shares of Company Common Stock and 10,000,000 shares of preferred stock, par value $.10 per share (the "Company Preferred Stock"). As of January 31, 1997, (i) 63,795,517 shares of Company Common Stock were issued and outstanding, (ii) 5,262,600 shares of Company Common Stock were reserved for issuance pursuant to the conversion of the Company Convertible Notes, (iii) shares of Company Common Stock issuable pursuant to the Rights Agreement were reserved for issuance in connection with the Rights, (iv) no shares of Company Common Stock were issued and held in the treasury of the Company, and (v) there were no shares of Preferred Stock issued and outstanding. Since January 31, 1997, no additional 18 20 shares of capital stock have been issued except shares of Company Common Stock and options therefor issued pursuant to the Company's stock option and employee stock purchase plans, pension plans and other similar employee benefit plans (the "Company Stock Plans"), which, upon exercise of all such options as of such date (whether or not vested), would not exceed 7,545,000 shares of Company Common Stock in the aggregate. Since January 31, 1997, the Company has issued only options to acquire 1,474,100 shares of Company Common Stock. All the outstanding shares of the Company's capital stock are duly authorized, validly issued, fully paid, non-assessable and free of preemptive rights. Except as disclosed in Section 3.2(a) of the Company Disclosure Letter and, except for the Company Convertible Notes, the Company Stock Plans and the Rights Agreement, as of the date hereof, there are no existing (i) options, warrants, calls, subscriptions or other rights, convertible securities, agreements or commitments of any character obligating the Company or any of its Subsidiaries to issue, transfer or sell any shares of capital stock or other equity interest in, the Company or any of its Subsidiaries or securities convertible into or exchangeable for such shares or equity interests, (ii) contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any capital stock of the Company or any of its Subsidiaries of the Company or (iii) voting trusts or similar agreements to which the Company is a party with respect to the voting of the capital stock of the Company. (b) Except as disclosed in Section 3.2(b) of the Company Disclosure Letter, all of the outstanding shares of capital stock (or equivalent equity interests of entities other than corporations) of each of the Company's Subsidiaries are owned of record and beneficially, directly or indirectly, by the Company. Section 3 Authorization; Validity of Agreement; Company Action. The Company has full corporate power and authority to execute and deliver this Agreement and, subject to obtaining the necessary approval of its shareholders, to consummate the transactions contemplated hereby. The execution, delivery and performance by the Company of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly authorized by its Board of Directors and, 19 21 except for those actions contemplated by Section 1.2(a) hereof and obtaining the approval of its shareholders as contemplated by Section 1.8 hereof, no other corporate action on the part of the Company is necessary to authorize the execution and delivery by the Company of this Agreement and the consummation by it of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and, subject to approval and adoption of this Agreement by the Company's shareholders (and assuming due and valid authorization, execution and delivery hereof by Parent and the Purchaser) is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 4 Consents and Approvals; No Violations. Except as disclosed in Section 3.4 of the Company Disclosure Letter and except for (a) filings pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (b) applicable requirements under the Exchange Act, (c) the filing of the Certificates of Merger, (d) applicable requirements under corporation or "blue sky" laws of various states, (e) approvals or filings under various state and federal laws, rules and regulations governing insurance holding and operating companies, health maintenance organizations, health care services plans, third party administrators, preferred provider plans, providers of utilization review services, or other managed health care organizations, including laws, rules and regulations with respect to the administration of Medicaid and Medicare (the "Insurance Regulatory Approvals") or (f) matters specifically described in this Agreement, neither the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby will (i) violate any provision of the Articles of Incorporation or By-Laws of the Company or any of its Subsidiaries, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give 20 22 rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture (other than the Indenture), lease, license, contract, agreement or other instrument or obligation to which the Company or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound and which has been filed as an exhibit to the Company SEC Documents (as defined in Section 3.5 hereof) (the "Material Agreements"), (iii) violate any order, writ, judgment, injunction, decree, law, statute, rule or regulation applicable to the Company, any of its Subsidiaries or any of their properties or assets, or (iv) require on the part of the Company any filing or registration with, notification to, or authorization, consent or approval of, any court, legislative, executive or regulatory authority or agency (a "Governmental Entity"); except in the case of clauses (ii), (iii) or (iv) for such violations, breaches or defaults which, or filings, registrations, notifications, authorizations, consents or approvals the failure of which to obtain, (A) would not have a Company Material Adverse Effect and would not materially adversely affect the ability of the Company to consummate the transactions contemplated by this Agreement, or (B) become applicable as a result of the business or activities in which Parent or Purchaser is or proposes to be engaged or as a result of any acts or omissions by, or the status of any facts pertaining to, Parent or Purchaser. Section 5 SEC Reports and Financial Statements. The Company has filed all reports required to be filed by it with the SEC pursuant to the Exchange Act and the Securities Act of 1933, as amended (the "Securities Act"), since January 1, 1994 (as such documents have been amended since the date of their filing, collectively, the "Company SEC Documents"). The Company SEC Documents, as of their respective filing dates, or if amended, as of the date of the last such amendment, did not contain any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company has delivered to Parent or the Purchaser the audited consolidated balance sheet (including the related notes) of the Company and its Subsidiaries as of December 31, 1996 and the audited 21 23 consolidated statements of operations and cash flow of the Company and its Subsidiaries for the period ended December 31, 1996 (collectively, the "1996 Financial Statements"). Each of the consolidated balance sheets (including the related notes) included in the Company SEC Documents and the 1996 Financial Statements fairly presents in all material respects the financial position of the Company and its consolidated Subsidiaries as of the respective dates thereof, and the other related statements (including the related notes) included in the Company SEC Documents and the 1996 Financial Statements fairly present in all material respects the results of operations and cash flows of the Company and its consolidated Subsidiaries for the respective periods or as of the respective dates set forth therein. Each of the consolidated balance sheets and statements of operations and cash flow (including the related notes) included in the Company SEC Documents and the 1996 Financial Statements has been prepared in all material respects in accordance with GAAP applied on a consistent basis during the periods involved, except as otherwise noted therein and subject, in the case of unaudited interim financial statements, to normal year-end adjustments. Section 6 No Undisclosed Liabilities. Except (a) for liabilities and obligations incurred in the ordinary course of business since December 31, 1996, (b) for liabilities and obligations disclosed in the Company SEC Documents or the 1996 Financial Statements, (c) for liabilities and obligations incurred in connection with the Offer and the Merger or otherwise as contemplated by this Agreement and (d) as disclosed in Section 3.6 of the Company Disclosure Letter, since December 31, 1996, neither the Company nor any of its Subsidiaries has incurred any material liabilities or obligations that would be required to be reflected or reserved against in a consolidated balance sheet of the Company and its consolidated Subsidiaries prepared in accordance with GAAP as applied in preparing the consolidated balance sheet of the Company and its consolidated Subsidiaries as of December 31, 1996. Section 7 Absence of Certain Changes. Except as (a) disclosed in the Company SEC Documents or the 1996 Financial Statements, (b) disclosed in Section 3.7 of the Company Disclosure Letter or (c) contemplated by this Agreement, since December 31, 1996, the Company has not 22 24 (i) suffered any change constituting a Company Material Adverse Effect; (ii) amended its Articles of Incorporation or By-laws; (iii) split, combined or reclassified the Company Common Stock or any capital stock of any of the Subsidiaries of the Company; (iv) declared or set aside or paid any dividend or other distribution with respect to the Company Common Stock (other than the redemption of the Rights); or (v) materially changed the Company's accounting methods, except as required by GAAP or applicable law. Section 8 Employee Benefit Plans; ERISA. (a) Section 3.8 of the Company Disclosure Letter sets forth a list of all material employee benefit plans, (including but not limited to plans described in section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), maintained by the Company or by any trade or business, whether or not incorporated (an "ERISA Affiliate"), which together with the Company would be deemed a "single employer" within the meaning of section 4001(b)(15) of ERISA ("Benefit Plans") and all material employment and severance agreements with employees of the Company ("Employee Agreements"). True and complete copies of all Employee Agreements, including all amendments to date, have been made available to Parent by the Company. (b) Except as set forth in Section 3.8 of the Company Disclosure Schedule, with respect to each Benefit Plan: (i) if intended to qualify under section 401(a) of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (the "Code"), such plan has received a determination letter from the Internal Revenue Service stating that it so qualifies and that its trust is exempt from taxation under section 501(a) of the Code and nothing has occurred to the best knowledge of the Company since the date of such determination that could materially adversely affect such qualification or exempt status; (ii) such plan has been administered in all material respects in accordance with its terms and applicable law; (iii) no breaches of fiduciary duty have occurred which might reasonably be expected to give rise to material liability on the part of the Company; (iv) no disputes are pending, or, to the knowledge of the Company, threatened that give rise to or might reasonably be expected to give rise to material 23 25 liability on the part of the Company; (v) no prohibited transaction (within the meaning of Section 406 of ERISA) has occurred that give rise to or might reasonably be expected to give rise to material liability on the part of the Company; and (vi) all contributions required to be made to such plan as of the date hereof (taking into account any extensions for the making of such contributions) have been made in full. (c) No Benefit Plan is a "multiemployer pension plan," as defined in section 3(37) of ERISA, nor is any Benefit Plan a plan described in section 4063(a) of ERISA. (d) No Benefit Plan has incurred an accumulated funding deficiency, as defined in section 302 of ERISA or section 412 of the Code, whether or not waived. (e) With respect to each Benefit Plan that is a "welfare plan" (as defined in section 3(1) of ERISA), no such plan provides medical or death benefits with respect to current or former employees of the Company or any of its Subsidiaries beyond their termination of employment (other than to the extent required by applicable law). (f) Except as set forth in the Disclosure Schedule, no material liability has been or is expected to be incurred by the Company or any ERISA Affiliate (either directly or indirectly, including as a result of an indemnification obligation or any joint and several liability obligations) under or pursuant to Title I or IV of ERISA or the penalty or the excise tax or joint and several liability provisions of the Code, relating to its or their employee benefit plans, and no event, transaction or condition has occurred or exists that have resulted in or would reasonably be expected to result in any such liability to Parent, the Purchaser, the Company or any ERISA Affiliate or any employee benefit plan of the Company or any ERISA Affiliate. (g) As of the last valuation date prior to the date hereof, the market value of assets under each Benefit Plan which is an Employee Pension Benefit Plan under Section 3(2) of ERISA (other than any multiemployer plan) is less than the present value of all vested and nonvested liabilities thereunder determined in accordance 24 26 with PBGC methods, factors, and assumptions applicable to an Employee Pension Benefit Plan terminating on the date for determination, by an amount no greater than $100,000. Section 9 Litigation. Except as disclosed in Section 3.9 of the Company Disclosure Letter or as disclosed in the Company SEC Documents, there is no action, suit, proceeding (other than any action, suit or proceeding resulting from or arising out of this Agreement or the transactions contemplated hereby) or, to the best knowledge of the Company, audit or investigation pending or, to the best knowledge of the Company, action, suit, proceeding, audit or investigation threatened, involving the Company or any of its Subsidiaries, by or before any court, governmental or regulatory authority or by any third party that would have a Company Material Adverse Effect. Section 10 No Default; Compliance with Applicable Laws. The business of the Company and each of its Subsidiaries is not in default or violation of any term, condition or provision of (i) its respective articles of incorporation or by-laws or similar organizational documents, (ii) any Material Agreement or (iii) any statute, law, rule, regulation, judgment, decree, order, arbitration award, concession, grant, franchise, permit or license or other governmental authorization or approval applicable to the Company or any of its Subsidiaries, including, without limitation, laws, rules and regulations relating to the environment, insurance companies, health maintenance organizations, Medicare, Medicaid, third-party administrators, occupational health and safety, employee benefits, wages, workplace safety, equal employment opportunity and race, religious or sex discrimination, excluding from the foregoing clauses (i), (ii) and (iii), defaults or violations which would not have a Company Material Adverse Effect or which become applicable as a result of the business or activities in which Parent or the Purchaser is or proposes to be engaged or as a result of any acts or omissions by, or the status of any facts pertaining to, Parent or Purchaser. Section 11 Taxes. (a) Except as disclosed in Section 3.11 of the Company Disclosure Letter, the Company and each of its Subsidiaries has (i) timely filed all federal, state, local and foreign tax returns required to be filed by any of them for tax years ended prior to the 25 27 date of this Agreement or requests for extensions have been timely filed and any such request shall have been granted and not expired and all such returns are true, correct and complete, (ii) paid or accrued (in accordance with GAAP) all material taxes other than such taxes as are being contested in good faith by the Company or its Subsidiaries, and (iii) properly accrued (in accordance with GAAP) in all respects all such taxes for such periods subsequent to the periods covered by such returns, except in the case of the foregoing clauses (i), (ii) and (iii) where any such failure would not have a Company Material Adverse Effect. (b) Except as disclosed in Section 3.11 of the Company Disclosure Letter, there are no ongoing or, to the best knowledge of the Company, threatened, in writing, federal, state, local or foreign audits or examinations of any Tax Return of the Company or its Subsidiaries, except where any such audit or examination would not have a Company Material Adverse Effect. (c) Except as disclosed in Section 3.11 of the Company Disclosure Letter, there are no outstanding written requests, agreements, consents or waivers to extend the statutory period of limitations applicable to the assessment of any material Taxes or deficiencies against the Company or any of its Subsidiaries, and no power of attorney granted by either the Company or any of its Subsidiaries with respect to any Taxes is currently in force. (d) Except as disclosed in Section 3.11 of the Company Disclosure Letter, neither the Company nor any of its Subsidiaries is a party to any agreement providing for the allocation or sharing of Taxes. (e) Except as disclosed in Section 3.11 of the Company Disclosure Letter, there are no material liens for Taxes upon the assets of the Company or any of its Subsidiaries which are not provided for in the financial statements included in the SEC Reports or the 1996 Financial Statements, except liens for Taxes not yet due and payable. (f) "Taxes" shall mean any and all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, excise, real 26 28 or personal property, sales, withholding, social security, occupation, use, service, service use, value added, license, net worth, payroll, franchise, transfer and recording taxes, fees and charges, imposed by the United States Internal Revenue Service or any taxing authority (whether domestic or foreign including, without limitation, any state, local or foreign government or any subdivision or taxing agency thereof (including a United States possession)), whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, penalties or additional amounts attributable to, or imposed upon, or with respect to, any such taxes, charges, fees, levies or other assessments. "Tax Return" shall mean any report, return, document, declaration or other information or filing required to be supplied to any taxing authority or jurisdiction (foreign or domestic) with respect to Taxes. Section 12 Real Property. The Company and the Subsidiaries, as the case may be, have sufficient title, leaseholds or rights to real property to conduct their respective businesses as currently conducted in all material respects. Section 13 Intellectual Property. Except as disclosed in Section 3.13 of the Company Disclosure Letter or as disclosed in the Company SEC Documents, and except for such claims, which individually or in the aggregate, would not have a Company Material Adverse Effect, there are no pending or threatened claims of which the Company or its Subsidiaries have been given written notice, by any person against their use of any material trademarks, trade names, service marks, service names, mark registrations, logos, assumed names and copyright registrations, patents and all applications therefor which are owned by the Company or its Subsidiaries and used in their respective operations as currently conducted (collectively, the Intellectual Property"). The Company and its Subsidiaries have such ownership of or such rights by license, lease or other agreement to the Intellectual Property as are necessary to permit them to conduct their respective operations as currently conducted, except where the failure to have such rights would not have a Company Material Adverse Effect. Section 14 Computer Software. The Company and its Subsidiaries have such title or such rights by li- 27 29 cense, lease or other agreement to the computer software programs (other than off-the-shelf software) which are owned, licensed, leased or otherwise used by the Company and its Subsidiaries and which are material to the conduct of their respective operations as currently conducted except where the failure to have such rights would not have a Company Material Adverse Effect. Section 15 Information in Offer Documents. None of the information supplied or to be supplied by the Company, or any of their officers, directors, employees, representatives or agents for inclusion or incorporation by reference in the Offer Documents or the Schedule 14D- 9, including any amendments or supplements thereto, will at the respective times the Offer Documents and the Schedule 14D-9 are filed with the SEC or first published, sent or given to the Company's shareholders, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not false or misleading. Notwithstanding the foregoing, the Company does not make any representation or warranty with respect to the information that has been supplied by Parent or the Purchaser or their officers, directors, employees, representatives or agents for inclusion or incorporation by reference in any of the foregoing documents. The Schedule 14D-9 and any amendments or supplements thereto will comply in all material respects with the applicable provisions of the Exchange Act and the rules and regulations thereunder. Section 16 Brokers or Finders. The Company represents, as to itself, its Subsidiaries and its affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any brokers' or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, except Bear, Stearns & Co. Inc. ("Bear, Stearns"), whose fees and expenses will be paid by the Company in accordance with the Company's agreement with such firm, a true and complete copy of which has heretofore been furnished to Parent or the Purchaser. Section 17 Opinion of Financial Advisor. The Company has received the opinion of Bear, Stearns to the 28 30 effect that, as of the date hereof, the Offer and the Merger are fair, from a financial point of view, to the shareholders of the Company. Section 18 Regulatory Statements. The annual and quarterly statements described in Section 3.18 of the Company Disclosure Letter and the statutory balance sheets and income statements included therein present fairly the statutory financial condition and results of operations of the Company and/or its Subsidiaries as of the dates and for the periods indicated therein and have been prepared in accordance with the accounting principles or practices set forth in applicable state laws and regulations or prescribed or permitted by the relevant state regulatory body consistently applied throughout the periods indicated, except as expressly set forth therein and except where the failure of such statements to so present fairly or to have been so prepared would not have a Company Material Adverse Effect. Section 19 Certain Contracts. Except as set forth in Section 3.19 of the Company Disclosure Letter, neither the Company nor any of its Subsidiaries is a party to any contract which by its terms expressly prohibits or limits its ability, to an extent material to the business of the Company and its Subsidiaries taken as a whole, to engage in any line of business, compete with any person or expand the nature or geographic scope of its business. Section 20 Investigation by the Company. In entering into this Agreement, the Company: (a) acknowledges that none of Parent, the Purchaser, their Subsidiaries or any of their respective directors, officers, employees, affiliates, agents, advisors or representatives makes any representation or warranty, either express or implied, as to the accuracy or completeness of any of the information provided or made available to the Company or their agents or representatives, and (b) agrees, to the fullest extent permitted by law, that none of Parent, the Purchaser, their Subsidiaries or any of their respective directors, officers, employees, shareholders, affiliates, agents, advisors or representatives shall have any liability or re- 29 31 sponsibility whatsoever to the Company on any basis (including, without limitation, in contract or tort, under federal or state securities laws or otherwise) based upon any information provided or made available, or statements made, to the Company, except that the foregoing limitations shall not (a) apply to Parent and the Purchaser to the extent Parent and the Purchaser makes the specific representations and warranties set forth in Article IV of this Agreement, but always subject to the limitations and restrictions contained herein, or (b) preclude the Company from seeking any remedy for fraud. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER Parent and the Purchaser jointly and severally represent and warrant to the Company as follows: Section 1 Organization. Each of Parent and the Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a Parent Material Adverse Effect. Parent and each of its Subsidiaries is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not have a Parent Material Adverse Effect. As used in this Agreement, "Parent Material Adverse Effect" means only any adverse change in, or effect on, the business, financial condition, operations or results of operations of Parent and its Subsidiaries, taken as a whole that, individually or in the aggregate, exceeds, or is reasonably likely to exceed, $67.5 million; provided, however, that the effects of changes that are generally applicable to (i) the 30 32 healthcare or HMO industries, (ii) the United States economy, or (iii) the United States securities markets shall be excluded from such determination. In addition to the foregoing, the determination of the dollar value or impact of any change or event pursuant to the preceding sentence shall be based solely on the actual dollar value of such change or effect, on a dollar-for-dollar basis, and shall not take into account (i) any multiplier valuation, including, without limitation, any multiple based on earnings or other financial indicia or (ii) any consequential damages or other consequential valuation. Section 2 Authorization; Validity of Agreement; Necessary Action. Each of Parent and the Purchaser has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by Parent and the Purchaser of this Agreement, and the consummation of the transactions contemplated hereby, have been duly authorized by their Boards of Directors and no other corporate action on the part of Parent and the Purchaser is necessary to authorize the execution and delivery by Parent and the Purchaser of this Agreement and the consummation by them of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Parent and the Purchaser, as the case may be (and assuming due and valid authorization, execution and delivery hereof by the Company) is a valid and binding obligation of each of Parent and the Purchaser, as the case may be, enforceable against them in accordance with its respective terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 3 Consents and Approvals; No Violations. Except for (a) filings pursuant to the HSR Act, (b) applicable requirements under the Exchange Act, (c) the filing of the Certificates of Merger, (d) applicable requirements under corporation or "blue sky" laws of various states, (e) the Insurance Regulatory Approvals or (f) as described in this Agreement, neither the execu- 31 33 tion, delivery or performance of this Agreement by Parent and the Purchaser nor the consummation by Parent and the Purchaser of the transactions contemplated hereby will (i) violate any provision of the Articles of Incorporation or By-Laws of Parent or the Purchaser, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which Parent or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound and which has been filed as an exhibit to the Parent SEC Documents (as defined in Section 4.4 hereof), (iii) violate any order, writ, judgment, injunction, decree, law, statute, rule or regulation applicable to Parent, any of its Subsidiaries or any of their properties or assets, or (iv) require on the part of Parent or the Purchaser any filing or registration with, notification to, or authorization, consent or approval of, any court, legislative, executive or regulatory authority or agency (a "Governmental Entity"); except in the case of clauses (ii), (iii) or (iv) for such violations, breaches or defaults which, or filings, registrations, notifications, authorizations, consents or approvals the failure of which to obtain, (A) would not have a Parent Material Adverse Effect and would not materially adversely affect the ability of Parent and the Purchaser to consummate the transactions contemplated by this Agreement, or (B) become applicable as a result of the business or activities in which the Company is or proposes to be engaged or as a result of any acts or omissions by, or the status of any facts pertaining to, the Company. Section 4 SEC Reports and Financial Statements. Parent has filed with the SEC, and has heretofore made available to the Company true and complete copies of, all forms, reports, schedules, statements and other documents required to be filed by it and its Subsidiaries since January 1, 1994 under the Exchange Act or the Securities Act (as such documents have been amended since the time of their filing, collectively, the "Parent SEC Documents"). As of their respective dates or, if amended, as of the date of the last such amendment, the Parent SEC Documents, including, without limitation, any financial 32 34 statements or schedules included therein did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Each of the consolidated balance sheets (including the related notes) included in the Parent SEC Documents fairly presents in all material respects the financial position of Parent and its consolidated Subsidiaries as of the respective dates thereof, and the other related statements (including the related notes) included therein fairly present in all material respects the results of operations and cash flows of Parent and its consolidated Subsidiaries for the respective periods or as of the respective dates set forth therein. Each of the consolidated balance sheets and statements of operations and cash flow (including the related notes) included in the Parent SEC Documents has been prepared in all material respects in accordance with GAAP applied on a consistent basis during the periods involved, except as otherwise noted therein and subject, in the case of unaudited interim financial statements, to normal year-end adjustments. Section 5 Information in Offer Documents; Proxy Statement. None of the information supplied or to be supplied by Parent or the Purchaser, or any of their officers, directors, employees, representatives or agents for inclusion or incorporation by reference in the Offer Documents, the Schedule 14D-9 or the Proxy Statement, including any amendments or supplements thereto, will, in the case of the Offer Documents and the Schedule 14D-9, at the respective times the Offer Documents and the Schedule 14D-9 are filed with the SEC or first published, sent or given to the Company's shareholders, or, in the case of the Proxy Statement, at the date the Proxy Statement is first mailed to the Company's shareholders or at the time of the Special Meeting, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not false or misleading. Notwithstanding the foregoing, Parent and the Purchaser do not make any representation or warranty with respect to the information that has been supplied by the Company or its officers, directors, employees, representatives or agents for inclusion or 33 35 incorporation by reference in any of the foregoing documents. The Offer Documents and the Proxy Statement and any amendments or supplements thereto will comply in all material respects with the applicable provisions of the Exchange Act and the rules and regulations thereunder. Section 6 Sufficient Funds. Either Parent or the Purchaser has sufficient funds available (through existing credit arrangements or otherwise) to purchase all of the Shares outstanding on a fully diluted basis and to pay all fees and expenses related to the transactions contemplated by this Agreement. Section 7 Share Ownership. None of Parent, the Purchaser or any of their respective "affiliates" or "associates" (as those terms are defined in Rule 12b-2 under the Exchange Act) beneficially owns any Shares. Section 8 Purchaser's Operations. The Purchaser was formed solely for the purpose of engaging in the transactions contemplated hereby and has not engaged in any business activities or conducted any operations other than in connection with the transactions contemplated hereby. Section 9 Brokers or Finders. Parent represents, as to itself, its Subsidiaries and its affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any brokers' or finders' fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, except Goldman, Sachs & Co., whose fees and expenses will be paid by Parent in accordance with Parent's agreement with such firm, a true and complete copy of which has heretofore been furnished to the Company. Section 10 Investigation by Parent. In entering into this Agreement, each of Parent and the Purchaser: (a) acknowledges that none of the Company, its Subsidiaries or any of their respective directors, officers, employees, affiliates, agents, advisors or representatives makes any representation or warranty, either express or implied, as to the accuracy or completeness of any of the information provided or made 34 36 available to Parent, the Purchaser or their agents or representatives, and (b) agrees, to the fullest extent permitted by law, that none of the Company, its Subsidiaries or any of their respective directors, officers, employees, shareholders, affiliates, agents, advisors or representatives shall have any liability or responsibility whatsoever to Parent or the Purchaser on any basis (including, without limitation, in contract or tort, under federal or state securities laws or otherwise) based upon any information provided or made available, or statements made, to Parent, except that the foregoing limitations shall not (a) apply to the Company to the extent the Company makes the specific representations and warranties set forth in Article III of this Agreement, but always subject to the limitations and restrictions contained herein, or (b) preclude Parent and the Purchaser from seeking any remedy for fraud. ARTICLE V COVENANTS Section 1 Interim Operations of the Company. The Company covenants and agrees that, except (i) as contemplated by this Agreement, (ii) as disclosed in Section 5.1 of the Company Disclosure Letter or (iii) as agreed in writing by Parent, after the date hereof, and prior to the time the directors of the Purchaser have been elected to, and shall constitute a majority of, the Board of Directors of the Company pursuant to Section 1.3 (the "Appointment Date"): (a) the business of the Company and its Subsidiaries shall be conducted only in the ordinary and usual course of business and, to the extent consistent therewith, each of the Company and its Subsidiaries shall use its best efforts to preserve in all material respects its business organization intact and maintain its existing relations with customers, suppliers, employees and business associates; 35 37 (b) the Company will not, directly or indirectly, (i) amend its Articles of Incorporation or By-laws or similar organizational documents; or (ii) split, combine or reclassify the outstanding Company Common Stock or any outstanding capital stock of any of the Subsidiaries of the Company; (c) neither the Company nor any of its Subsidiaries shall: (i) declare, set aside or pay any dividend or other distribution payable in cash, stock or property with respect to its capital stock (other than dividends from any Subsidiary of the Company to the Company or any other Subsidiary of the Company); (ii) issue or sell any additional shares of, or securities convertible into or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of capital stock of any class of the Company or its Subsidiaries, other than shares of Company Common Stock reserved for issuance on the date hereof upon exercise of outstanding Rights pursuant to the Rights Agreement, issuances pursuant to the exercise of Options outstanding on the date hereof, or issuances pursuant to the Company Convertible Notes; (iii) acquire, sell, lease or dispose of any assets in excess of $5 million, other than in the ordinary and usual course of business; (iv) incur or modify any material debt, other than in the ordinary and usual course of business; or (v) redeem, purchase or otherwise acquire directly or indirectly any of its capital stock other than redemption of the outstanding Rights pursuant to the Rights Agreement; (d) neither the Company nor any of its Subsidiaries shall, except as may be required or contemplated by this Agreement or in the ordinary and usual course of business, terminate or materially amend any of its Benefit Plans; (e) neither the Company nor any of its Subsidiaries shall, except as contemplated by this Agreement, enter into, adopt or materially amend any employee benefit plans or amend any employment or severance agreement or (except for normal increases in the ordinary and usual course of business to persons other than the employees listed as Tier I through Tier V on Schedule 5.4(b) hereof) increase in any manner the compensation of any employees; 36 38 (f) neither the Company nor any of its Subsidiaries shall: (i) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the material obligations of any other person (other than Subsidiaries of the Company), except in the ordinary and usual course of business; (ii) make any material loans, advances or capital contributions to, or investments in, any other person (other than to Subsidiaries of the Company), other than in the ordinary and usual course of business; or (iii) make capital expenditures in excess of an aggregate of $10 million for the first seven months from the date hereof or an additional $5 million thereafter; (g) neither the Company nor any of its Subsidiaries shall materially change any of the accounting methods used by it unless required by GAAP or applicable law; (h) the Company will not settle or compromise any claim (including arbitration) or litigation involving payments by the Company in excess of $1,000,000, individually, which are not subject to insurance reimbursement without the prior written consent of Parent, which consent will not be unreasonably withheld, and will consult with Parent with respect to settlement or compromise of any claim (including arbitration) or litigation for less than $1,000,000; (i) the Company will not amend, modify or terminate in any material respect its hospital contracts without the prior written consent of Parent, which consent shall not be unreasonably withheld, and provided that Parent shall designate a single senior officer with responsibility to provide such consent and such officer shall respond within two business days of any such request and the Company will consult with Parent prior to entering into any new hospital contract or agreement; and (j) neither the Company nor any of its Subsidiaries will authorize or enter into an agreement to do any of the foregoing. Section 2 Actions Regarding the Rights. The Company, in accordance with the terms and provisions of the Rights Agreement, and as promptly as practicable on or after the date hereof, shall take all reasonable ac- 37 39 tions necessary to cause the (a) postponement of the Distribution Date under the Rights Agreement as necessary to prevent this Agreement or the consummation of any of the transactions contemplated hereby, including without limitation, the publication or other announcement of the Offer and the consummation of the Offer and the Merger, from resulting in (i) the distribution of separate Rights certificates, or (ii) the occurrence of a Distribution Date, and (b) redemption of the Rights prior to the consummation of the Offer. Section 3 Access to Information. Upon reasonable notice, the Company shall (and shall cause each of its Subsidiaries to) afford to the officers, employees, accountants, counsel, financing sources and other representatives of Parent, access, during normal business hours during the period prior to the Appointment Date, to all its properties, books, contracts, commitments and records and, during such period, the Company shall (and shall cause each of its Subsidiaries to) furnish promptly to the Parent (a) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws and (b) all other information concerning its business, properties and personnel as Parent may reasonably request. After the Appointment Date the Company shall provide Parent and such persons as Parent shall designate with all such information, at such time, as Parent shall request. Unless otherwise required by law and until the Appointment Date, Parent will hold any such information which is nonpublic in confidence in accordance with the provisions of the Confidentiality Agreement between the Company and Parent, dated as of January 31, 1997 (the "Confidentiality Agreement"). Section 4 Employee Benefits. (a) Parent and the Purchaser agree that, effective as of the Effective Time and for a two-year period following the Effective Time, the Surviving Corporation and its Subsidiaries and successors shall provide those persons who, immediately prior to the Effective Time, were employees of the Company or its Subsidiaries ("Retained Employees") with employee plans and programs which provide benefits that are no less favorable in the aggregate to those provided to such Retained Employees 38 40 immediately prior to the date hereof. As soon as reasonably practicable (and in any event prior to consummation of the Offer) and following a review of Parent's employee plans and programs, the Company will confirm to Parent whether it considers Parent's employee plans and programs to be no less favorable in the aggregate than the employee plans and programs of the Company. With respect to such benefits, service accrued by such Retained Employees during employment with the Company and its Subsidiaries prior to the Effective Time shall be recognized for all purposes, except to the extent necessary to prevent duplication of benefits. (b) Parent and the Purchaser agree to honor, and cause the Surviving Corporation to honor, without modification, (i) all employment and severance agreements and arrangements, as amended through the date hereof, with respect to employees and former employees of the Company, including, without limitation, the Employee Agreements referred to in Section 3.8(a) hereof (collectively, the "Severance Agreements"), and (ii) the New Severance Arrangements (as defined below). Parent and the Purchaser acknowledge that the transactions contemplated hereby shall constitute a "change in control" for purposes of the Severance Agreements. Parent, the Purchaser and the Company agree that, prior to the Effective Time, the Company shall adopt severance plans and/or enter into severance agreements substantially as provided in Schedule 5.4(b) hereof (the "New Severance Arrangements"). (c) In the event Parent or the Purchaser or the Surviving Corporation or any of their successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary to effectuate the purposes of this Section 5.4, proper provision shall be made so that the successors and assigns of Parent, the Purchaser or the Surviving Corporation, as the case may be, assume the obligations set forth in this Section 5.4 and none of the actions described in clauses (i) or (ii) shall be taken until such provision is made. 39 41 (d) As soon as practicable following the Effective Time (but in no event later than 30 days following the Effective Time) Parent shall take any and all action necessary and appropriate to grant options ("Parent Options") to purchase 200,000 shares of Parent Common Stock to persons who were employees of the Company immediately prior to the Effective Time. Each Parent Option shall have (i) an exercise price equal to the closing price of the Parent Common Stock on the New York Stock Exchange as of the date of grant and (ii) a term of ten years. The allocation to individual employees of the Parent Options shall be made solely by Parent after reasonable consultation with the individual serving as CEO of the Company on the date hereof (the "Company CEO"). The Company CEO shall not be eligible to receive any Parent Options. All other terms and conditions of Parent Options shall be determined by Parent after reasonable consultation with the Company CEO; provided, that such options shall be issued under Parent's existing option plans with terms and conditions customary for grants to similarly situated employees. Section 5 No Solicitation. (a) The Company and its Subsidiaries will not, and will use their best efforts to cause their respective officers, directors, employees and investment bankers, attorneys or other agents retained by or acting on behalf of the Company or any of its Subsidiaries not to, (i) initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal that constitutes or is reasonably likely to lead to any Acquisition Proposal (as defined in Section 5.5(c) hereof), (ii) except as permitted below, engage in negotiations or discussions with, or furnish any information or data to any third party relating to an Acquisition Proposal, or (iii) except as permitted below, enter into any agreement with respect to any Acquisition Proposal or approve any Acquisition Proposal. Notwithstanding anything to the contrary contained in this Section 5.5 or in any other provision of this Agreement, the Company and its Board of Directors (i) may participate in discussions or negotiations (including, as a part thereof, making any counterproposal) with or furnish information to any third party making an unsolicited Acquisition Proposal (a "Potential Acquiror") or approve an unsolicited Acquisition Proposal if the Company's Board of Directors is advised by its financial advisor that such Potential Acquiror has the financial wherewith- 40 42 al to be reasonably capable of consummating such an Acquisition Proposal, and either (A) the Board determines in good faith, after receiving advice from its financial advisor, that such third party has submitted to the Company an Acquisition Proposal which is a Superior Proposal, or (B) the Board determines in good faith, based upon advice of its outside legal counsel, that the failure to participate in such discussions or negotiations or to furnish such information or approve an Acquisition Proposal would violate the Board's fiduciary duties under applicable law, and (ii) shall be permitted to (X) take and disclose to the Company's shareholders a position with respect to any tender or exchange offer by a third party, or amend or withdraw such position, pursuant to Rules 14d-9 and 14e-2 of the Exchange Act or (Y) make disclosure to the Company's shareholders, in the case of clause (X) or clause (Y) either (1) with respect to or as result of a Superior Proposal, or (2) if the Company's Board of Directors determines in good faith, based upon advice of its outside legal counsel, that the failure to take such action would violate such Board's fiduciary duties under, or otherwise violate, applicable law. The Company agrees that any non-public information furnished to a Potential Acquiror will be pursuant to a confidentiality agreement substantially similar to the confidentiality provisions of the confidentiality agreement entered into between the Company and Parent. In the event that the Company shall determine to provide any information as described above, or shall receive any Acquisition Proposal, it shall promptly inform Parent in writing as to the fact that information is to be provided and shall furnish to Parent the identity of the recipient of such information and/or the Potential Acquiror and the terms of such Acquisition Proposal, except to the extent that the Board determines in good faith, based upon advice of its outside legal counsel, that any such action described in this sentence would violate such Board's fiduciary duties under, or otherwise violate, applicable law. The Company will keep Parent reasonably informed of the status (including amendments or proposed amendments) of any such Acquisition Proposal except to the extent that the Board determines in good faith, based upon advice of its outside legal counsel, that any such action would violate such Board's fiduciary duties under, or otherwise violate, applicable law. 41 43 (b) The Board of Directors of the Company shall not (i) withdraw or modify or propose to withdraw or modify, in any manner adverse to Parent, the approval or recommendation of such Board of Directors of this Agreement, the Offer or the Merger or (ii) approve or recommend, or propose to approve or recommend, any Acquisition Proposal unless, in each case, (A) the Board determines in good faith, after receiving advice from its financial advisor, that such Acquisition Proposal is a Superior Proposal or (B) the Board determines in good faith, based upon advice of its outside legal counsel, that the failure to take such action would violate Board's fiduciary duties under applicable law. (c) For purposes of this Agreement, "Acquisition Proposal" shall mean any bona fide proposal, whether in writing or otherwise, made by a third party to acquire beneficial ownership (as defined under Rule 13(d) of the Exchange Act) of all or a material portion of the assets of, or any material equity interest in, the Company or its material Subsidiaries pursuant to a merger, consolidation or other business combination, sale of shares of capital stock, sale of assets, tender offer or exchange offer or similar transaction involving the Company or its material Subsidiaries including, without limitation, any single or multi-step transaction or series of related transactions which is structured to permit such third party to acquire beneficial ownership of any material portion of the assets of, or any material portion of the equity interest in, the Company or its material Subsidiaries (other than the transactions contemplated by this Agreement). (d) The term "Superior Proposal" means any bona fide proposal to acquire, directly or indirectly, for consideration consisting of cash and/or securities, more than a majority of the Shares then outstanding or all or substantially all the assets of the Company, and otherwise on terms which the Board of Directors of the Company determines in good faith to be more favorable to the Company and its shareholders than the Offer and the Merger (based on advice of the Company's financial advisor that the value of the consideration provided for in such proposal is superior to the value of the consideration provided for in the Offer and the Merger), for which financing, to the extent required, is then committed or which, in the good faith reasonable judgment of 42 44 the Board of Directors, after receiving advice from its financial advisor, is reasonably capable of being financed by such third party. Section 6 Publicity. The initial press releases with respect to the execution of this Agreement shall be acceptable to Parent and the Company. Thereafter, so long as this Agreement is in effect, neither the Company, Parent nor any of their respective affiliates shall issue or cause the publication of any press release with respect to the Merger, this Agreement or the other transactions contemplated hereby without the prior consultation of the other party, except as may be required by law or by any listing agreement with a national securities exchange. Section 7 Directors' and Officers' Insurance and Indemnification. (a) From and after the consummation of the Offer, Parent shall, and shall cause the Company (or the Surviving Corporation if after the Effective Time) to, indemnify, defend and hold harmless any person who is now, or has been at any time prior to the date hereof, or who becomes prior to the Effective Time, an officer, director, employee and agent (the "Indemnified Party") of the Company and its Subsidiaries against all losses, claims, damages, liabilities, costs and expenses (including attorney's fees and expenses), judgments, fines, losses, and amounts paid in settlement in connection with any actual or threatened action, suit, claim, proceeding or investigation (each a "Claim") to the extent that any such Claim is based on, or arises out of, (i) the fact that such person is or was a director, officer, employee or agent of the Company or any Subsidiaries or is or was serving at the request of the Company or any of its Subsidiaries as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (ii) this Agreement, or any of the transactions contemplated hereby, in each case to the extent that any such Claim pertains to any matter or fact arising, existing, or occurring prior to or at the Effective Time, regardless of whether such Claim is asserted or claimed prior to, at or after the Effective Time, to the full extent permitted under New Hampshire law or the Company's Articles of Incorporation, By-laws or indemnification agreements in effect at the date hereof, including provisions relating to advancement of expenses incurred in the defense of any action or suit. Without limiting the foregoing, in the event any Indemnified Party becomes involved in any capacity in any Claim, then from and after consummation 43 45 of the Offer Parent shall, or shall cause the Company (or the Surviving Corporation if after the Effective Time) to, periodically advance to such Indemnified Party its legal and other expenses (including the cost of any investigation and preparation incurred in connection therewith), subject to the provision by such Indemnified Party of an undertaking to reimburse the amounts so advanced in the event of a final non-appealable determination by a court of competent jurisdiction that such Indemnified Party is not entitled thereto. (b) Parent and the Company agree that all rights to indemnification and all limitations or liability existing in favor of the Indemnified Party as provided in the Company's Articles of Incorporation and By-laws as in effect as of the date hereof shall survive the Merger and shall continue in full force and effect, without any amendment thereto, for a period of six years from the Effective Time to the extent such rights are consistent with the NHBCA; provided, that, in the event any claim or claims are asserted or made within such six year period, all rights to indemnification in respect of any such claim or claims shall continue until disposition of any and all such claims; provided, further, that any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under New Hampshire law, the Company's Articles of Incorporation or By-laws or such agreements, as the case may be, shall be made by independent legal counsel selected by the Indemnified Party and reasonably acceptable to Parent and; provided, further, that nothing in this Section 5.7 shall impair any rights or obligations of any present or former directors or officers of the Company. (c) In the event Parent or the Purchaser or any of their successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary to effectuate the purposes of this Section 5.7, proper provision shall be made so that the successors and assigns of Parent and the Purchaser assume the obligations set forth in this Section 5.7 and none of the ac- 44 46 tions described in clauses (i) or (ii) shall be taken until such provision is made. (d) Parent or the Surviving Corporation shall maintain the Company's existing officers' and directors' liability insurance policy ("D&O Insurance") for a period of not less than six years after the Effective Date; provided, that the Parent may substitute therefor policies of substantially similar coverage and amounts containing terms no less advantageous to such former directors or officers. Section 8 Approvals and Consents; Cooperation; Notification. (a) The parties hereto shall use their respective best efforts, and cooperate with each other, to obtain as promptly as practicable all governmental and third party authorizations, approvals, consents or waivers, including, without limitation, pursuant to the HSR Act and with respect to the Insurance Regulatory Approvals, required in order to consummate the transactions contemplated by this Agreement, including, without limitation, the Offer and the Merger. (b) The Company, Parent and the Purchaser shall take all actions necessary to file as soon as practicable all notifications, filings and other documents required to obtain all governmental authorizations, approvals, consents or waivers, including, without limitation, under the HSR Act and with respect to the Insurance Regulatory Approvals, and to respond as promptly as practicable to any inquiries received from the Federal Trade Commission, the Antitrust Division of the Department of Justice and any other Governmental Entity 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 Entity in connection therewith. (c) The Company shall give prompt notice to Parent of the occurrence of any Company Material Adverse Effect. Each of the Company and Parent shall give prompt notice to the other of the occurrence or failure to occur of an event that would, or, with the lapse of time would cause any condition to the consummation of the Offer or the Merger not to be satisfied. 45 47 Section 9 Further Assurances. Each of the parties hereto agrees to use their respective best efforts to take, or cause to be taken, all action, 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 Agreement, including, without limitation, the Offer and the Merger, which efforts shall include, without limitation, (a) Parent and the Purchaser proffering their willingness to accept an order or orders providing for the divestiture by Parent and the Purchaser of such of the Company's assets and businesses (or, in lieu thereof, approximately equivalent assets and businesses of Parent and the Purchaser) which do not represent in the aggregate assets with a fair market value greater than $67.5 million as are necessary to permit Parent and the Purchaser otherwise fully to consummate the Offer and the Merger and the transactions contemplated hereby, including an offer to hold separate such assets and businesses pending any such divestiture or pending the receipt of any required regulatory approvals, (b) Parent and the Purchaser using their best efforts to prevent any preliminary or permanent injunction or other order by a court of competent jurisdiction or Governmental Entity relating to consummating the transactions contemplated by this Agreement, including, without limitation, under the antitrust laws and with respect to the Insurance Regulatory Approvals, and, if issued, to appeal any such injunction or order through the appellate court or body for the relevant jurisdiction, provided that Parent shall not be obligated to continue pursuing any particular litigation or action following the issuance of any preliminary injunction with respect thereto and (c) Parent and the Purchaser using their best efforts to satisfy any objections of, and accept any conditions imposed by, any Governmental Entity in connection with any Insurance Regulatory Approval, except where such objection or condition would result in costs or liabilities to the Company and Parent, taken together (and aggregated with any loss incurred in connection with a disposition of assets pursuant to clause (a) above at less than fair market value), in excess of $67.5 million; provided, however, that notwithstanding the foregoing, during the sixty day period following the date hereof, Parent and Purchaser shall only be obligated to use commercially reasonable efforts to obtain all Insurance Regulatory Approvals. If at any time after the Effective Time any 46 48 further action is necessary or desirable to carry out the purposes of this Agreement, the parties hereto shall take or cause to be taken all such necessary action, including, without limitation, the execution and delivery of such further instruments and documents as may be reasonably requested by the other party for such purposes or otherwise to consummate and make effective the transactions contemplated hereby. Parent agrees to file all applications on Form A (or equivalent form) necessary to obtain the Insurance Regulatory Approvals within 12 business days of the date hereof. Section 10 Taxes. With respect to any Taxes, the Company shall not (i) make any material tax election or (ii) settle or compromise any material income tax liability (whether with respect to amount or timing), in each case without the prior written consent of Parent which consent shall not be unreasonably withheld. Section 11 Compliance with Security Takeover Disclosure Act. As soon as practicable following the commencement of the Offer, Parent and Purchaser shall, to the extent required by law, (i) file with the Director of the Office of Securities Regulation (the "Director") of the State of New Hampshire a registration statement (the "Registration Statement") in accordance with, and containing the information required by, Section 421-A:4 of the New Hampshire Security Takeover Disclosure Act (the "Takeover Disclosure Act"), and (ii) comply with all other requirements of the Takeover Disclosure Act. None of the information supplied or to be supplied by Parent or the Purchaser, or any of their officers, directors, employees, representatives or agents for inclusion or incorporation by reference in the Registration Statement will, at the time its is filed with the Director, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not false or misleading. Notwithstanding the foregoing, Parent and the Purchaser do not make any representation or warranty with respect to the information that has been supplied by the Company or its officers, directors, employees, representatives or agents for inclusion or incorporation by reference in the Registration Statement. 47 49 Section 12 1996 Form 10-K. The Company will periodically provide Parent with current draft versions of the Company's Annual Report on Form 10-K including documents incorporated therein by reference, for the year ended December 31, 1996. Section 13 Shareholder Litigation. The Company and Parent agree that in connection with any litigation which may be brought against the Company or its directors relating to the transactions contemplated hereby, the Company will keep Parent, and any counsel which Parent may retain at its own expense, informed of the course of such litigation, to the extent Parent is not otherwise a party thereto, and the Company agrees that it will consult with Parent prior to entering into any settlement or compromise of any such shareholder litigation; provided, that, no such settlement or compromise will be entered into involving the payment of money in excess of $1 million (to the extent not subject to insurance reimbursement) without Parent's prior written consent, which consent shall not be unreasonably withheld. ARTICLE VI CONDITIONS Section 1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) this Agreement shall have been approved and adopted by the requisite vote of the holders of Company Common Stock, if required by applicable law and the Articles of Incorporation; (b) any waiting period applicable to the Merger under the HSR Act shall have expired or been terminated; (c) all Insurance Regulatory Approvals shall have been obtained, except where the failure to have obtained any such approvals would not have a Company Material Adverse Effect; 48 50 (d) no statute, rule, regulation, order, decree or injunction shall have been enacted, promulgated or issued by any Governmental Entity or court which prohibits the consummation of the Merger; and (e) Parent, the Purchaser or their affiliates shall have purchased shares of Company Common Stock pursuant to the Offer. Section 2 Conditions to the Obligations of the Company to Effect the Merger. The obligation of the Company to effect the Merger shall be further subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) the representations and warranties of Parent and the Purchaser shall be true and accurate as of the Effective Time as if made at and as of such time (except for those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time which need only be true and accurate as of such date or with respect to such period), except where the failure of such representations and warranties to be so true and accurate (without giving effect to any limitation as to "materiality" or "material adverse effect" set forth therein) would not have a Parent Material Adverse Effect; and (b) each of Parent and the Purchaser shall have performed in all material respects all of the respective obligations hereunder required to be performed by Parent or the Purchaser, as the case may be, at or prior to the Effective Time. Section 3 Conditions to the Obligations of Parent and the Purchaser to Effect the Merger. The obligations of Parent and the Purchaser to effect the Merger shall be further subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) the representations and warranties of the Company shall be true and accurate as of the Effective Time as if made at and as of such time (except for those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time which need only be true and accurate as of such date or with respect to such period), except 49 51 where the failure of such representations and warranties to be so true and accurate (without giving effect to any limitation as to "materiality" or "material adverse effect" set forth therein), would not have a Company Material Adverse Effect; and (b) the Company shall have performed in all material respects all of the respective obligations hereunder required to be performed by the Company, at or prior to the Effective Time. Section 4 Exception. The conditions set forth in Section 6.3 hereof shall cease to be conditions to the obligations of the parties if the Purchaser shall have accepted for payment and paid for Shares validly tendered pursuant to the Offer, provided that the terms of this exception will be deemed satisfied if the Purchaser fails to accept for payment any Shares pursuant to the Offer in violation of the terms thereof. ARTICLE VII TERMINATION Section 1 Termination. This Agreement may be terminated and the Merger contemplated herein may be abandoned at any time prior to the Effective Time, whether before or after shareholder approval thereof: (a) By the mutual consent of Parent, the Purchaser and the Company. (b) By either of the Company, on the one hand, or Parent and the Purchaser, on the other hand: (i) if shares of Company Common Stock shall not have been purchased pursuant to the Offer on or prior to seven months from the execution of this Agreement; provided, however, the Company may, in its sole discretion, extend such termination date for up to an additional 60 days in the event that the Insurance Regulatory Approvals shall not have been obtained by the end of such initial seven month period and provided that, at the end of such seven month period, no Company Material Adverse Effect shall have occurred and be continuing; provid- 50 52 ed, further, that the right to terminate this Agreement under this Section 7.1(b)(i) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of Parent or the Purchaser, as the case may be, to purchase shares of Company Common Stock pursuant to the Offer on or prior to such date; or (ii) if any Governmental Entity shall have issued an order, decree or ruling or taken any other action (which order, decree, ruling or other action the parties hereto shall use their respective best efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or prohibiting Parent to acquire or hold or exercise rights of ownership of the Shares except such prohibitions which would not have a Company Material Adverse Effect, and such order, decree, ruling or other action shall have become final and non-appealable. (c) By the Company: (i) if, prior to the purchase of shares of Company Common Stock pursuant to the Offer, either (A) a third party shall have made an Acquisition Proposal that the Board of Directors of the Company determines in good faith, after consultation with its financial advisor, is a Superior Proposal, or (B) the Board of Directors of the Company shall have withdrawn, or modified or changed in a manner adverse to Parent or the Purchaser its approval or recommendation of the Offer, this Agreement or the Merger (or the Board of Directors of the Company resolves to do any of the foregoing); or (ii) if Parent or the Purchaser shall have terminated the Offer, or the Offer shall have expired, without Parent or the Purchaser, as the case may be, purchasing any shares of Company Common Stock pursuant thereto; provided that the Company may not terminate this Agreement pursuant to this Section 7.1(c)(ii) if the Company is in willful breach of this Agreement; or 51 53 (iii) if, due to an occurrence that if occurring after the commencement of the Offer would result in a failure to satisfy any of the conditions set forth in Annex A hereto, Parent, the Purchaser or any of their affiliates shall have failed to commence the Offer on or prior to five business days following the date of the initial public announcement of the Offer; provided, that the Company may not terminate this Agreement pursuant to this Section 7.1(c)(iii) if the Company is in willful breach of this Agreement. (d) By Parent and the Purchaser: (i) if, prior to the purchase of shares of Company Common Stock pursuant to the Offer, the Board of Directors of the Company shall have withdrawn, modified or changed in a manner adverse to Parent or the Purchaser its approval or recommendation of the Offer, this Agreement or the Merger or shall have recommended an Acquisition Proposal or shall have executed an agreement in principle or definitive agreement relating to an Acquisition Proposal or similar business combination with a person or entity other than Parent, the Purchaser or their affiliates (or the Board of Directors of the Company resolves to do any of the foregoing); or (ii) if, due to an occurrence that if occurring after the commencement of the Offer would result in a failure to satisfy any of the conditions set forth in Annex A hereto, Parent, the Purchaser, or any of their affiliates shall have failed to commence the Offer on or prior to five business days following the date of the initial public announcement of the Offer; provided that Parent may not terminate this Agreement pursuant to this Section 7.1(d)(ii) if Parent or the Purchaser is in willful breach of this Agreement. Section 2 Effect of Termination. (a) In the event of the termination of this Agreement as provided in Section 7.1, written notice thereof shall forthwith be given to the other party or parties specifying the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith become null and void, 52 54 and there shall be no liability on the part of Parent, the Purchaser or the Company or their respective directors, officers, employees, shareholders, representatives, agents or advisors other than, with respect to Parent, the Purchaser and the Company, the obligations pursuant to this Section 7.2, Sections 8.1, 8.2, 8.3, 8.4, 8.5, 8.6, 8.7, 8.8, 8.9, 8.10, 8.11, 8.12, 8.13 and the last sentence of Section 5.3. Nothing contained in this Section 7.2 shall relieve Parent, the Purchaser or the Company from liability for willful breach of this Agreement. (b) In the event that this Agreement is terminated by the Company pursuant to Section 7.1(c)(i) hereof or by Parent and the Purchaser pursuant to Section 7.1(d)(i) hereof, the Company shall pay to Parent by certified check or wire transfer to an account designated by Parent immediately following receipt of a request therefor, an amount equal to $45 million (the "Termination Fee"). In addition, the Company shall pay Parent the Termination Fee if this Agreement is terminated for any reason (other than as a result of a material breach by Parent or the Purchaser that resulted in the termination of this Agreement, or a willful breach by Parent or the Purchaser of their obligations hereunder) at any time after an Acquisition Proposal has been made by a third party (a "Third Party Acquiror") and, within one year after such a termination, the Company completes either (x) a merger, consolidation or other business combination with any such Third Party Acquiror (or another party who makes an Acquisition Proposal at a time when the Company is in discussions with any such Third Party Acquiror), or (y) the sale of 50% or more (in voting power) of the voting securities of the Company or of 40% or more (in market value) of the assets of the Company and its Subsidiaries, on a consolidated basis to any such Third Party Acquiror (or another party who makes an Acquisition Proposal at a time when the Company is in discussions with any such Third Party Acquiror). ARTICLE VIII MISCELLANEOUS Section 1 Amendment and Modification. Subject to applicable law, this Agreement may be amended, 53 55 modified and supplemented in any and all respects, whether before or after any vote of the shareholders of the Company contemplated hereby, by written agreement of the parties hereto, by action taken by their respective Boards of Directors (which in the case of the Company shall include approvals as contemplated in Section 1.3(b)), at any time prior to the Closing Date with respect to any of the terms contained herein; provided, however, that after the approval of this Agreement by the shareholders of the Company, no such amendment, modification or supplement shall reduce or change the Merger Consideration or adversely affect the rights of the Company's shareholders hereunder without the approval of such shareholders. Section 2 Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement or in any schedule, instrument or other document delivered pursuant to this Agreement shall survive the Effective Time or the termination of this Agreement. This Section 8.2 shall not limit any covenant or agreement contained in this Agreement which by its terms contemplates performance after the Effective Time. Section 3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or sent by an overnight courier service, such as Federal Express, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or the Purchaser, to: CIGNA Corporation One Liberty Place 1650 Market Street Philadelphia, PA 19192-1520 Telephone No.: (215) 761-6041 Telecopy No.: (215) 761-3399 Attention: Robert L. Rose 54 56 with a copy to: O'Melveny & Myers LLP Citicorp Center 153 East 53rd Street New York, New York 10022 Telephone No.: (212) 326-2000 Telecopy No.: (212) 326-2061 Attention: C. Douglas Kranwinkle, Esq. (b) if to the Company, to: Healthsource, Inc. Two College Park Drive Hooksett, NH 03106 Telephone No.: (603) 268-7000 Telecopy No.: (603) 268-7905 Attention: Norman C. Payson, M.D. with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022 Telephone No.: (212) 735-2322 Telecopy No.: (212) 735-2000 Attention: Paul T. Schnell, Esq. Section 4 Interpretation. The words "hereof", "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. Whenever the words "include", "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation". The words describing the singular number shall include the plural and vice versa, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and vice versa. The phrase "to the best knowledge of" or any similar phrase shall mean such facts and other information which as of the date of determination are actually known to any vice president, 55 57 chief financial officer, general counsel, chief compliance officer, controller, and any officer superior to any of the foregoing, of the referenced party after the conduct of a reasonable investigation under the circumstances by such officer. The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The phrases "the date of this Agreement", "the date hereof" and terms of similar import, unless the context otherwise requires, shall be deemed to refer to February 27, 1997. As used in this Agreement, the term "affiliate(s)" shall have the meaning set forth in Rule l2b-2 of the Exchange Act. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. Section 5 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Section 6 Entire Agreement; Third Party Beneficiaries. This Agreement, the Tender Agreement and Irrevocable Proxy and the Confidentiality Agreement (including the documents and the instruments referred to herein and therein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided in Sections 2.4, 5.4 and 5.7, are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. Section 7 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain 56 58 in full force and effect and shall in no way be affected, impaired or invalidated. Section 8 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York (other than the provisions relating to the mechanics of the Merger, and other than the duties and obligations of directors and officers of the Company, including without limitation, the provisions of Section 5.5 and 5.7, which shall be governed by New Hampshire law) without giving effect to the principles of conflicts of law thereof or of any other jurisdiction. Section 9 Specific Performance. Each of the parties hereto acknowledges and agrees that in the event of any breach of this Agreement, each non-breaching party would be irreparably and immediately harmed and could not be made whole by monetary damages. It is accordingly agreed that the parties hereto (a) will waive, in any action for specific performance, the defense of adequacy of a remedy at law and (b) shall be entitled, in addition to any other remedy to which they may be entitled at law or in equity, to compel specific performance of this Agreement in any action instituted in a court of competent jurisdiction. Section 10 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective permitted successors and assigns. Section 11 Expenses. Except as set forth in Section 7.2 hereof, all costs and expenses incurred in connection with the Offer, the Merger, this Agreement and the consummation of the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the Offer or the Merger is consummated. Section 12 Headings. Headings of the Articles and Sections of this Agreement are for convenience of the parties only, and shall be given no substantive or interpretative effect whatsoever. 57 59 Section 13 Waivers. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party or parties entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Section 14 Schedules. The Company Disclosure Letter shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. Any matter disclosed pursuant to the Company Disclosure Letter shall be deemed to be disclosed for all purposes under this Agreement but such disclosure shall not be deemed to be an admission or representation as to the materiality of the item so disclosed. 58 60 IN WITNESS WHEREOF, Parent, the Purchaser and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. HEALTHSOURCE, INC. By:/s/ Norman C. Payson ---------------------------------------------- Name: Norman C. Payson Title: President and Chief Executive Officer CIGNA CORPORATION By:/s/ Robert L. Rose ---------------------------------------------- Name: Robert L. Rose Title: Vice President Strategic Growth & Development CHC ACQUISITION CORP. By:/s/ Robert L. Rose ---------------------------------------------- Name: Robert L. Rose Title: President 59 61 ANNEX A CONDITIONS TO THE OFFER Notwithstanding any other provision of the Offer, subject to the provisions of the Merger Agreement, the Purchaser shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to the Purchaser's obligation to pay for or return tendered Shares promptly after termination or withdrawal of the Offer), pay for, and may delay the acceptance for payment of or, subject to the restriction referred to above, the payment for, any tendered Shares, and may terminate the Offer and not accept for payment any tendered Shares if (i) any applicable waiting period under the HSR Act has not expired or been terminated prior to the expiration of the Offer, (ii) any Insurance Regulatory Approvals or any other material consent, approval, or authorization required under Federal or any State law required to consummate the Offer have not been obtained, except where the failure to have obtained any such approvals, consents, authorizations or Insurance Regulatory Approvals would not have a Company Material Adverse Effect and would not result in a violation of law, (iii) the Minimum Condition has not been satisfied, or (iv) at any time on or after February 26, 1997, and before the time of acceptance of Shares for payment pursuant to the Offer, any of the following events shall occur: (a) there shall have been any statute, rule, regulation, judgment, order or injunction promulgated, entered, enforced, enacted or issued applicable to the Offer or the Merger by any federal or state governmental regulatory or administrative agency or authority or court or legislative body or commission which (1) prohibits the consummation of the Offer or the Merger, (2) prohibits, or imposes any material limitations on, Parent's or the Purchaser's ownership or operation of all or a material portion of the Company's businesses or assets or the Shares, except for such prohibitions or limitations which would not have a Company Material Adverse Effect, (3) prohibits, or makes illegal the acceptance for payment, payment for or purchase of Shares or the consummation of the Offer, or (4) renders the Purchaser unable to accept for payment, pay for or purchase a material portion or all of the Shares; provided, that the parties shall have used their best efforts to cause any such statute, 1 62 rule, regulation, judgment, order or injunction to be vacated or lifted; (b) the representations and warranties of the Company set forth in the Merger Agreement shall not be true and accurate as of the date of consummation of the Offer as though made on or as of such date (except for those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time which need only be true and accurate as of such date or with respect to such period) or the Company shall have breached or failed to perform or comply with any obligation, agreement or covenant required by the Merger Agreement to be performed or complied with by it except, in each case where the failure of such representations and warranties to be true and accurate (without giving effect to any limitation as to "materiality" or "material adverse effect" set forth therein), or the performance or compliance with such obligations, agreements or covenants, do not, individually or in the aggregate, have a Company Material Adverse Effect; (c) the Merger Agreement shall have been terminated in accordance with its terms; (d) it shall have been publicly disclosed that any person, entity or "group" (as defined in Section 13(d)(3) of the Exchange Act), shall have acquired beneficial ownership (as determined pursuant to Rule 13d-3 promulgated under the Exchange Act) of more than 30% of the then outstanding Shares, through the acquisition of stock, the formation of a group or otherwise; (e) the Board of Directors of the Company shall have withdrawn, modified or changed in a manner adverse to Parent or the Purchaser its approval or recommendation of the Offer, the Merger Agreement or the Merger or shall have recommended an Acquisition Proposal or shall have executed an agreement in principle or definitive agreement relating to an Acquisition Proposal or similar business combination with a person or entity other than Parent, the Purchaser or their affiliates or the Board of Directors of the Company shall have adopted a resolution to do any of the foregoing; or (f) there shall have occurred (i) any general suspension of trading in securities on any national securities exchange or in the over-the-counter market, (ii) the declaration of a banking moratorium or any suspension of 2 63 payments in respect of banks in the United States (whether or not mandatory), or (iii) any limitation (whether or not mandatory) by an United States governmental authority or agency on the extension of credit by banks or other financial institutions which in the reasonable judgment of Parent or the Purchaser, in any such case, and regardless of the circumstances giving rise to such condition, makes it inadvisable to proceed with the Offer and/or with such acceptance for payment or payments. The foregoing conditions are for the sole benefit of the Purchaser and Parent and, subject to the Merger Agreement, may be asserted by either of them or may be waived by Parent or the Purchaser, in whole or in part at any time and from time to time in the sole discretion of Parent or the Purchaser. The failure by Parent or the Purchaser at any time to exercise any such rights shall not be deemed a waiver of any right and each right shall be deemed an ongoing right which may be asserted at any time and from time to time. 3 64 Schedule 5.4(b) - - Severance Agreements with Company Officers - Benefits to be paid if employment is terminated by officer for "good reason" or by Parent or the Company without "cause", in either case, within two years of the consummation of the Offer. Benefits to be paid to the tier I officer concurrently with consummation of the Offer. - Lump sum severance benefits for the number of of- ficers identified in this paragraph will be equal to a multiple of salary and maximum bonus. The multiple shall be: 3 with respect to the tier I officer identified to Parent by the Company (pro- vided that such lump sum severance benefit of 3 times salary plus bonus shall not exceed $2.5 mil- lion for such tier I officer) and the 2 tier II officers identified to Parent by the Company; 2 with respect to the 5 tier III officers identified to Parent by the Company; 1.5 with respect to the 4 tier IV officers identified to Parent by the Compa- ny; and 1 with respect to the 17 tier V officers identified to Parent by the Company. - Severance benefit also to include (1) pro rata target bonus for the year employment terminates, (2) continuation of medical and other welfare bene- fits for a period of years equal to the applicable multiple, (3) office and secretarial services for the same period, (4) outplacement and financial planning services for 12 months following a termi- nation (outplacement services to be consistent with those provided under Parent's severance plan as in effect on the date hereof), (5) a 280G "gross up" payment for any such officer subject to such provi- sion (including the tier I officer) and (6) reason- able legal fees and other expenses incurred in en- forcing the agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code. 4 65 - - Severance Plan for All Other Company Employees - Benefits to be paid if employment is terminated by employee for "good reason" or by Parent or the Company without "cause", in either case, within eighteen months of the consummation of the Offer. - Severance benefit to be equal to the benefit provided under the applicable Company Severance Plan (as in effect on the date hereof) or, if greater, under any agreement entered into between the Company and such individual prior to the date hereof, provided however that in no event shall the severance benefit exceed 18 months of base salary. - Severance benefit also to include (1) pro rata target bonus for the year employment terminates and (2) continuation of medical and other welfare benefits for a number of weeks equal to the period during which severance is paid. - - Definitions - "Cause" shall mean (i) the commission of any fraud or embezzlement against the Company, (ii) the will- ful and continued refusal to perform duties or willful and continued refusal to comply with direc- tives of superiors, in each case after the employee's failure to cure such conduct within 10 days after receiving written notice from the Compa- ny, (iii) the conviction of a felony and (iv) an order by, or an agreement by an employee with, an appropriate governmental health care regulatory agency removing or otherwise disqualifying an em- ployee from employment with the Company or any of its affiliates. - "Good Reason" shall mean (i) any reduction in total compensation, including incentive compensation opportunity, (ii) relocation of place of employment to a location more than 35 miles from each of the employee's existing place of employment and the employee's primary residence or (iii) (A) in the case of the tier II officers, any adverse change in duties, responsibilities, authority, title or of- fice and (B) in the case of tier III, tier IV and tier V officers, any material adverse change to 5 66 title or office or material diminution of duties, responsibilities or authority. Notwithstanding the foregoing, Good Reason shall not include a reduction from regional responsibility to serving as CEO of the individual's principal HMO with respect to the Senior Vice Presidents of the Company identified to Parent by the Company. 6 EX-99.3 4 TENDER AND IRREVOCABLE PROXY 1 TENDER AGREEMENT AND IRREVOCABLE PROXY THIS TENDER AGREEMENT AND IRREVOCABLE PROXY dated as of February 27, 1997 (this "Agreement") is by and among CIGNA CORPORATION, a Delaware corporation ("PARENT"), CHC ACQUISITION CORP., a New Hampshire corporation and a wholly owned subsidiary of Parent ("PURCHASER"), and DR. NORMAN PAYSON ("SHAREHOLDER"). WITNESSETH: WHEREAS, simultaneously with the execution of this Agreement, Parent, Purchaser and Healthsource, Inc., a New Hampshire corporation (the "COMPANY"), have entered into an Agreement and Plan of Merger (as amended from time to time, the "MERGER AGREEMENT"), pursuant to which Purchaser has agreed, among other things, to commence a cash tender offer (as such tender offer may hereafter be amended from time to time, the "OFFER") to purchase any and all shares of common stock, $0.10 par value, of the Company (the "COMPANY COMMON STOCK"); WHEREAS, as of the date hereof, Shareholder is the record and beneficial owner of, and has the sole right to vote and dispose of, the number of shares of Company Common Stock set forth on the signature page hereto; WHEREAS, as an inducement and a condition to its entering into the Merger Agreement and incurring the obligations set forth therein, including the Offer and the Merger, Parent has required that Shareholder enter into this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual premises, representations, warranties, covenants and agreements contained herein and in the Merger Agreement, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Certain Definitions. Capitalized terms used and not defined herein have the respective meanings ascribed to them in the Merger Agreement. In addition, for purposes of this Agreement: "AFFILIATE" means, with respect to any specified Person, any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. For purposes of this Agreement, with respect to Shareholder, "AFFILIATE" shall not include the Company and the Persons that directly, or indirectly through one or more intermediaries, are controlled by the Company. "BENEFICIALLY OWN" or "BENEFICIAL OWNERSHIP" with respect to any securities means having "BENEFICIAL OWNERSHIP" of such securities (as determined pursuant to Rule 13d-3 under the Exchange Act ), including pursuant to any agreement, arrangement or understanding, whether or not in writing. Without duplicative counting of the same securities by the same 2 holder, securities Beneficially Owned by a Person shall include securities Beneficially Owned by all Affiliates of such Person and all other Persons with whom such Person would constitute a "GROUP" within the meaning of Section 13(d) of the Exchange Act and the rules promulgated thereunder. "OWNED SHARES" means the shares of Company Common Stock owned by Shareholder on the date hereof, together with any other shares of Company Common Stock, or any other securities of the Company entitled, or which may be entitled, to vote generally in the election of directors and any other shares of Company Common Stock or such other securities which may hereafter be owned by Shareholder. "PERSON" means an individual, corporation, partnership, joint venture, association, trust, unincorporated organization or other entity. "REPRESENTATIVE" means, with respect to any Person, such Person's officers, directors, employees, agents and representatives (including any investment banker, financial advisor, agent, representative or expert retained by or acting on behalf of such Person or its subsidiaries). "TRANSFER" means, with respect to a security, the sale, transfer, pledge, hypothecation, encumbrance, assignment or disposition of such security or the Beneficial Ownership thereof, the offer to make such a sale, transfer or other disposition, and each option, agreement, arrangement or understanding, whether or not in writing, to effect any of the foregoing. As a verb, "TRANSFER" shall have a correlative meaning. 2. Tender of Shares. Shareholder hereby agrees to tender (or cause the record owner thereof), pursuant to and in accordance with the terms of the Offer, all Owned Shares. Shareholder hereby acknowledges and agrees that Parent's and Purchaser's obligation to accept for payment and pay for shares of Company Common Stock in the Offer, including any Owned Shares tendered by Shareholder, is subject to the terms and conditions of the Offer. The parties agree that Shareholder will, for all Owned Shares tendered by Shareholder in the Offer and accepted for payment by Purchaser, receive a price per Owned Share equal to $21.75, or such higher per share consideration paid to other shareholders who have tendered into the Offer. 3. Voting of Owned Shares; Proxy. (a) Shareholder hereby agrees that during the period commencing on the date hereof and continuing until the earlier of (x) the consummation of the Offer and (y) the termination of this Agreement (such period being referred to as the "VOTING PERIOD"), at any meeting (whether annual or special, and whether or not an adjourned or postponed meeting) of the Company's shareholders, however called, or in connection with any written consent of the Company's shareholders, subject to the absence of a preliminary or permanent injunction or other requirement under applicable law by any United States federal, state or foreign court barring such action, Shareholder shall vote (or cause to be voted) all Owned Shares: (i) in favor of the Merger, the execution and delivery by the Company of the Merger Agreement and the approval and adoption of the Merger and the terms 2 3 thereof and each of the other actions contemplated by the Merger Agreement and this Agreement and any actions required in furtherance thereof and hereof; (ii) against any action or agreement that would impede, interfere with, or prevent the Offer or the Merger; and (iii) except as otherwise agreed to in writing in advance by Parent, against the following actions (other than the Offer, the Merger and the transactions contemplated by the Merger Agreement and this Agreement): (I) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company or any of its subsidiaries (including any transaction contemplated by an Acquisition Proposal); (II) any sale, lease or transfer of a material amount of the assets or business of the Company or its subsidiaries, or any reorganization, restructuring, recapitalization, special dividend, dissolution, liquidation or winding up of the Company or its subsidiaries; and (III) any change in the present capitalization of the Company including any proposal to sell any material equity interest in the Company or any amendment of the Articles of Incorporation of the Company. Shareholder shall not enter into any agreement, arrangement or understanding with any Person the effect of which would be inconsistent or violative of the provisions and agreements contained in this Section 3(a). (b) IRREVOCABLE PROXY. SHAREHOLDER HEREBY GRANTS TO, AND APPOINTS PURCHASER AND ANY DESIGNEE OF PURCHASER, EACH OF THEM INDIVIDUALLY, SHAREHOLDER'S IRREVOCABLE (UNTIL THE TERMINATION OF THIS AGREEMENT) PROXY AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE THE OWNED SHARES OF SHAREHOLDER AS INDICATED IN SECTION 3(a) ABOVE. SHAREHOLDER INTENDS THIS PROXY TO BE IRREVOCABLE (UNTIL THE TERMINATION OF THIS AGREEMENT) AND COUPLED WITH AN INTEREST AND WILL TAKE SUCH FURTHER ACTION AND HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY SHAREHOLDER WITH RESPECT TO SHAREHOLDER'S OWNED SHARES. (c) Shareholder Capacity. Shareholder is making this Agreement solely in his capacity as the owner of the Owned Shares and not in his capacity as a director or officer, and the agreements set forth herein shall in no way restrict Shareholder in the exercise of his fiduciary duties as a director and officer of the Company. Shareholder signs solely in his or her capacity as the record and beneficial owner of the Owned Shares. 4. Restrictions on Transfer, Other Proxies; No Solicitation. (a) Shareholder shall not, until the termination of this Agreement, directly or indirectly: (i) except as provided in Section 2 hereof, Transfer to any Person any or all Owned Shares; or (ii) except as provided in Section 3(b), grant any proxies or powers of attorney, deposit any Owned Shares into a voting trust or enter into a voting agreement, understanding or arrangement with respect to such Owned Shares. Notwithstanding anything to the contrary provided in this Agreement, Shareholder shall have the right to Transfer Owned Shares to (i) any Family Member, (ii) the trustee or trustees of a trust solely (except for remote contingent interests) for the benefit of Shareholder and/or one or more Family Members, (iii) a foundation created or established by Shareholder, (iv) a corporation of which Shareholder and/or any Family Members owns all of the outstanding capital stock, (v) a partnership of which Shareholder and/or any Family Members owns all of the partnership interests, (vi) the executor, 3 4 administrator or personal representative of the estate of Shareholder, or (vii) any guardian, trustee or conservator appointed with respect to the assets of Shareholder; provided, that in the case of any such Transfer, the transferee shall execute an agreement to be bound by the terms of this Agreement, or terms substantially identical thereto. "Family Member" shall have the meaning ascribed to "Related Parties" under Section 672(c) of the Internal Revenue Code of 1986, as amended. (b) Until the termination of this Agreement, Shareholder will comply with the provisions of Section 5.5 of the Merger Agreement to the extent applicable to Shareholder in his capacity as a director or officer of the Company; provided, that nothing in this Section 4(b) shall prohibit Shareholder from taking any actions that the Company is permitted to take in accordance with Section 5.5 of the Merger Agreement. 5. Representations and Warranties of Shareholder. Shareholder hereby represents, warrants and covenants to Parent and Purchaser as follows: (a) Shareholder has all necessary power and authority to execute and deliver this Agreement and perform his obligations hereunder. No other proceedings or actions on the part of Shareholder are necessary to authorize the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. (b) This Agreement has been duly and validly executed and delivered by Shareholder and constitutes the valid and binding agreement of Shareholder, enforceable against Shareholder in accordance with its terms except (i) to the extent limited by applicable bankruptcy, insolvency or similar laws affecting creditors rights and (ii) the remedy of specified performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (c) Shareholder is the record holder and beneficial owner of the Owned Shares which, as of the date hereof, are set forth on the signature page hereto. Shareholder has good and marketable title to all of the Owned Shares, free and clear of all liens, claims, options, proxies, voting agreements, security interests, charges and encumbrances. The Owned Shares constitute all of the capital stock of the Company Beneficially Owned by Shareholder, and except for the Owned Shares and shares of Company Common Stock issuable upon exercise of options held by Shareholder, neither Shareholder nor any of his Affiliates Beneficially Owns or has any right to acquire (whether currently, upon lapse of time, following the satisfaction of any conditions, upon the occurrence of any event or any combination of the foregoing) any shares of Company Common Stock or any securities convertible into Company Common Stock. Except as provided in Section 3(b) hereof and in this Section 5(c), Shareholder has sole power to vote and to dispose of the Owned Shares. (d) Except for the items disclosed in clauses (a) through (f) in Section 3.4 of the Merger Agreement, none of the execution and delivery of this Agreement by Shareholder, the consummation by Shareholder of the transactions contemplated hereby or compliance by Shareholder with any of the provisions hereof shall (A) result in a violation or breach of, or 4 5 constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, loan agreement, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which Shareholder is a party or by which Shareholder or any of his properties or assets (including the Owned Shares) may be bound, or (B) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to Shareholder or any of its properties or assets. (e) Shareholder understands and acknowledges that Parent is entering into, and causing the Purchaser to enter into, the Merger Agreement, and is incurring the obligations set forth therein, in reliance upon Shareholder's execution and delivery of this Agreement. (f) No broker, investment banker, financial adviser or other intermediary is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby or by the Merger Agreement based upon arrangements made by or on behalf of Shareholder or any of his Representatives. (g) Shareholder agrees with and covenants to Parent that Shareholder shall not request that the Company or Parent, as the case may be, register the Transfer (book-entry or otherwise) of any certificated or uncertificated interest representing any of the securities of the Company or of Parent, as the case may be, unless such Transfer is made in compliance with this Agreement. 6. Representations and Warranties of Parent and Purchaser. Parent and Purchaser hereby represent, warrant and covenant to Shareholder as follows: (a) Each of Parent and Purchaser is a corporation duly organized and validly existing under the laws of its jurisdiction of incorporation, and each of them is in good standing under the laws of its jurisdiction of incorporation. Parent and Purchaser have all necessary corporate power and authority to execute and deliver this Agreement and perform their respective obligations hereunder. The execution and delivery by Parent and Purchaser of this Agreement and the performance by Parent and Purchaser of their respective obligations hereunder have been duly and validly authorized by the Board of Directors of each of Parent and Purchaser and no other corporate proceedings on the part of Parent or Purchaser are necessary to authorize the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. (b) This Agreement has been duly and validly executed and delivered by Parent and Purchaser and constitutes a valid and binding agreement of each of Parent and Purchaser, enforceable against each of them in accordance with its terms except (i) to the extent limited by applicable bankruptcy, insolvency or similar laws affecting creditors rights and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 5 6 (c) Except for the items disclosed in clauses (a) through (f) in Section 4.3 of the Merger Agreement, none of the execution and delivery of this Agreement by Parent or Purchaser, the consummation by Parent or Purchaser of the transactions contemplated hereby or compliance by Parent or Purchaser with any of the provisions hereof shall (A) conflict with or result in any breach of the certificate of incorporation or by-laws of Parent or Purchaser, or (B) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, loan agreement, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which Parent or Purchaser is a party or by which Parent or Purchaser or any of their respective properties or assets may be bound, or violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to Parent or Purchaser or any of their respective properties or assets. (d) Except for Goldman, Sachs & Co., whose fees and expenses are the sole responsibility of Parent, no broker, investment banker, financial adviser or other intermediary is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby or by the Merger Agreement based upon arrangements made by or on behalf of Parent or any of its Representatives. 7. Further Assurances. From time to time, at the other party's request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further lawful action as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement. 8. Termination. This Agreement, and all rights and obligations of the parties hereunder, shall terminate upon the earlier of (a) the date upon which the Parent shall have purchased and paid for all of the Owned Shares of Shareholder in accordance with the Offer and (b) the date on which the Merger Agreement is terminated. 9. Miscellaneous. (a) This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. (b) Shareholder agrees that this Agreement and the respective rights and obligations of Shareholder hereunder shall attach to any shares of Company Common Stock, and any securities convertible into such shares, that may become Beneficially Owned by Shareholder. (c) Except as otherwise provided in this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. 6 7 (d) This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors, personal or legal representatives, executors, administrators, heirs, distributees, devisees, legatees and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either party (whether by operation of law or otherwise) without the prior written consent of the other party; provided, that Parent and the Purchaser may assign their rights and obligations hereunder to any assignee of such parties' rights and obligations under the Merger Agreement. Nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. (e) This Agreement may not be amended, changed, supplemented, or otherwise modified or terminated, except upon the execution and delivery of a written agreement executed by each of the parties hereto. The parties may waive compliance by the other parties hereto with any representation, agreement or condition otherwise required to be complied with by such other party hereunder, but any such waiver shall be effective only if in writing executed by the waiving party. (f) All notices and other communications hereunder shall be in writing and shall be deemed given upon (a) transmitter's confirmation of a receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight carrier or when delivered by hand or (c) the expiration of five business days after the day when mailed by certified or registered mail, postage prepaid, addressed at the following addresses (or at such other address for a party as shall be specified by like notice): If to Parent or Purchaser: CIGNA Corporation 1 Liberty Place 1950 Market Street Philadelphia, PA 19192-1520 Telecopy: 215-761-6041 Attn: Robert L. Rose, Esq. Copy to: O'Melveny & Myers 153 East 53rd Street New York, New York 10022-4611 Telecopy: 212-326-2061 Attn: C. Douglas Kranwinkle, Esq. 7 8 If to Shareholder, to Shareholder's address or facsimile number set forth on the signature page hereto; or to such other address or facsimile number as the Person to whom notice is given shall have previously furnished to the others in writing in the manner set forth above. (g) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without affecting the validity or enforceability of the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. (h) Each of the parties hereto acknowledges and agrees that in the event of any breach of this Agreement, each non-breaching party would be irreparably and immediately harmed and could not be made whole by monetary damages. It is accordingly agreed that the parties hereto (a) will waive, in any action for specific performance, the defense of adequacy of a remedy at law and (b) shall be entitled, in addition to any other remedy to which they may be entitled at law or in equity, to compel specific performance of this Agreement. (i) All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance. (j) This Agreement shall be governed and construed in accordance with the laws of the State of New York (other than the duties and obligations of directors and officers of the Company, which shall be governed by the laws of the State of New Hampshire), without giving effect to the principles of conflicts of law thereof or of any other jurisdiction. (k) The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. "Include," "includes," and "including" shall be deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import. (l) This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which, taken together, shall constitute one and the same instrument. 8 9 IN WITNESS WHEREOF, Parent, Purchaser and Shareholder have caused this Agreement to be duly executed as of the day and year first above written. CIGNA CORPORATION By: /s/ Robert L. Rose --------------------------------- Name: Robert L. Rose Title: Vice President Strategic Growth & Development CHC ACQUISITION CORP. By: /s/ Robert L. Rose --------------------------------- Name: Robert L. Rose Title: President DR. NORMAN PAYSON /s/ Norman C. Payson --------------------------------- Address: c/o Healthsource, Inc. 2 College Park Drive Hooksett, NH 03106 Telecopy: 603-268-7905 Owned Shares: 4,332,760 S-1 EX-99.4 5 CONSULTING AGREEMENT 1 CONSULTING AGREEMENT CONSULTING AGREEMENT, dated as of February 27, 1997 (this "Agreement") by and between CIGNA Corporation, a Delaware corporation ("Parent"), and Dr. Norman Payson (the "Consultant"). WHEREAS, Parent, has entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and among Parent, CHC Acquisition Corp., a New Hampshire corporation (the "Purchaser"), and Healthsource, Inc., a New Hampshire corporation (the "Company"), dated as of February 27, 1997; WHEREAS, in connection with the transactions contemplated by the Merger Agreement and in recognition of the Consultant's experience and abilities, Parent desires to assure itself of the services of the Consultant in accordance with and subject to the terms and conditions provided herein; and WHEREAS, the Consultant wishes to perform services for Parent in accordance with and subject to the terms and conditions provided herein. NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Engagement as Consultant. Parent hereby agrees to engage the Consultant, and the Consultant hereby agrees to perform services for Parent, on the terms and conditions set forth herein. 2. Term. This Agreement is for the nine month period (the "Term") commencing on the date of consummation of the "Offer" (as such term is defined in the Merger Agreement) and terminating nine months from such 2 date; provided, however, that if the Offer is not consummated or if the Merger Agreement is terminated this Agreement shall terminate immediately and be of no force or effect. 3. Duties and Reporting Relationship. From time to time during the Term, the Consultant shall perform such services relating to the business of Parent as the Consultant and the President of CIGNA HealthCare (or his designee) shall mutually agree. The Consultant shall in no event be required to provide more than 120 hours per month of consulting services to Parent for the first 6 months of the Term and no more than 80 hours per month of consulting services to Parent for the next 3 months of the Term. The scheduling of such time shall be mutually agreeable to the Consultant and Parent. Subject to the Consultant's obligations elsewhere herein, Parent acknowledges that the Consultant is permitted to pursue other activities, whether of a personal or business nature, and, accordingly, may not always be immediately available to Purchaser. 4. Place of Performance. The Consultant shall perform his duties and conduct his business from his primary residence and/or at such other locations as are reasonably acceptable to him; provided, however, that, as mutually agreed, the Consultant will be available to travel domestically to meet from time to time with representatives of Parent. 5. Independent Contractor. During the term of this Agreement, the Consultant shall be an independent contractor and not an employee of Parent. 6. Compensation and Related Matters. (a) Monthly Consulting Fee. During the Term, Parent shall pay to the Consultant a monthly consulting fee at a rate of $100,000 per month. 2 3 (b) Business Expenses. In addition to the expenses to be reimbursed pursuant to Annex A hereto, the Consultant will be reimbursed by Parent for all ordinary and appropriate business expenses incurred by him in connection with his performance of consulting services hereunder upon submission by the Consultant of receipts and other documentation in accordance with Parent's normal reimbursement procedures. (c) Benefits and Perquisites. During the Term and, where applicable, thereafter, Parent shall provide the Consultant (and, to the extent applicable, his covered dependents) with those employee benefits and perquisites set forth on Annex A hereto. (d) Options. Notwithstanding anything to the contrary, including, without limitation, anything contained in this Agreement, the Merger Agreement or any stock option or incentive plan of Parent, the Purchaser or the Company, Parent shall take all action necessary to cause each Substitute Option (as defined in the Merger Agreement) held by the Consultant (or, in the event of his death, held by his estate or designated beneficiary) to expire no earlier than the tenth anniversary of the date of grant of the corresponding Company Employee Stock Option (as defined in the Merger Agreement) that was converted into a Substitute Option pursuant to Section 2.4 of the Merger Agreement, without regard to any of (i) the termination or expiration of this Agreement, (ii) the termination of the Consultant's employment with the Company, (iii) the death or disability of the Consultant or (iv) the cessation of the Consultant's services to Parent; provided, however, that Parent may grant Substitute Options to the Consultant under a stock option plan of Parent, so long as such grant does not adversely affect the rights of the Consultant hereunder and under the Merger Agreement. In this regard, notwithstanding anything to the contrary, including, without limitation, anything contained in this Agreement, the Merger Agreement or any stock option or incentive plan of Parent, the 3 4 Purchaser or the Company, Parent agrees that each such Substitute Option held by the Consultant shall be freely exercisable without restriction, at all times prior to the expiration of such option, by the Consultant and his successors, for shares of Parent common stock. 7. Termination. The Consultant's engagement as a consultant hereunder shall terminate without further action by any party hereto nine months from the date of consummation of the Offer. Upon any termination of this Agreement or the Consultant's engagement as a consultant hereunder, the parties hereto shall have no further obligation or liability under this Agreement, except that (a) Parent shall pay the Consultant all fees and reimburse the Consultant for all expenses incurred prior to the date of termination, (b) Parent shall continue to provide the Consultant (and his covered dependents) with the employee benefits and perquisites set forth on Annex A hereto for a period of 36 months from such date of termination (except for use of the aircraft described in Annex A which Parent will provide for a period of 12 months from such date of termination) and (c) the provisions of Sections 6(c), 6(d) and 7, 8 and 11 through 15 of this Agreement shall survive any such termination. 8. Releases. (a) In consideration for the payment and benefits provided in this Agreement, the Consultant hereby voluntarily, knowingly, willingly, irrevocably and unconditionally releases Parent and the Company, together with each of its parents, subsidiaries and affiliates, and each of their respective officers, directors, employees, representatives, attorneys and agents, and each of their respective predecessors, successors and assigns (collectively, the "Releasees") from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, causes of action, rights, costs, losses, debts and expenses of any nature whatsoever, known or unknown (other than with respect to any breach by the Releasees of this Agreement or the Merger Agreement), against them which the Consultant or his succes- 4 5 sors or assigns ever had, now have or hereafter can, shall or may have (either directly, indirectly, derivatively or in any other representative capacity) by reason of any matter, fact or cause whatsoever arising from the beginning of time to the date of consummation of the Offer, including without limitation all claims arising under Title VII of the Civil Rights Act of 1964, the federal Age Discrimination in Employment Act ("ADEA") and all other federal, state or local laws, rules, regulations, judicial decisions or public policies now or hereafter recognized. By signing this Agreement, the Consultant admits that he has read this Agreement, understands it is a legally binding agreement and that he was advised to review it with legal counsel of his choice, and has reviewed it with legal counsel of his choice, has had, or had the opportunity to take, 21 calendar days to discuss it with legal counsel of his choice before signing and that if he signs prior to the end of such period, he does so of his own free will and with full knowledge that he could have taken the full period. The Consultant realizes and understands that this release applies to and covers all claims, demands and causes of action including those under the ADEA against the Releases whether or not the Consultant knows or suspects them to exist at the present time. The Consultant acknowledges that he understands the terms of this Agreement, that it is not part of an exit incentive or other employment termination program being offered to a group or class of employees. The Consultant shall have a period of 7 calendar days from the date he signs this Agreement to revoke the Agreement and any revocation and cancellation must be in writing, signed by the Consultant and received by Parent before the close of business on the seventh calendar day following the date hereof. (b) In consideration for the Consultant's obligations under this Agreement, Parent hereby voluntarily, knowingly, willingly, irrevocably and unconditionally releases the Consultant (and hereby agrees to cause each of the Purchaser, the Company and their affil- 5 6 iates to release the Consultant) from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, causes of action, rights, costs, losses, debts and expenses of any nature whatsoever, known or unknown (other than with respect to any breach by the Consultant of this Agreement) against him which Parent, the Purchaser or the Company or their respective successors or assigns ever had, now have or hereafter can, shall or may have (either directly, indirectly, derivatively or in any other representative capacity) by reason of any matter, fact or cause whatsoever arising from the beginning of time to the date of consummation of the Offer. 9. Covenant Not to Compete. (a) The Consultant hereby agrees that, for a period of nine months following the date of consummation of the Offer, the Consultant shall not, whether acting individually or as an officer, director, employee, agent, stockholder or consultant of any person, firm, corporation, business or other entity, engage in a business that competes, directly or indirectly, in any material respect with the business conducted as of the date hereof by Parent, the Company and their respective subsidiaries; provided, however, that the Consultant may own publicly-traded stock of any such person, firm, corporation, business or other entity constituting not more than 5% of the outstanding shares of such class of stock so long as his involvement with any such entity is limited to the ownership of such stock. (b) The Consultant and Parent acknowledge that the non-competition provision contained in Section 9(a) above is reasonable and necessary, in view of the nature of Parent and the Company, their businesses and his knowledge thereof, in order to protect the legitimate interests of Parent and the Company. (c) The Consultant agrees that during the Term and for a period of one year following the termination of this Agreement, he shall not (i) induce any employee of 6 7 Parent, the Company or any of their affiliates to leave the employ of Parent, the Company or any of their affiliates or to accept any other employment or position, or (ii) assist any other person in hiring any such employee, provided, however, that nothing contained herein shall prevent the Consultant from responding to or addressing inquiries initiating from employees of Parent, the Company and its affiliates or from hiring any such employees who make initial contact with the Consultant. (d) The Consultant hereby agrees that he shall not following the termination of this Agreement retain in his possession any written, documentary, tape, recorded or computerized proprietary information relating to the Company and its clients and customers. (e) Parent hereby agrees that in the event of any alleged breach of this Section 9 by the Consultant, Parent shall deliver to the Consultant a written notice, which notice shall specifically identify the manner in which the Consultant has allegedly breached this Section 9. Upon receipt of such notice, Consultant shall have a period of 10 calendar days during which period he may attempt to cure any such specified breach. Parent hereby agrees that it shall not seek any judicial remedy or relief in respect of any such alleged breach until after the expiration of such 10 calendar day period, and may only seek such judicial remedy or relief in the event any such breach has not been reasonably cured during such 10 calendar day period. 10. No Disparagement. Parent and the Consultant hereby agree that each shall not (and Parent further agrees (i) to cause the Company and the Purchaser and its and their respective directors and officers and (ii) if notified in writing by the Consultant of a material breach of this paragraph, Parent agrees to use reasonable efforts to cause its and their respective subsidiaries, employees, affiliates, advisors, representatives and agents to not) make, or cause to be made, any statement, 7 8 observation or opinion, or communicate any information (whether oral or written), that materially disparages the reputation or business of the other party hereto. The Consultant agrees that in the event of any alleged breach of this Section 10 by Parent, the Consultant shall deliver to Parent written notice specifically identifying the manner in which Parent has allegedly breach this Section 10. Upon receipt of such notice, Parent shall have a period of 10 calendar days during which period it may attempt to cure any such specified breach. The Consultant hereby agrees that he will not seek any judicial remedy or relief in respect of such breach (including the remedy described in this paragraph) until after the expiration of such 10 calendar day period, and may only seek such judicial remedy or relief in the event any such breach has not been reasonably cured during such 10 calendar day period. 11. Indemnification. Parent shall indemnify and hold harmless the Consultant to the full extent permitted by law and the by-laws of Parent for all expenses, costs, liabilities and legal fees that the Consultant may incur in the discharge of his duties hereunder, including the mandatory advancement of and reimbursement for any legal fees and expenses incurred by the Consultant in enforcing any right or benefit under this Agreement. Such payments shall be made within 5 days after the Consultant's request for payment. Any termination or expiration of the Consultant's engagement as a consultant hereunder or of this Agreement shall have no effect on the continuing operation of this Section 11. 12. Successors; Binding Agreement. (a) Parent shall require any successor to all or substantially all of the business or assets of Parent, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Parent would be required to perform it if no such succession had taken place. 8 9 (b) This Agreement and all rights of the Consultant hereunder shall inure to the benefit of and be enforceable by the Consultant's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. This Agreement is personal to and may not be assigned by the Consultant. 13. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or sent by an overnight courier service to the parties at the following addresses (or at such other addresses for a party as shall be specified by the notice): If to Parent: c/o CIGNA HealthCare (B-216) 900 North Cottage Grove Road Hartford, CT 06152-1216 Attention: H. Edward Hanway If to the Consultant: Dr. Norman Payson Healthsource, Inc. Two College Park Drive Hooksett, NH 03106 14. Disputes. (a) Any dispute, controversy or claim arising out of or relating to this Agreement, including any annexes hereto, or the breach, termination or validity hereof, shall be finally settled by arbitration by one arbitrator in the city and state of the Company's headquarters on the date hereof pursuant to the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court of competent jurisdiction. The 9 10 arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. Section 1-16. (b) In no event shall the Consultant be liable to Parent on account of any breach or breaches of this Agreement for an aggregate amount that exceeds the amount paid to the Consultant during the Term under Section 6(a) hereof. 15. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the parties hereto. No waiver by a party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by the parties which are not set forth expressly in this Agreement. This Agreement shall be governed and construed in accordance with the laws of the State in which the Company is incorporated on the date hereof, without giving effect to the principles of conflicts of law thereunder or of any other jurisdiction. 16. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but both of which together will constitute one and the same instrument. 17. Enforcement. If any court or arbitrator determines that any covenant contained in this Agreement, or any part thereof, is unenforceable for any reason, the duration and/or scope of such provision shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced. 10 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. /s/ Norman Payson --------------------------- Dr. Norman Payson CIGNA CORPORATION By:/s/ Robert L. Rose ------------------------ Name: Robert L. Rose Title: Vice President 12 ANNEX A Medical, hospitalization, dental, life and disability insurance benefits at a level no less favorable than that provided to senior executive officers of Parent and without any waiting periods or preexisting condition limitations. Full and complete access to the aircraft cur- rently used by the Consultant as Chief Executive Officer of the Company (or comparable aircraft if the current aircraft is unavailable). To the ex- tent such aircraft use is not in connection with the business of Parent, the Consultant shall reimburse Parent for such use at the rate of $1,000 per hour for the time such aircraft is airborne. Upon termination or expiration of the Agreement, the Consultant shall have the right to purchase such aircraft from Parent at its then book value. An initial cash payment of $25,000, made immedi- ately following the consummation of the Offer, the proceeds of which are to be used by the Con- sultant solely to purchase computer and telephone equipment in connection with the establishment of an office in the Consultant's home (or other location selected by him). The Consultant may employ one or more assistants to administer his office and, if any such assistant was an employee of the Company immediately prior to the consumma- tion of the Offer, such assistant shall be enti- tled to receive from Parent full severance bene- fits as if such assistant was terminated by Par- ent without cause. Purchaser will reimburse the Consultant for the costs associated with the employment of such assistants as well as for any other expenses incurred with the operation of 13 such office on a monthly basis, up to a total annual cost of $200,000. EX-99.5 6 OPINION OF BEAR, STEARNS & CO. 1 EXHIBIT 5 March 6, 1997 Healthsource, Inc. Two College Park Drive Hooksett, NH 03106 Attention: Dr. Norman C. Payson Chairman and Executive Officer Dear Sirs: We understand that Healthsource, Inc. ("Healthsource") has received an offer from CIGNA Corporation ("CIGNA") to acquire all of the outstanding shares of the common stock of Healthsource (the "Shares"). As more fully described in the Agreement and Plan of Merger (the "Merger Agreement") among Healthsource, CIGNA and CHC Acquisition Corp., a wholly-owned subsidiary of CIGNA ("Subsidiary"), Subsidiary (i) would promptly commence a tender offer to purchase all Shares for $21.75 per share in cash and (ii) as promptly thereafter as practicable, would merge with Healthsource and each outstanding Share not previously tendered would be converted into the right to receive $21.75 in cash (collectively, the "Transaction"). You have provided us with the Offer to Purchase and the Schedule 14D-9 in substantially the form to be sent to shareholders of Healthsource (collectively, the "Tender Offer Documents", which include the Merger Agreement). You have asked us to render our opinion as to whether the Transaction is fair, from a financial point of view, to the shareholders of Healthsource. In the course of our analyses for rendering this opinion, we have; 1. reviewed the Tender Offer Documents; 2. reviewed Healthsource's Annual Reports to Shareholders and Annual Reports on Form 10-K for the fiscal years ended December 31, 1993 through 1995, and its Quarterly Report on Form 10-Q for the period ended September 30, 1996; 3. reviewed certain operating and financial information, including projections, provided to us by management relating to Healthsource's business and prospects; 4. met with certain members of Healthsource's senior management to discuss its operations, historical financial statements and future prospects; 5. reviewed the historical prices and trading volume of the common shares of Healthsource; 6. reviewed publicly available financial data and stock market performance data of companies which we deemed generally comparable to Healthsource; 7. reviewed the terms of recent acquisitions of companies which we deemed generally comparable to Healthsource; and 8. conducted such other studies, analyses, inquiries and investigations as we deemed appropriate. 2 In the course of our review, we have relied upon and assumed the accuracy and completeness of the financial and other information provided to us by Healthsource. With respect to Healthsource's projected financial results we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Healthsource as to its expected future performance. We have not assumed any responsibility for the information or projections provided to us and we have further relied upon the assurances of the management of Healthsource that it is unaware of any facts that would make the information or projections provided to us incomplete or misleading. In arriving at our opinion, we have not performed or obtained any independent appraisal of the assets or liabilities of Healthsource. Our opinion is necessarily based on economic, market and other conditions, and the information made available to us, as of the date hereof. Based on the foregoing, it is our opinion that the Transaction is fair, from a financial point of view, to the shareholders of Healthsource. We have acted as financial advisor to Healthsource in connection with the Transaction and will receive a fee for such services, payment of a significant portion of which is contingent upon the consummation of the Transaction. Very truly yours, BEAR, STEARNS & CO. INC. By: /s/ CURTIS LANE Senior Managing Director EX-99.6 7 LETTER TO SHAREHOLDERS OF HEALTHSOURCE 1 Healthsource logo March 6, 1997 To the Shareholders of Healthsource, Inc.: We are pleased to inform you that on February 27, 1997, Healthsource, Inc. ("Healthsource" or the "Company") entered into an Agreement and Plan of Merger (the "Merger Agreement") with CIGNA Corporation ("CIGNA") and CHC Acquisition Corp. ("Purchaser"), an indirect, wholly-owned subsidiary of CIGNA, pursuant to which Purchaser has today commenced a tender offer (the "Offer") to purchase all of the outstanding shares of common stock, $.10 par value per share (the "Shares"), of the Company for $21.75 per Share in cash. Under the Merger Agreement, following the Offer, Purchaser will be merged (the "Merger" and, together with the Offer, the "Transaction") with and into the Company and all Shares not purchased in the Offer (other than Shares held by CIGNA, Purchaser or the Company, or Shares held by dissenting shareholders) will be converted into the right to receive $21.75 per Share in cash. Your Board of Directors has unanimously approved the Merger Agreement, the Offer and the Merger and has determined that the Offer and the Merger are fair to and in the best interests of Healthsource's shareholders. The Board unanimously recommends that the Company's shareholders accept the Offer and tender their Shares in the Offer. In arriving at its recommendation, the Board of Directors gave careful consideration to a number of factors described in the attached Schedule 14D-9 that is being filed today with the Securities and Exchange Commission, including, among other things, the opinion of Bear, Stearns & Co. Inc., the Company's financial advisor, that the Transaction is fair, from a financial point of view, to the shareholders of Healthsource. In addition to the attached Schedule 14D-9 relating to the Offer, also enclosed is the Offer to Purchase, dated March 6, 1997, of Purchaser, together with related materials, including a Letter of Transmittal to be used for tendering your Shares. These documents set forth the terms and conditions of the Offer and the Merger and provide instructions as to how to tender your Shares. We urge you to read the enclosed materials carefully. Sincerely, Payson sig Bagan sig Norman C. Payson, M.D. Merwyn Bagan, M.D., M.P.H. President and Chief Executive Officer Chairman of the Board
[HEALTHSOURCE ADDRESS] EX-99.7 8 PRESS RELEASE ISSUED BY HEALTHSOURCE, INC. 1 For Further Information at Healthsource, Inc. Joseph Zubretsky Chief Financial Officer Tracey Turner Vice President, Corporate Communications HEALTHSOURCE, INC. REPORTS FOURTH QUARTER EARNINGS PER SHARE OF $0.05 BEFORE NON-RECURRING CHARGES; LOSS OF $0.35 PER SHARE AFTER NON-RECURRING CHARGES OF $0.40 PER SHARE; REVENUE UP 28%; ENROLLMENT UP 26% TO 940,900 IN JANUARY 1997 CIGNA CORPORATION AND HEALTHSOURCE SEPARATELY REPORTED AN AGREEMENT FOR CIGNA TO PURCHASE HEALTHSOURCE FOR $21.75 PER SHARE HOOKSETT, NH, FEBRUARY 28, 1997 -- HEALTHSOURCE, INC. (NYSE:HS), a leading owner of managed health care companies today reported the results of its operations for the fourth quarter and year end period ended December 31, 1996. Earnings per share for the fourth quarter 1996 were $0.05 before the effect of a non-recurring charge of $0.40 per share related to costs the Company has elected to incur to enhance its provider arrangements and for costs related to a re-structuring of operations. After non-recurring charges, the Company reported a net loss of 2 $0.35 per share compared with net income of $0.22 per share for the three month period ended December 31, 1995. QUARTERLY REVENUES AND NET INCOME Revenue for the period including managed care premiums and other administrative fees increased 28 percent to $438.3 million from the $343.6 million recorded in the fourth quarter of 1995. After the effect of a pre-tax, non-recurring charge of $40.4 million, the quarter's result was a net loss of $22.6 million compared with net income of $15.8 million for the three month period ended December 31, 1995, representing a decrease of $38.4 million or 243 Percent. TWELVE MONTH RESULTS For the twelve month period ended December 31, 1996 earnings per share were $0.45 before the effect of non-recurring charges of $0.53. Including the effect of non-recurring charges, the Company recognized a loss of $0.08 versus the $0.81 earned in 1995. Revenue for the year reached $1.7 billion, up 47% from $1.2 billion recorded in 1995. After the effect of the pre-tax, non-recurring 3 charge of $53.4 million, net loss for the twelve month period was $3.9 million compared with earnings of $56.2 million during the same period a year ago. ENROLLMENT GROWTH Enrollment in Healthsource's health maintenance organizations (HMOs) continued to grow during the fourth quarter increasing to 940,900 in January 1997, up 26 percent from 744,700 reported in the fourth quarter of 1995. Norman Payson, M.D., President and Chief Executive Officer of Healthsource, Inc., said today, "The fourth quarter results, exclusive of non-recurring charges, are consistent with the challenges for the industry in 1996 in which premium pricing did not keep pace with health care costs. January 1997 premium pricing, however, was more favorable and the measures we have taken to address certain unprofitable accounts, improve our provider contracts and significantly trim administrative costs, we believe will benefit results in 1997. "Separately, the major news for us today, of course, is the announcement of a definitive merger agreement with CIGNA Corporation. 4 We hold CIGNA Corporation in highest regard and look forward to a very successful combination for all concerned." Healthsource confirmed today that it has entered into a definitive merger agreement under which CIGNA Corporation (NYSE:CI) has agreed to acquire the Company. Pursuant to the Agreement, CIGNA will commence a tender offer for any and all outstanding Healthsource shares at a price of $21.75 per share in cash. Following consummation of the tender offer, Healthsource will merge with a subsidiary of CIGNA under which all remaining Healthsource shareholders will receive the same per share price. The tender offer is subject to various conditions, including among others, the tender of at least a majority of Healthsource's outstanding shares and receipt of regulatory approvals. Healthsource, Inc., through its subsidiaries, is a geographically diversified provider of a broad range of managed health care services serving more than three million members including former members of Provident 5 Life and Accident Insurance Company. Healthsource owns HMOs operating primarily in the Northeast, the Midwest and the South which offer traditional HMO plans, point-of-service plans, preferred provider organizations and utilization review and managed care services to other health care payors including former members of Provident Life and Accident Insurance Company. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this release that are not historical facts are forward looking statements; actual results may differ materially from those projected in the forward looking statements which statements involve risks and uncertainties, including but not limited to, the following; that increased regulation will increase health care expenses; that increased competition in the Company's markets or change in product mix will unexpectedly reduce premium yield; that health care costs in any given period may be greater than expected due to unexpected incidence of major cases, natural disasters, epidemics, changes in physician prac- 6 tices, and new technologies; that the Company will be unable to close acquisitions of other HMOs on satisfactory terms; and that the Company may be unable to close global capitation arrangements on satisfactory terms in key markets. Investors are also directed to the other risks discussed in documents filed by the Company with the Securities and Exchange Commission. 7
HEALTHSOURCE, INC. (NYSE) ------------------------- Three Months Ended December 31, ------------------------- 1996 1995(1) ----------- ----------- (unaudited) (in thousands, except per share data) Revenue: HMO medical premiums . . . . . . . . . . . . $322,297 $220,409 Other insured medical premiums(2) . . . . . . 57,491 66,187 Administrative and managed care fees. . . . . . . 58,549 57,039 -------- -------- Total operating revenue . . . . . . . . 438,337 343,635 -------- -------- Expenses: Cost of HMO medical premiums. . . . . . . . . 263,890 165,177 Cost of other insured medical premiums(2) . . 45,637 53,521 Selling, general and administrative: HMO and other insured services(3) . . . . . 63,267 45,101 Admin. and managed care services . . . . . 50,921 48,927 -------- -------- Total selling, general and admin. . . . 114,188 94,028 -------- -------- Other charges . . . . . . . . . . . . . . . . 40,462 - Depreciation and amortization . . . . . . . . 10,770 8,143 -------- -------- Total operating expenses . . . . . . . 474,947 320,869 -------- -------- Operating income (loss) . . . . . . . . (36,610) 22,766 Interest income . . . . . . . . . . . . . . . . . 5,904 4,945 Interest expense . . . . . . . . . . . . . . . . (3,474) (1,785) -------- -------- Interest income, net . . . . . . . . . 2,430 3,160 -------- -------- Income (loss) before provision for income taxes . . . . . . . . . . . . . . . . (34,180) 25,926 Income tax benefit (provision). . . . . . . . . . 11,579 (10,071) -------- -------- Net income (loss) . . . . . . . . . . . . . . . . $(22,601) $ 15,855 ======== ======== Preferred stock dividends . . . . . . . . . . . . - (1,563) -------- -------- Net income (loss) applicable to
8 common shareholders . . . . . . . . . . $(22,601) $ 14,292 ======== ======== Net income (loss) per share:(4)... $(0.35) $ 0.22 Weighted average number of common and common equivalent shares outstanding:... 63,795 65,167 See Addendum 9 for footnote information.
9
HEALTHSOURCE, INC. (NYSE) ------------------------- Year Ended December 31, ------------------------- 1996 1995(1) ------------ ---------- (unaudited) (in thousands, except per share data) Revenue: HMO medical premiums . . . . . . . . . . . . . $1,238,936 $ 811,645 Other insured medical premiums(2). . . . . . . 242,535 184,819 Administrative and managed care fees . . . . . 232,492 170,233 ---------- ---------- Total operating revenue . . . . . . . . 1,713,963 1,166,697 ---------- ---------- Expenses: Cost of HMO medical premiums . . . . . . . . . 1,000,002 621,888 Cost of other insured medical premiums(2) . . . . . . . . 202,525 149,396 Selling, general and administrative: HMO and other insured services(3). . . . . . 240,945 153,326 Admin. and managed care services . . . . . . 194,641 146,340 ---------- ---------- Total selling, general and admin. . . . 435,586 299,666 ---------- ---------- Other charges . . . . . . . . . . . . . . . . 53,411 - Depreciation and amortization . . . . . . . . 38,721 24,129 ---------- ---------- Total operating expenses . . . . . . . . 1,730,245 1,095,079 ---------- ---------- Operating income (loss). . . . . . . . . (16,282) 71,618 Interest income . . . . . . . . . . . . . . . . 24,305 20,823 Interest expense . . . . . . . . . . . . . . . . (12,629) (5,392) ---------- ---------- Interest income, net . . . . . . . . . . 11,676 15,431 ---------- ---------- Income (loss) before provision for income taxes . . . . . . . . . . . . . . . (4,606) 87,049 Income tax benefit (provision) . . . . . . . . . 666 (30,778) ---------- ---------- Net income (loss) . . . . . . . . . . . . . . . . $ (3,940) $ 56,271 ========== ========== Preferred stock dividends . . . . . . . . . . . . (1,128) (4,167) ---------- ----------
10 Net income (loss) applicable to common shareholders . . . . . . . . $ (5,068) $ 52,104 ========== ========== Net income (loss) per share:(4) $(0.08) $0.81 Weighted average number of common and common equivalent shares outstanding: 63,725 64,195 See Addendum 9 for footnote information.
11
OPERATIONAL STATISTICS ---------------------- (Unaudited) ENROLLMENT BY PRODUCT LINE MEDICAL LOSS RATIOS BY REGION(6) -------------------- QUARTER QUARTER ENDED ENDED 1/1/97 1/1/96 %CHANGE 12/31/96 12/31/95 --------- --------- ------- -------- -------- HMOs(5) Northern Region: 81.9% 77.9% New Hampshire 136,300 122,300 11% Massachusetts 77,100 - - % Maine 70,700 65,500 8% Indiana 36,500 67,000 (46)% New Jersey 34,200 1,950 -% New York City 33,600 30,750 9% New York (Syracuse) 19,000 21,200 (10)% Kentucky 12,400 11,200 11% Ohio 2,500 1,000 150% --------- --------- ----- Sub-total 422,300 320,900 32% --------- --------- ----- Southern Region: 81.9% 72.4% North Carolina 212,200 170,600 24% South Carolina 141,400 143,700 (2)% Tennessee 92,600 62,400 48% Arkansas 34,600 32,800 5% Georgia 24,800 10,200 143% Texas 13,000 4,100 217% --------- --------- ----- Sub-total 518,600 423,800 22% --------- --------- ----- Total HMO 940,900 744,700 26% --------- ========= ========= ===== MANAGED INDEMNITY (INSURED)(7) 45,100 66,600 (32)% - --------------------------- ========= ========= ===== SELF AND PARTIALLY - ------------------ INSURED MEDICAL PRODUCTS ------------------------ Point of Service(8) 181,300 196,300 (8)% Workers' Compensation 90,700 120,000 (24)% Other Managed Care/Administration(9) 1,914,800 2,300,500 (17)% --------- --------- ----- Total Self-Insured 2,186,800 2,616,800 (16)% ------------------ --------- --------- ----- TOTAL ADMINISTERED MEDICAL 3,172,800 3,428,100 (7)% - -------------------------- ========= ========= ===== DENTAL PRODUCTS(10) - -------------------
12 Fully Insured 313,000 396,400 (21)% Self Insured 2,298,700 2,176,500 6% --------- --------- ----- TOTAL ADMINISTERED DENTAL 2,611,700 2,572,900 2% - ------------------------- ========= ========= =====
Three Months Ended December 31, 1996 1995 ---- ---- CONSOLIDATED HMO MEDICAL LOSS RATIOS(11) 81.9% 74.9% See Addendum 9 for footnote information.
13 HEALTHSOURCE, INC. (NYSE) -------------------------
SELECTED BALANCE SHEET DATA (IN THOUSANDS) - ------------------------------------------ December 31, December 31, 1996 1995 ------------ ------------ Cash, cash equivalents, and current marketable securities $ 150,152 $155,728 Current assets 428,870 427,496 Long-term marketable securities 110,049 68,357 Total assets 1,006,900 873,039 Medical claims payable 175,481 152,649 Current liabilities 365,164 283,026 Long-term debt 247,250 95,000 Shareholders' equity 385,425 488,082
COMMONLY USED RATIOS - -------------------- December 31, December 31, 1996 1995 ------------ ------------ Book value per common shares outstanding (63,795,000 and 63,580,800 at December 31, 1996 and December 31, 1995 respectively) $6.04/share $7.68/share Working capital $63.7 Million $144.5 Million Current ratio 1.2 1.5 Days of health care expense in Three Months Ended medical claims payable for December 31, fully-insured products ------------------ (medical claims payable 1996 1995 divided by average daily ---- ---- health care expenses for the three months ended December 31, 61 Days 58 Days 1996 and 1995 which does not include the effects of provider capitation and other arrangements)
14
Three Months Ended ------------------ December 31, 1996 1995 ---- ---- Average annual hospital bed days 233 244 per 1,000 members (calculated on the basis of average members during the period)(12) See Addendum 9 for footnote information.
(1) Results for 1995 include the effects of the acquisition as of May 1, 1995 of the medical services group of the Provident Life and Accident Insurance Company of America, Inc. (the "Provident acquisition"). (2) Includes fully-insured indemnity and shared risk (minimum premium and retrospectively rated premium arrangements with self-insured employers) from the Provident acquisition and the Company's previously existing managed indemnity business. (3) Includes all corporate administrative and development expenses. (4) Reflects a two-for-one stock split in the form of a 100% stock dividend effective December 15, 1995. (5) Includes membership for HMOs owned, co-owned, and/or managed by Healthsource (New York City and New Jersey) and 81,000 members acquired in the Central Massachusetts Health Care, Inc. (CMHC) acquisition effective February 1, 1996. Managed indemnity lives previously reported in the Company's HMO membership are now reported separately as managed indemnity lives. For 1997 and 1996, these lives were 4,300 and 7,000, respectively. (6) Includes aggregate medical loss ratios for HMOs owned or significantly co-owned by Healthsource, including those from the Provident acquisition. New York City and New Jersey ("ChubbHealth") are not included. (7) Includes managed indemnity business from the Provident acquisition of approximately 40,800 and 59,600 lives for 1997 and 1996, respectively. 15 (8) Excludes managed care membership from the Provident acquisition. (9) Includes self-insured business from the Provident acquisition of approximately 1,703,000 and 2,026,000 lives for 1997 and 1996, respectively. Included in these totals are approximately 178,700 and 329,000 lives for 1996 and 1995, respectively, which were covered by minimum premium and retrospectively rated premium products where the Company shares risk with the employers and where the Company receives an insurance premium. Many of these employer accounts have managed care benefit designs. (10) Obtained through the Provident acquisition. (11) Consolidated medical loss ratios exclude unconsolidated plans (which for 1995 were ChubbHealth and CMHC and which for 1996 is ChubbHealth). (12) Average annual hospital bed days per 1,000 members exclude mental health/substance abuse and are presented for HMOs owned or significantly co-owned by Healthsource, which excludes ChubbHealth. EX-99.8 9 EMPLOYMENT AGREEMENT - ROBERT CHIN 1 HEALTHSOURCE 54 Regional Drive P.O. Box 2041 Concord, NH 03302-2041 Phone 603-225-5077 1-800-531-3121 July 30, 1993 Mr. Robert Chin 38 Cranberry Circle Sudbury, MA 01776 Dear Bob: Confirming our discussions, we would like to formally offer you the full-time position of Vice President of Information Systems reporting to the President and Chief Executive Officer with a start date anytime prior to December 7, 1993, at your election. The following are the terms of your employment with Healthsource. You will be compensated at a biweekly salary of $6,153.85 ($160,000 annually). You shall also receive a sign-on bonus of ten (10) percent of your salary. In addition, you will receive (1) a $10,000 stipend for moving expenses when you relocate your principal residence to New Hampshire. The decision and time frame for the relocation to New Hampshire shall be entirely up to you; (2) an option to acquire 2,000 shares of Healthsource, Inc. stock over a five (5) year period, not exercisable before two (2) years, at a price equal to 110 percent (110%) of the closing market price on the day your employment understanding is confirmed with the Company, all pursuant to Healthsource's 1991 stock option plan; (3) all other routine employee benefits provided to senior management in the Company including but not limited to health, life, dental and professional liability insurance, and the opportunity to participate in the Company 401(k) plan, once eligible, and stock purchase plan (currently in development). The proposed compensation package also includes: - The Healthsource New Hampshire HMO for you, or, at a small cost to you, the Healthsource New Hampshire HMO or our indemnity product for you and your family. 2 July 30, 1993 Mr. Robert Chin Page 2 - A combination of paid days for holiday, vacation, and sick days of 36 which means that 3.0 days accrue each month. - A Life Insurance Policy worth two times your salary. - Short Term and Long Term Disability policies. - Dental Insurance. This employment offer is irrevocable for a period of thirty (30) days following the date of the offer letter. Should your employment be terminated by the Company, you would receive six (6) months' salary in severance pay if termination was for "cause" and twelve (12) months' salary in severance pay if the termination was "without cause." On an annual basis, you will be eligible for increases in your salary and for further awards of stock options. Please know that an executive compensation plan is currently in the development stages that will include incentives and bonuses. We will need you to sign the attached non-compete, no solicitation agreement as part of our final understanding. We are very enthusiastic about your joining us. Sincerely, /s/ Anne Golden - ------------------------------ Anne Golden /s/ Robert Chin Vice President Human Resources ------------------------------------ Robert Chin 3 HEALTHSOURCE 54 Regional Drive P.O. Box 2041 Concord, NH 03302-2041 Phone 603-225-3077 1-800-531-3121 NON-COMPETITION/NO SOLICITATION AGREEMENT (A) Employee may not during his employment with Healthsource, and for a period of one (1) year after termination of his employment, be employed by, consult with, operate, own, control or otherwise be directly or indirectly involved in a corporation or other enterprise engaged in the HMO managed care or other health care financing or third party administration business located or operating within New Hampshire or in any Proscribed Area (as defined below) where Healthsource or any of its affiliates then has active prospects or existing business relationships which perform the services performed by Healthsource or any of its affiliates. Proscribed Area shall mean the area within a radius of 100 aerial miles from the location of any plan or other business which is within the prohibition of the first sentence of this subsection. If any court of competent jurisdiction shall determine this covenant to be unenforceable upon the term or scope herein imposed, then this covenant shall nonetheless be enforceable by such court upon such shorter term, or within such lesser scope, as may be determined by the court to be reasonable and enforceable. (B) At all times while Employee is employed by Healthsource, and thereafter for a period of one (1) year, Employee shall not, directly or indirectly, employ, attempt to employ, recruit or otherwise solicit, induce or influence to leave his employment any employee of Healthsource or its affiliates. (C) Healthsource in addition to and not in limitation of its rights, shall be entitled to a permanent injunction in order to prevent or restrain any breach of this Agreement by Employee and any persons acting directly or indirectly for or with him. Employee waives any right to a jury trial concerning the enforcement of the covenants in this Agreement and consents to the jurisdiction of Merrimack County Superior Court with respect to disputes hereunder. (D) Employee acknowledges that in and as a result of his employment hereunder, he will be making use of, acquir- 4 ing, or adding to confidential information of a special nature and value relating to such matters as Healthsource's systems, procedures, manuals, confidential reports, and lists of customers, as well as the nature and type of services rendered by Healthsource. As a material inducement to Healthsource to enter into this Agreement, Employee covenants and agrees that he shall not, at any time during or following the term of his employment, divulge or disclose for a period of one (1) year from termination of employment for any purpose whatsoever any confidential information that has been obtained by, or disclosed to, him as a result of his employment by Healthsource. In the event of a breach or threatened breach by Employee of any of the provisions of this paragraph, Healthsource, in addition to and not in limitation of, any other rights, remedies, or damages available to Healthsource at law or in equity, shall be entitled to a permanent injunction in order to prevent or restrain any such breach by Employee or by Employee's partners, agents, representatives, servants, employers, employees, or any and all persons directly or indirectly acting for or with him. Accepted and Agreed to: /s/ Robert Chin - ----------------------------- Robert Chin EX-99.9 10 EMPLOYMENT AGREEMENT - FRANCIS MIDDLETON, M.D. 1 EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 1st day of January, 1995 by and between Healthsource, Inc., a corporation organized under the laws of the State of New Hampshire ("Healthsource"), and Francis G. Middleton, M.D. ("Middleton"). RECITALS WHEREAS, Healthsource is engaged in the operation of a health maintenance organization and other managed health care programs and operations, as well as health insurance companies, third party administrators, and utilization review organizations; and WHEREAS, Healthsource wishes to engage Middleton's as an employee of Healthsource or a subsidiary designated by Healthsource; NOW THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the parties agree as follows: 1. Employment. Healthsource agrees that it or one of its subsidiaries shall employ Middleton and Middleton agrees to be employed by Healthsource or its designated subsidiary, upon the terms and conditions set forth in this Agreement. 2. Duties. Middleton shall assume the title, function and duties of President of Healthsource South, which generally shall mean development, management and oversight of the Healthsource subsidiaries based in the southern portion of the United States, as designated by and under the direction and control of Healthsource's Board of Directors. Middleton shall devote his full time to performance of his duties as specified in this Agreement. 3. Compensation. For all services rendered by Middleton under this Agreement, Healthsource (or the subsidiary designated by Healthsource as Middleton's employer) shall compensate Middleton as set forth in this Section 3: 2 3.1 Salary. Healthsource (or the subsidiary designated by Healthsource as Middleton's employer) shall pay Middleton an annual salary of $285,000, provided that, after the first year of this Agreement, Middleton shall be eligible for salary increases which shall be determined in the discretion of the Board of Directors of Healthsource in accordance with criteria applied to other Healthsource senior executives generally ("Base Salary"). The Base Salary will be paid in 26 equal installments. 3.2 Additional Compensation. In lieu of any Board stipends and fees for attendance at Board of Directors meetings of Healthsource and its subsidiaries, all rights to which Middleton hereby waives, Healthsource (or the subsidiary designated by Healthsource as Middleton's employer) shall pay Middleton additional compensation of $35,000 annually. This additional compensation will be paid with the Base Salary. 3.3 Bonus Compensation. Middleton will be eligible for an annual bonus of up to twenty percent (20%) of the Base Salary. Bonus compensation, if any, will be determined by the Healthsource Board of Directors based on company performance, Middleton's performance, or such other criteria as determined by the Healthsource Board of Directors in its sole discretion. Payment of bonus compensation, if any, will be made at such time and in such manner as determined by the Healthsource Board of Directors. 3.4 Fringe Benefits. Middleton shall be entitled to participate in all fringe benefits generally made available to senior management, as such benefits may be established, amended or discontinued from time to time, including the following employee benefits: 4.1 The Healthsource South Carolina, Inc. HMO (or indemnity or other reasonably equivalent coverage from another Healthsource subsidiary) for Middleton and his family at a cost to Middleton in accordance with Healthsource's regular policy for its senior management. 4.2 Three (3) weeks fully paid vacation during each calendar year, at such times as will not unreasonably interfere with Middleton's performance of his duties under this Agreement. 2 3 4.3 Middleton shall be entitled to participate in the 401k deferred compensation plan, in effect on January 1, 1995, in accordance with its terms as they may be amended from time to time, provided that nothing herein shall prevent Healthsource from terminating such 401k plan in whole or in part. 3.5 Stock Options. Middleton shall be eligible to receive options to purchase stock of Healthsource, Inc. in accordance with Healthsource stock option plans or policies for key or senior management employees as are in effect from time to time, and as determined by the Board of Directors of Healthsource in its sole discretion. 4. Reimbursement of Expenses. Healthsource (or the subsidiary designated by Healthsource as Middleton's employer) shall reimburse Middleton for travel and other expenses reasonably and necessarily incurred in the performance of his duties in accordance with Healthsource's normal documentation procedure. 5. Termination. 5.1 Without Cause Termination. This Agreement may be terminated by either party, at will, without cause, by giving sixty (60) days prior written notice to the other. If termination is accomplished in this manner the effective date of termination shall be the 60th day following receipt of the termination notice. 5.2 Termination on Change of Control. Within ninety (90) days following a Change of Control of Healthsource, to a party not "affiliated with" Healthsource, Middleton may elect to terminate this Agreement by providing sixty (60) days advance written notice to Healthsource (or its successor in interest). For purposes of this Agreement, "Change of Control" of Healthsource shall be deemed to occur if Healthsource shall merge or consolidate with, or transfer substantially all of its assets to, another corporation, association or business or person not affiliated with Healthsource or an affiliate of Healthsource. For purposes of this Agreement, "affiliate" or "affiliated with" Healthsource shall mean any person or entity which owns or in which Healthsource or any "affiliated" of Healthsource owns at least a five percent (5%) interest, or with which 3 4 Healthsource or any affiliate of Healthsource has a management agreement in effect to manage such person's or entity's business. 5.3 For-Cause Termination. Healthsource (or the subsidiary designated by Healthsource as Middleton's employer) may terminate this Agreement, for cause, if: 3.1 Middleton is convicted by a court of competent jurisdiction of any criminal offense involving dishonesty, breach of trust or other act of moral turpitude. 3.2 Middleton shall commit an act of fraud upon, or materially evidence bad faith toward, Healthsource. 3.3 Middleton willfully refuses to perform the duties reasonably assigned to him by the Board of Directors of Healthsource consistent with his duties as described in this Agreement, after notice and opportunity for thirty (30) days to cure such willful refusal. 6. Middleton's Obligations Upon Termination. 6.1 Middleton. Upon termination of this Agreement, all records created or maintained by Middleton in the course of his employment shall remain the property of Healthsource and be returned to Healthsource. 6.2 Non Disclosure of Information. 2.1 Middleton acknowledges that as a consequence of his employment under this Agreement, he has been and will be given access to confidential information relating to valued physicians, subscribers, and customers of Healthsource subsidiaries, and such other confidential matters as Healthsource's systems, procedures, manuals, confidential reports, and the nature and type of services rendered by Healthsource. In consideration of the covenants of Healthsource under this Agreement, Middleton agrees that while employed, and for a period of two (2) years after termination of this Agreement for any reason, he shall not disclose any confidential information to third persons, except for the benefit of Healthsource and its subsidiaries, or in the course of 4 5 performing his duties. If any court of competent jurisdiction shall determine this covenant to be unenforceable upon the term or scope set forth in this subsection 6.2.1, then this covenant shall nonetheless be enforceable by such court for such shorter term or within such lesser scope as may be determined by the court to be reasonable and enforceable. Middleton shall execute the Healthsource Confidentiality Statement annexed hereto as attachment 1. In the event of any inconsistency between the Confidentiality Statement and this Agreement, the terms of this Agreement shall prevail. 6.3 Non-Compete. Upon termination of this Agreement for any reason, Middleton agrees that, for a period of one (1) year following the date of termination, he shall not be employed by or associated with (as employee, consultant, director, officer or shareholder) any company which engages in the HMO, HMO management, preferred provider organization, physician hospital organization, integrated delivery system, utilization review or other managed care business in any state in which Healthsource or any affiliate of Healthsource is engaged in business or is engaged in discussions or negotiations regarding any such business as of the effective date of termination; provided, however, that such restriction shall not apply to Middleton's status as a participating provider for any such company, or employment in the field of hospital administration. If any court of competent jurisdiction shall determine this covenant to be unenforceable upon the term or scope set forth in this Section 6.3, then this covenant shall nonetheless be enforceable by such court for such shorter term or within such lesser scope as may be determined by the court to be reasonable and enforceable. 6.4 Injunctive Relief. In the event that Middleton breaches or threatens to breach the covenants contained in Article 6, Healthsource (or the subsidiary designated by Healthsource as Middleton's employer) shall, without limitation, be entitled to an injunction restraining Middleton (and any person acting for or on behalf of Middleton) from disclosing in whole or in part any such confidential information of Healthsource (or the subsidiary designated by Healthsource as Middleton's employer). Nothing herein shall be construed as prohibiting Healthsource from pursuing and obtaining any other 5 6 remedies available to it for such breach or threatened breach. 6.5 Survival. The rights and obligations contained in this Section 6 shall survive termination of this Agreement for any reason. 7. Healthsource's Obligations Upon Termination. 7.1 Severance. 1.1 In the event that Healthsource (or any successor in interest) terminates this Agreement under Section 5.1, Healthsource (or its successor in interest) shall pay Middleton three hundred thousand dollars ($300,000), plus an additional two (2) months Base Salary for each calendar year or portion of a calendar year that this Agreement remains in effect up to a maximum of twelve (12) months; provided that Middleton complies with the obligations set forth in Article 6. 1.2 In the event that Middleton terminates this Agreement under Section 5.2, Healthsource (or its successor in interest) shall pay Middleton five hundred thousand dollars ($500,000); provided that Middleton complies with the obligations set forth in Article 6, plus an additional two (2) months Base Salary for each calendar year or portion of a calendar year that this Agreement remains in effect up to a maximum of twelve (12) months; provided that Middleton complies with the obligations set forth in Article 6. 7.2 Survival. The rights and obligations contained in this Section 7 shall survive termination of this Agreement for any reason. 8. Miscellaneous. 8.1 Amendments. This Agreement may be modified only by a writing executed by the parties hereto. 8.2 Integration. This Agreement supersedes all prior agreements and understandings of the parties as to the employment of Middleton by Healthsource or any affiliate of Healthsource, including but not limited to the Employment Agreement by and among Physician's Health Systems, Inc., Healthsource South Carolina, Inc. and 6 7 Middleton dated as of July 1991 (the "PHS Agreement") and the Employment Agreement by and between Healthsource, Inc. and Middleton dated as of February 1, 1994 (the "Healthsource Agreement"). Healthsource and Middleton agree that the PHS Agreement and the Healthsource Agreement are hereby terminated, and that all obligations set forth in th PHS Agreement and the Healthsource Agreement have been satisfied and that, notwithstanding anything to the contrary neither party (nor their affiliates) has any further obligation to each other under such agreements. 8.3 Captions. All captions used herein are for purposes of convenience only and shall not be referred to in construing this Agreement. 8.4 Governing Law. This Agreement shall be governed, construed and enforced in accordance with the internal laws of the State of New Hampshire, without regard to conflicts of interest. The parties agree that any action brought in connection with this Agreement shall be maintained only in a state or federal court of competent subject matter jurisdiction located within the state in which Middleton resides. 8.5 Waiver of Breach. The failure by either party to insist upon strict compliance with any of the terms, conditions, or covenants contained herein shall not be deemed a waiver of any such terms, conditions or covenants; nor shall any waiver any one or more times be deemed a waiver at any other time or times. 8.6 Severability. The provisions of this Agreement are severable and the invalidity of any term or provision of this Agreement shall not invalidate any other term or provision of this Agreement. 8.7 Succession. This Agreement shall be binding upon the parties hereof, their heirs, estates, assigns, transferees and successors in interest. Middleton's duties shall be non-delegable and non-assignable. 8.8 Notice. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail or courier, with a signed receipt required, as follows: 7 8 To Healthsource: Healthsource, Inc. 2 College Park Drive Hooksett, NH 03106 ATTN: Vice President, Human Resources with a copy to: Healthsource, Inc. 2 College Park Drive Hooksett, NH 03106 ATTN: General Counsel To Middleton: Francis G. Middleton, M.D. 215 East Bay Street Charleston, SC 29401 with a copy to: T. Hayward Carter, Jr. Evans, Carter, Canes and Grant, P.A. 151 Meetinghouse Street, Suite 145 P.O. Box 369 Charleston, SC 29402-0369 or to such other persons as may from time to time be designated by either of the parties hereto in writing. 8.9 Corporate Authority. Healthsource and Middleton warrant that all necessary corporate actions have been taken to authorize them to enter into this Agreement. 8.10 Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement. 8.11 Guarantee. In the event that Healthsource designates a subsidiary as Middleton's employer, Healthsource hereby guarantees satisfaction by the subsidiary of the obligations set forth in this Agreement. 8 9 IN WITNESS WHEREOF, Middleton and Healthsource, by its duly authorized representative, have executed this Agreement as of the date first written above. HEALTHSOURCE, INC. FRANCIS G. MIDDLETON, M.D. BY: /s/ Norman C. Payson BY: /s/ Francis G. Middleton, M.D. ----------------------------- ------------------------------- Norman C. Payson, M.D. Francis G. Middleton, M.D. President and Chief Executive Officer 10 HEALTHSOURCE, INC. Two College Park Drive Hooksett, New Hampshire 03106 February 5, 1997 Francis G. Middleton, M.D. Healthsource South, Inc. 146 Fairchild Street Charleston, SC 29492 Dear Frank: This letter will correct a scrivener's error in your Employment Agreement dated as of January 1, 1995. The severance provision of Paragraph 7.1.2 was intended to provide for the base amount of $500,000 plus an additional two (2) months salary for each year of your full-time employment with Healthsource, i.e., from July 1, 1991, not from the date of the 1995 Agreement as literally stated. Sincerely, /s/ Norman C. Payson - ----------------------------- Norman C. Payson, M.D. Accepted: /s/ Francis J. Middleton - ----------------------------- Francis J. Middleton, M.D. EX-99.10 11 EMPLOYMENT AGREEMENT - JOSEPH ZUBRETSKY 1 EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 25th day of June, 1996 by and between Healthsource, Inc., a corporation organized under the laws of the State of New Hampshire ("Healthsource") and Joseph M. Zubretsky ("Zubretsky"). RECITALS WHEREAS, Healthsource is engaged in the operation of a health maintenance organization and other managed health care programs and operations, as well as health insurance companies, third party administrators, and utilization review organizations; and WHEREAS, Healthsource wishes to engage Zubretsky as its chief financial officer; NOW THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the parties agree as follows: 1. Employment. Healthsource agrees to employ Zubretsky and Zubretsky agrees to be employed by Healthsource, upon the terms and conditions set forth in this Agreement. 2. Duties. Zubretsky shall assume the title, function and duties of Chief Financial Officer which generally shall mean that he is responsible for financial affairs of Healthsource. Zubretsky shall report to the Chief Executive Officer of Healthsource, and shall have a functional relationship with the Executive Vice President of Healthsource, as the same shall be designated from time to time. Zubretsky shall devote his full time to performance of his duties as specified in this Agreement. 3. Compensation. For all services rendered by Zubretsky under this Agreement, Healthsource shall compensate Zubretsky as set forth in this Section 3: 3.1 Salary. Healthsource shall pay Zubretsky an annual salary of $325,000, provided that Zubretsky shall be eligible for salary adjustments which shall be determined in the discretion of Healthsource in accor- 2 dance with criteria applied to other Healthsource senior executives generally ("Base Salary"). The initial review of Base Salary will be made at January 1, 1997. The Base Salary will be paid in 26 equal installments. 3.2 Bonus Compensation. Zubretsky will be eligible for an annual bonus of up to thirty percent (30%), and a minimum of twenty percent (20%), of the Base Salary, the first review being at January 1, 1997. Bonus compensation, other than the minimum 20%, will be determined by Healthsource based on company performance, Zubretsky's performance, or such other criteria as determined by Healthsource in its sole discretion. Payment of bonus compensation, other than the minimum 20%, will be made at such time and in such manner as determined by Healthsource. 3.3 Fringe Benefits. Zubretsky shall be entitled to participate in all fringe benefits generally made available to senior management, as such benefits may be established, amended or discontinued from time to time. The fringe benefits made available to senior management as of the execution of this Agreement include: 3.1 The Healthsource New Hampshire health plan or other reasonably equivalent coverage from another Healthsource subsidiary for Zubretsky and his family at a cost to Zubretsky in accordance with Healthsource's regular policy for its senior management. 3.2 Thirty (30) paid leave days for each year of employment, accrued at two and one-half (2.5) days per month, which shall include holiday, vacation and sick days. 3.3 Participation in the Healthsource 401k deferred compensation plan in accordance with its terms as they may be amended from time to time, provided that nothing herein shall prevent Healthsource from terminating such 401k plan in whole or in part. 3.4 Stock Options. Upon commencement of employment, and confirmation by the Compensation Commit- tee of the Healthsource Board of Directors, Zubretsky shall receive 50,000 options to purchase the common stock of Healthsource, in accordance with the 1994 Healthsource Employee Stock Option Plan. Fifty percent (50%) of such 2 3 stock options shall vest on the first anniversary of the grant of the options by the Compensation Committee, and the remainder shall vest on the second anniversary of the grant of the options by the Compensation Committee. Thereafter, Zubretsky shall be annually considered for additional options in accordance with Healthsource stock option plans or policies for key or senior management employees as are in effect from time to time, and as determined by the Stock Option Plan Committee in its discretion, the first consideration being at January 1, 1997 for services provided during 1996. 4. Reimbursement of Expenses. Healthsource shall reimburse Zubretsky for travel and other expenses reasonably and necessarily incurred in the performance of his duties in accordance with Healthsource's normal documen- tation procedure. 5. Term and Termination. 5.1 Term of Agreement. The term of this Agreement shall be for an initial term commencing in July, 1996 and ending December 31, 1997, unless this Agreement shall be terminated as provided below. Employment shall continue from year to year thereafter, unless one party provides the other with notice of an intent not to renew this Agreement no less than sixty (60) days before the beginning of the next renewal term or unless terminated as provided below. 5.2 Without Cause Termination. This Agreement may be terminated by either party, at will, without cause, by giving sixty (60) days prior written notice to the other. If termination is accomplished in this manner the effective date of termination shall be the 60th day following receipt of the termination notice. 5.3 For-Cause Termination. Healthsource may terminate this Agreement immediately, for cause, in the event of: 3.1 Conviction of Zubretsky by a court of competent jurisdiction of any criminal offense involving dishonesty, breach of trust or other act of moral turpitude; 3 4 3.2 Commission by Zubretsky of an act of fraud upon, or materially evidencing bad faith toward, Healthsource; 3.3 Death of Zubretsky; 3.4 Disability of Zubretsky, provided that he is unable to perform the necessary functions of his job for a period of ninety (90) days. 6. Zubretsky's Obligations Upon Termination. 6.1 Non Disclosure of Information. Zubretsky acknowledges that as a consequence of his employment under this Agreement, he has been and will be given access to confidential information including but not limited to information relating to valued physicians, subscribers, and customers of Healthsource subsidiaries, and such other confidential matters as Healthsource's systems, procedures, manuals, confidential reports, and the nature and type of services rendered by Healthsource. In consideration of the covenants of Healthsource under this Agreement, Zubretsky agrees that anytime during or following the term of the Agreement, he shall not directly or indirectly disclose any confidential information to third persons except for the benefit of Healthsource and its subsidiaries, or in the course of performing his duties. In addition, Zubretsky agrees that all records created or maintained by Zubretsky in the course of his employment shall remain the property of Healthsource and Zubretsky shall, upon termination of his employment, immediately return all such records, without maintaining any copies, to Healthsource. Zubretsky shall execute the Healthsource Confidentiality Statement annexed hereto as Attachment 1. In the event of any conflict between the Confidentiality Statement and this Agreement, the terms of this Agreement shall prevail. If any court of compe- tent jurisdiction shall determine this covenant to be unenforceable then this covenant shall nonetheless be enforceable by such court for such lesser scope as may be determined by the court to be reasonable and enforceable. 6.2 Non-Compete. Upon termination of this Agreement for any reason, Zubretsky agrees that, during the term of this Agreement and for a period of one (1) year following the date of termination, he shall not be employed by or associated with (as employee, consultant, 4 5 director, officer or shareholder) any company which engages in the HMO, HMO management, preferred provider organization, physician-hospital organization, integrated delivery system, utilization review or other managed care business in any state in which Healthsource or any affiliate of Healthsource is engaged in business or is engaged in discussions or negotiations regarding any such business as of the effective date of termination. However, Zubretsky may return to employment with Coopers & Lybrand LLP and not be in violation of this non-compete clause. If any court of competent jurisdiction shall determine this covenant to be unenforceable upon the term or scope set forth in this Section 6.2, then this covenant shall nonetheless by enforceable by such court for such shorter term or within such lesser scope as may be determined by the court to be reasonable and enforceable. 6.3 Injunctive Relief. In the event that Zubretsky breaches or threatens to breach the covenants contained in Article 6, Healthsource shall, without limitation, be entitled to an injunction restraining Zubretsky (and any person acting for or on behalf of Zubretsky) from disclosing in whole or in part any such confidential information of Healthsource and from competing with Healthsource. Nothing herein shall be construed as prohibiting Healthsource from pursuing and obtaining any other remedies available to it for such breach or threatened breach. 6.4 Survival. The rights and obligations contained in this Article 6 shall survive termination of this Agreement for any reason. 7. Healthsource's Obligation Upon Termination. 7.1 Severance. 7.1.1 In the event that Healthsource (or any successor in interest) issues a notice of intent not to renew this Agreement under Section 5.1 or terminates this Agreement without cause under Section 5.2, Healthsource (or its successor in interest) shall pay Zubretsky the Base Salary in effect immediately prior to termination for a period of two (2) years, provided that Zubretsky complies with the obligations set forth in Article 6. 5 6 1.2 Notwithstanding subsection 7.1.1, if Healthsource (or a successor in interest) terminates this Agreement without cause under Section 5.2 within one hundred eighty (180) days following a Change in Control of Healthsource, or in any way reduces the authority or status of Zubretsky (by way of example, making Zubretsky chief financial officer of a subsidiary but not the surviving corporation) then Healthsource (or its successor in interest) shall pay Zubretsky the Base Salary in effect immediately prior to termination for a period of two years and 364 days. For purposes of this Section 7.1, a Change in Control is a change of greater than one-half of the Healthsource Board of Directors at one time, or the sale of a majority of stock or substantially all of the assets of Healthsource, or a merger or exchange of stock with another company in which at least 30% of Healthsource stock is issued or exchanged for another Company's stock or the purchase of assets or stock of another company the value of which is greater or equal to 30% of the market value of Healthsource stock. 1.3 Zubretsky is not entitled to severance benefits if Healthsource (or any successor in interest) terminates this Agreement for cause under Section 5.3, or if Zubretsky submits a notice of intent not to renew this Agreement under Section 5.1 or voluntarily resigns; provided, however, that Zubretsky shall be entitled to severance benefits under subsection 7.1.1 if he terminates this Agreement within one hundred eighty (180) days after a Change in Control of Healthsource, pursuant to which his job title or duties are diminished, including but not limited being designated only as the chief financial officer of a subsidiary of Healthsource or its successor, as described in paragraph 7.1.2. 7.2 Survival. The rights and obligations contained in this Section 7 shall survive termination of this Agreement for any reason. 8. Miscellaneous. 8.1 Amendments. This Agreement may be modified only by a writing executed by the parties hereto. 8.2 Integration. This Agreement supersedes all prior agreements and understandings of the parties as to the employment of Zubretsky by Healthsource or any 6 7 affiliate of Healthsource, except for the letter from Norman C. Payson M.D. dated June 25, 1996. 8.3 Captions. All captions used herein are for purposes of convenience only and shall not be referred to in construing this Agreement. 8.4 Governing Law. This Agreement shall be governed, construed and enforced in accordance with the internal laws of the State of New Hampshire, without regard to conflicts of interest. The parties agree that any action brought in connection with this Agreement shall be maintained only in a State or federal court of competent subject matter jurisdiction located within the state of New Hampshire. 8.5 Waiver of Breach. The failure by either party to insist upon strict compliance with any of the terms, conditions, or covenants contained herein shall not be deemed a waiver of any such terms, conditions, or covenants; nor shall any waiver any one or more times be deemed a waiver at any other time or times. 8.6 Severability. The provisions of this Agreement are severable and the invalidity of any term or provision of this Agreement shall not invalidate any other term or provision of this Agreement. 8.7 Succession. This Agreement shall be binding upon the parties hereof, their heirs, estates, assigns, transferees and successors in interest. Zubretsky's duties shall be non-delegable and non-assignable. 8.8 Notice. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail or courier, with a signed receipt required, as follows: To Healthsource: Healthsource, Inc. 2 College Park Drive Hooksett, New Hampshire 03106 ATTN: Vice President, Human Resources 7 8 with a copy to: Healthsource, Inc. 2 College Park Drive Hooksett, New Hampshire 03106 ATTN: General Counsel To Zubretsky: Joseph M. Zubretsky 14 Sturbridge Lane Avon, Connecticut 06001 or to such other persons as may from time to time be designated by either of the parties hereto in writing. 8.9 Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement. IN WITNESS WHEREOF, Zubretsky and Healthsource, by its duly authorized representative, have executed this Agreement as of the date first written above. HEALTHSOURCE, INC. JOSEPH M. ZUBRETSKY BY: /s/ Norman C. Payson BY: /s/ Joseph M. Zubretsky ------------------------------- --------------------------------- Norman C. Payson, M.D. Joseph M. Zubretsky President and Chief Executive Officer 8 EX-99.11 12 EMPLOYMENT AGREEMENT - CHARLES SCHNEIDER 1 EXHIBIT 11 [HEALTHSOURCE LETTERHEAD] July 19, 1996 OVERNIGHT MAIL Mr. Charles M. Schneider 298 North Watauge Lookout Mountain, Tennessee 37350 RE: FOLLOW UP ON YOUR BENEFIT PACKAGE AS PART OF YOUR RELOCATION "THE PARACHUTE" Dear Chuck: I wanted to reassure you in writing, to confirm our earlier discussions, that in addition to your salary increase, options and other benefits that were approved by the Healthsource, Inc. Board that in the event Healthsource terminates your employment without cause or in the event of a change in control (as defined in the stock option plan) and provided that such change in control materially adversely alters your duties or salary within ninety (90) days of such change in control, Healthsource or its successor will pay you for two years from the date of the termination at the base salary in effect at the time of the termination. In the frantic last few days, I can't even recall if I told you how much the Board (and me most of all) appreciate the enormous personal sacrifice of you and Sandra to relocate back to New Hampshire. It will be extremely valuable to the Corporation to have us all together and the Board acknowledges and is very grateful for your singular commitment to our enterprise. I hope your move in the next week goes smoothly. Best regards, /s/ Norman C. Payson Norman C. Payson, M.D. President and Chief Executive Officer NCP/dsl bcc: Rich Merkle EX-99.12 13 EMPLOYMENT AGREEMENT - RICHARD SALMON, M.D., PHD. 1 HEALTHSOURCE, INC. Two College Park Drive Hooksett, New Hampshire 03106 February 14, 1997 Dick Salmon, M.D., Ph.D. 105 Tidewater Farm Road Stratham, NH 03885 Dear Dick: This letter of agreement confirms your transition to Senior Vice President of Medical Affairs. 1. Annual Salary for 1997 to be determined. Your 1996 salary was $225,000. 2. Annual Performance Based Bonus for 1996 to be determined, maximum potential 25%. 3. Stock Option Plan Participation in the stock option plan on the same basis as other senior management executives. 4. Benefits Healthsource benefits at the same level as our other executives. 5. Termination This agreement may be terminated at will with or without cause by you upon thirty (30) days written notice. If you terminate this agreement, you shall not be eligible for any severance benefits and shall not have the right to exercise any stock options in which you are not fully vested. The non-competition agreement shall, however, remain in force. Should your employment be terminated with or without cause, or have your duties and responsibilities materially altered, you will be provided with twelve (12) months of salary continuation at your salary of record at that time or your 1996 salary (whichever 2 HEALTHSOURCE, INC. Two College Park Drive Hooksett, New Hampshire 03106 DICK SALMON, M.D., PH.D. February 14, 1997 Page 2 is greater) plus your bonus eligibility of record. An additional month of salary continuation will be given for each year of full-time employment. 6. Protection of Proprietary Information and Non-compete In your position with Healthsource, you will have access to and become familiar with Healthsource trade secrets, business practices and strategies (such as marketing and provider development strategies and financing, many of which have been developed over time and at great expense), and confidential information regarding customers, patients, and health care practitioners. It would be extremely prejudicial to Healthsource for this information to be made directly or indirectly available to competitors, or for it to be used to Healthsource's disadvantage in the managed care marketplace. In order to protect Healthsource from such potential harm, you agree that during the time of your employment with Healthsource, any of its affiliates, or successors, and for six (6) months thereafter, you will not, on your own behalf or for any other person or employer, compete or aid competition in any capacity with Healthsource and/or any of its affiliates in any state in which Healthsource or one of its affiliates is operating. This "Covenant Not to Compete" is material to Healthsource and our offer of employment is contingent on your agreement to the Covenant. Your acceptance of our offer will automatically include acceptance of the Covenant and acknowledgement that it is reasonable. You also agree that we can enforce the Covenant by asking a court for an injunction to prevent a breach of the Covenant, and/or to assess money damages for its breach that is based on damages caused to Healthsource by your breach of the Covenant Not to Compete. A court is empowered to 3 HEALTHSOURCE, INC. Two College Park Drive Hooksett, New Hampshire 03106 DICK SALMON, M.D., PH.D. February 14, 1997 Page 3 restrict the scope of the Covenant if it finds that it is too broad and to enforce it as restricted. 7. Non-solicitation As an additional condition of your employment on the terms set forth above, during your employment and for a period of one (1) year thereafter, you shall not, directly or indirectly, employ, attempt to employ, recruit or otherwise solicit, induct or influence to leave his/her employment any employee of Healthsource or its subsidiaries. We are very pleased with your continued employment with Healthsource. Sincerely, /s/ Norm Payson - ----------------------------- Norm Payson, M.D. President and Chief Executive Officer /kmc By signing below, I indicate my acceptance of the terms of this employment agreement. /s/ Dick Salmon 2/14/97 ----------------------------------------- EX-99.13 14 DEFERRED COMPENSATION PLAN FOR SELECTED EMPLOYEES 1 THE HEALTHSOURCE DEFERRED COMPENSATION PLAN FOR SELECTED EMPLOYEES Effective October 15, 1995 2 TABLE OF CONTENTS Purpose......................................................................1 ARTICLE 1 Definitions..................................................................1 ARTICLE 2 Eligibility and Enrollment......................................6 2.1 Participation...................................................6 2.2 Enrollment Requirements.........................................6 2.3 Commencement of Participation...................................6 2.4 Termination of Participation and/or Deferrals...................7 ARTICLE 3 Deferral Commitments/Interest Crediting/Taxes...................7 3.1 Minimum Deferral................................................7 3.2 Maximum Deferral................................................8 3.3 Election to Defer; Effect of Election Form......................8 3.4 Withholding of Deferral Amounts.................................8 3.5 Employer Credits................................................9 3.6 Interest Crediting..............................................9 3.7 Interesting Crediting for Installment Distributions.............9 3.8 FICA and Other Taxes............................................9 ARTICLE 4 Short-Term Payout; Withdrawals.................................10 4.1 Short-Term Payout..............................................10 4.2 Other Benefits Take Precedence Over Short-Term Payout..........10 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies....................................................10 4.4 Withdrawal Election............................................11 ARTICLE 5 Retirement Benefit.............................................11 5.1 Retirement Benefit.............................................11 5.2 Payment of Retirement Benefit..................................11 5.3 Death Prior to Completion of Retirement Benefit................11 ARTICLE 6 Pre-Retirement Survivor Benefit................................12 6.1 Pre-Retirement Survivor Benefit................................12 6.2 Payment of Pre-Retirement Survivor Benefit.....................12 ARTICLE 7 Termination Benefit............................................12 7.1 Termination Benefit............................................12 7.2 Payment of Termination Benefit.................................13 -ii- 3 ARTICLE 8 Disability Waiver and Benefit................... 13 8.1 Disability Waiver............................... 13 8.2 Continued Eligibility; Disability Benefit....... 13 ARTICLE 9 Beneficiary Designation......................... 14 9.1 Beneficiary..................................... 14 9.2 Beneficiary Designation......................... 14 9.3 Acknowledgment.................................. 14 9.4 No Beneficiary Designation...................... 14 9.5 Doubt as to Beneficiary......................... 14 9.6 Discharge of Obligations........................ 15 ARTICLE 10 Leave of Absence................................ 15 10.1 Paid Leave of Absence........................... 15 10.2 Unpaid Leave of Absence......................... 15 ARTICLE 11 Termination, Amendment or Modification.......... 15 11.1 Termination..................................... 15 11.2 Amendment....................................... 16 11.3 Plan Agreement.................................. 17 11.4 Effect of Payment............................... 17 ARTICLE 12 Administration.................................. 17 12.1 Committee Duties................................ 17 12.2 Agents.......................................... 17 12.3 Binding Effect of Decisions..................... 17 12.4 Indemnity of Committee.......................... 17 12.5 Employer Information............................ 17 ARTICLE 13 Other Benefits and Agreements................... 18 13.1 Coordination with Other Benefits................ 18 ARTICLE 14 Claims Procedures............................... 18 14.1 Presentation of Claim........................... 18 14.2 Notification of Decision........................ 18 14.3 Review of a Denied Claim........................ 19 14.4 Decision on Review.............................. 19 14.5 Legal Action.................................... 19 ARTICLE 15 Trust........................................... 20 15.1 Establishment of the Trust...................... 20 15.2 Interrelationship of the Plan and the Trust..... 20 15.3 Distribution From the Trust..................... 20 -iii- 4 ARTICLE 16 Miscellaneous................................ 20 16.1 Limitation on Benefit Payment................ 20 16.2 Status of Plan............................... 21 16.3 Unsecured General Creditor................... 21 16.4 Employer's Liability......................... 21 16.5 Nonassignability............................. 21 16.6 Not a Contract of Employment................. 21 16.7 Furnishing Information....................... 22 16.8 Terms........................................ 22 16.9 Captions..................................... 22 16.10 Governing Law................................ 22 16.11 Notice....................................... 22 16.12 Successors................................... 22 16.13 Spouse's Interest............................ 22 16.14 Validity..................................... 23 16.15 Incompetent.................................. 23 16.16 Court Order.................................. 23 16.17 Distribution in the Event of Taxation........ 23 -iv- 5 THE HEALTHSOURCE DEFERRED COMPENSATION PLAN FOR SELECTED EMPLOYEES Effective October 15, 1995 Purpose The purpose of this Plan is to provide specified benefits to a select group of highly compensated Employees who contribute materially to the continued growth, development and future business success of Community Choice Physicians, Healthsource Physician Group, Inc. and any other Healthsource Company, if any, that adopts this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. ARTICLE 1 DEFINITIONS For purposes hereof, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean (i) the Deferral Amount, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of this Plan, less (iii) all distributions. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant pursuant to this Plan. 1.2 "Annual Bonus" shall mean any compensation, in addition to Base Annual Salary, paid annually to a Participant as an Employee under any Employer's annual bonus and incentive plans. 1.3 "Annual Deferral Amount" shall mean that portion of a Participant's Base Annual Salary and/or Annual Bonus that a Participant elects to have deferred in accordance with Article 3, for any one Plan Year, together with any Employer credit made to the Participant's Account Balance pursuant to Section 3.5 for such Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld (or credited pursuant to Section 3.5) prior to such event. -1- 6 1.4 "Base Annual Salary" shall mean the annual compensation, excluding bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, automobile and other allowances (whether or not such allowances are included in the Employee's gross income), paid to a Participant for employment services rendered. Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h) or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee. 1.5 "Beneficiary" shall mean one or more persons, trust, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.6 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.7 "Board" shall mean the board of directors of the Company. 1.8 "Bonus Rate" shall mean, for a Plan Year, an interest rate equal to 20% of the Crediting Rate determined for such Plan Year. 1.9 "Change in Control" shall mean the first to occur of any of the following events: (a) Any "person" (as that term is used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act")) becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of 50% or more of the Company's capital stock entitled to vote in the election of directors; (b) During any period of not more than two consecutive years, not including any period prior to the adoption of this Plan, individuals who, at the beginning of such period constitute the board of directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c), (d) or (e) of this Section 1.9) whose election by the board of directors or nomination for election by the Company's stockholders was approved by a vote of at least three-fourths (3/4ths) of the directors then still in -2- 7 office, who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof: (c) The shareholders of the Company approve any consolidation or merger of the Company, other than a consolidation or merger of the Company in which the holders of the common stock of the Company immediately prior to the consolidation or merger hold more than 50% of the common stock of the surviving corporation immediately after the consolidation or merger; (d) The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or (e) The shareholders of the Company approve the sale or transfer of substantially all of the assets of the Company to parties that are not within a "controlled group of corporations" (as defined in Code Section 1563) in which the Company is a member. 1.10 "Claimant" shall have the meaning set forth in Section 14.1. 1.11 "Code" shall mean the Internal Revenue Code of 1986, as may be amended from time to time. 1.12 "Committee" shall mean the committee described in Article 12. 1.13 "Company" shall mean Healthsource, Inc., a New Hampshire corporation, and any successor to all or substantially all of the Company's assets or business which assumes the obligations of the Company. 1.14 "Compensation" shall mean compensation as defined in the Healthsource, Inc. Retirement Savings Plan for purposes of determining Matching Contributions under that plan. 1.15 "Crediting Rate" shall mean, for each Plan Year, an interest rate, stated as an annual rate, determined and announced by the Committee before the Plan Year for which it is to be used that is equal to the applicable "Moody's Rate." The Moody's Rate for a Plan Year shall be an interest rate, stated as an annual rate, that (i) is published in Moody's Bond Record under the heading of "Moody's Corporate Bond Yield Averages -- Av. Corp." and (ii) is equal to the average corporate bond yield calculated for the October preceding the Plan Year for which the rate is to be used: -3- 8 provided, however, that for the first Plan Year of the Plan, such rate shall be equal to the average corporate bond yield calculated for September, 1995. 1.16 "Deferral Amount" shall mean the sum of all of a Participant's Annual Deferral Amounts. 1.17 "Deduction Limitation" shall mean the limitation described in Section 16.1 on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. 1.18 "Disability" shall mean a period of disability during which a Participant qualifies for permanent disability benefits under the Participant's Employer's long-term disability plan, or, if a Participant does not participate in such a plan, a period of disability during which the Participant would have qualified for permanent disability benefits under such a plan had the Participant been a participant in such a plan, as determined in the sole discretion of the Committee. 1.19 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.20 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.21 "Employee" shall mean a person who is an employee of any Employer. 1.22 "Employer(s)" shall mean Community Choice Physicians and Healthsource Physicians Group, Inc. and any other Healthsource Company (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor. 1.23 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.24 "Healthsource Company" shall mean Healthsource, Inc., a New Hampshire corporation and any subsidiary of Healthsource, Inc. 1.25 "Matching Contribution" shall mean a matching contribution as defined in the Healthsource, Inc. Retirement Savings Plan. 1.26 "Participant" shall mean any Employee (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan -4- 9 Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan, even if he or she has an interest in the Participant's benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce. 1.27 "Plan" shall mean the Healthsource Deferred Compensation Plan for Selected Employees, which shall be evidenced by this instrument and by each Plan Agreement, as may be amended from time to time. 1.28 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant's Employer shall provide for the entire benefit to which such Participant is entitled to under the Plan, and the Plan Agreement bearing the latest date of acceptance by the Committee shall govern such entitlement. The terms of any Plan Agreement may be varied by Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant. 1.29 "Plan Year" shall, for the first Plan Year, begin on October 15, 1995, and end on December 31, 1995. For each Plan Year thereafter, the Plan Year shall begin on January 1 of each year and continue through December 31. 1.30 "Preferred Rate" shall mean, for each Plan Year, an interest rate that is the sum of the Crediting Rate and the Bonus Rate for that Plan Year. 1.31 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6. 1.32 "Retirement", "Retires" or "Retired" shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability on or after the earlier of the attainment of (a) age sixty-five(65) or (b) age fifty-five(55) with five (5) Years of Service. 1.33 "Retirement Benefit" shall mean the benefit set forth in Article 5. 1.34 "Short-Term Payout" shall mean the payout set forth in Section 4.1. 1.35 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.36 "Termination of Employment" shall mean the ceasing of employment with all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence. -5- 10 1.37 "Trust" shall mean the trust established pursuant to that certain Trust Agreement, effective as of October 15, 1995, between the Company and the trustee named therein, as amended from time to time. 1.38 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. 1.39 "Years of Deferral" shall mean, with respect to a Participant's Annual Deferral Amount for a Plan Year, the number of full Plan Years between the beginning of such Plan Year and the Participant's Termination of Employment. 1.40 "Years of Plan Participation" shall mean the total number of full Plan Years a Participant has been a Participant in the Plan prior to his or her Termination of Employment. For purposes of a Participant's first Plan Year of Participation only, any partial Plan Year of participation shall be treated as a full Plan Year. 1.41 "Years of Service" shall mean the total number of full years in which a Participant has been an Employee. Any partial year shall not be counted. ARTICLE 2 ELIGIBILITY AND ENROLLMENT -------------------------- 2.1 PARTICIPATION. Participation in the Plan shall be limited to a select group of highly compensated Employees of the Employers, as determined by the Committee, in its sole discretion. From that group, the Committee shall select, in its sole discretion, Employees to participate in the Plan. 2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each selected Employee shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form within 30 days of the later of (a) October 15, 1995 or (b) the day on which he or she is selected to participate in the Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines, in its sole discretion, are necessary. 2.3 COMMENCEMENT OF PARTICIPATION. Each selected Employee shall commence participation in the Plan upon satisfaction of all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents -6- 11 to the Committee within the required time frame. If a selected Employee fails to meet all such requirements within the required 30 day period, he or she shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents. 3.4 Termination of Participation and/or Deferrals. If the Committee determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the Plan Year in which the Participant's membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the Participant's then Account Balance as a Termination Benefit and terminate the Participant's participation in the Plan. If the Committee chooses not to terminate the Participant's participation in the Plan, the Committee may, in its sole discretion, reinstate the Participant to full Plan participation at such time in the future as the Participant again becomes a member of the select group described above. ARTICLE 3 Deferral Commitments/Interest Crediting/Taxes 3.1 Minimum Deferral (a) Minimum. For each Plan Year, a Participant may elect to defer one or more of the following forms of compensation in the following minimum amounts for each deferral elected: MINIMUM DEFERRAL AMOUNTS Base Annual Salary $2,000 Annual Bonus $2,000 If an election is made for less than stated minimum amounts, or if no election is made, the amount deferred shall be zero. (b) Short Plan Year. If a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the minimum Base Annual Salary deferral shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is -7- 12 the number of complete months remaining in the Plan Year and the denominator of which is 12. 3.2 Maximum Deferral. For each Plan Year, a Participant may elect to defer his or her Base Annual Salary and/or Annual Bonus up to the following maximum percentages for each deferral elected: MAXIMUM DEFERRAL PERCENTAGE Base Annual Salary 50% Annual Bonus 100% Notwithstanding the foregoing, if a selected Employee first becomes a participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the maximum Annual Deferral Amount shall be limited to the amount of compensation not yet earned by the Participant as of the later of October 15, 1995 or the date the Participant submits a Plan Agreement and Election Form that are accepted by the Committee. Moreover, the Committee, from time to time and in its sole discretion, may establish further limits regarding the percentage of a Participant's Base Annual Salary and/or Annual Bonus which may be deferred for a Plan Year. 3.3 Election to Defer: Effect of Election Form. (a) First Plan Year. In connection with a Participant's commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.3 above) and accepted by the Committee. (b) Subsequent Plan Years. For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering to the Committee, in accordance with its rules and procedures before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. if no Election Form is timely delivered for a Plan Year, there shall be no Annual Deferral Amount for the Plan Year. -8- 13 3.4 WITHHOLDING OF DEFERRAL AMOUNTS. For each Plan Year, the Base Annual Salary portion of the Annual Deferral Amount shall be withheld in equal amounts from each regularly scheduled Base Annual Salary payroll. The Annual Bonus portion of the Annual Deferral Amount shall be withheld at the time the Annual Bonus is or otherwise would be paid to the Participant. 3.5 EMPLOYER CREDITS. If, for a calendar year, a Participant elects to defer a percentage of his or her Compensation under the Healthsource, Inc. Retirement Savings Plan ("Healthsource 401(k) Plan") and the aggregate Matching Contributions made by the Participant's Employer under that plan for such year are less than the lesser of (i) 50% of the amounts deferred under the Healthsource 401(k) Plan for the year or (ii) 3% of the Participant's Compensation in such year, increased (but not beyond the $150,000 compensation limit, as adjusted from time to time under Code section 401(a)(17)) by the amounts deferred under this Plan for the year, then his or her Employer shall credit to his or her Account Balance under this Plan, as of the last day of such calendar year, the lesser of the amounts set forth in clauses (i) and (ii) above, reduced by the aggregate Matching Contributions made for the Participant under the Healthsource 401(k) Plan for the calendar year. 3.6 INTEREST CREDITING. Prior to any distribution of benefits under Article 4, 5, 6, 7 or 8, interest shall be credited and compounded annually on a Participant's Account Balance as though the Annual Deferral Amount for that Plan Year was withheld at the beginning of the Plan Year or, in the case of the first year of Plan participation, was withheld on the date that the Participant commenced participation in the Plan; provided, however, that any employer credit made under Section 3.5 for such Plan Year shall earn interest only from the end of such Plan Year. The rate of interest for crediting shall be the Preferred Rate, except as otherwise provided in this Plan, which rate shall be treated as the nominal rate for crediting interest. In the event distribution of the Annual Deferral Amount is made or commences prior to the end of a Plan Year, the basis for that year's interest crediting will be a fraction of the full year's interest, based on the number of full months prior to such distribution or commencement. For purposes of crediting interest up to the time of a distribution, each distribution shall be treated as made on the first day of the month in which the distribution is actually made. 3.7 INTEREST CREDITING FOR INSTALLMENT DISTRIBUTIONS. If a Participant's benefits under this Plan are to be paid in substantially equal monthly installments, such payments shall be determined by amortizing the Participant's specified benefit over the number of months elected, using the Preferred Rate for each year and treating the first installment payment as all principal and each subsequent installment payment, first as interest accrued for the applicable installment period on the unpaid Account Balance and second as a reduction in the Account Balance. -9- 14 3.8 FICA AND OTHER TAXES. For each Plan Year in which the Participant has an Annual Deferral Amount, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and Annual Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes. If necessary, the Committee shall reduce the Annual Deferral Amount in order to comply with this Section 3.8. In addition, the Participant's Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust. ARTICLE 4 SHORT-TERM PAYOUT; WITHDRAWALS 4.1 SHORT-TERM PAYOUT. In connection with each election to defer an Annual Deferral Amount, a Participant may elect to receive a future "Short-Term Payout" from the Plan with respect to that Annual Deferral Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral Amount plus interest credited in the manner provided in Section 3.5 above on that amount, but using the applicable interest rate set forth in Section 7.1 below determined at the time that the Short-Term Payout becomes payable (rather than the date of a Termination of Employment). Subject to the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid, subject to the Deduction Limitation, within 60 days of the first day of any Plan Year designated by the Participant that is at least 5 years after the first day of the Plan Year in which the Annual Deferral Amount is actually deferred. 4.2 OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM PAYOUT. Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral Amount, plus interest thereon, that is subject to a Short-Term Payout election under Section 4.1 shall not be paid in accordance with Section 4.1, but shall be paid in accordance with the other applicable Article. 4.3 WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed -10- 15 to satisfy Unforeseeable Financial Emergency, If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made with in 60 days to the date of approval. The payment of any amount under this Section 4.3 shall not be subject to the Deduction Limitation. 4.4 WITHDRAWAL ELECTION. A Participant may elect, at any time, to withdraw all of his or her Account Balance, calculated as if there had occurred a Termination of Employment; as of the day of the election, less a withdrawal penalty equal to 10% of such amount (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time before or after Retirement, Disability, death or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process for being paid pursuant to an installment payment schedule. No partial withdrawals of the Withdrawal Amount shall be allowed. The Participant shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant shall be paid the Withdrawal Amount within 60 days of his or her election. Once the Withdraw Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan in the future. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation. ARTICLE 5 RETIREMENT BENEFIT 5.1 RETIREMENT BENEFIT. Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance. 5.2 PAYMENT OF RETIREMENT BENEFIT. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or in equal monthly payments the latter determined in accordance with Section 3.6 above) over a period of 60, 120 or 180 months. The Participant may annually change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted as least 3 years prior to the Participant's Retirement and is accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Participant Retires. Any payment made shall be subject to the Deduction Limitation. -11- 16 5.3 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT. If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary (a) over the remaining number of months and in the same amounts as that benefit would have been paid to the Participant had the Participant survived, or (b) in a lump sum, if requested by the Beneficiary and allowed in the sole discretion of the Committee, that is equal to the Participant's unpaid remaining Account Balance. ARTICLE 6 PRE-RETIREMENT SURVIVOR BENEFIT 6.1 PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation, the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance, if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability. 6.2 PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT. The payment of the Pre-Retirement Survivor Benefit shall be paid in a lump sum. The lump sum payment shall be made no later than 60 days after the date the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. Any payment made shall be subject to the Deduction Limitation. ARTICLE 7 TERMINATION BENEFIT 7.1 TERMINATION BENEFIT. Subject to the Deduction Limitation, the Participant shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance, with interest credited in the manner provided in Section 3.5 above, but using the applicable interest rate set forth in the following schedule, if a Participant experiences a Termination of Employment prior to his or her Retirement or death. Completion of Years of Plan Participation Applicable Rate Ten years or more Preferred Rate Less than ten years: - Portion of Account Balance attributable to Annual Deferral Amounts with five or more -12- 17 Years of Deferral Preferred Rate - Portion of Account Balance attributable to Annual Deferral Amounts with less than five Years of Deferral Crediting Rate Notwithstanding the foregoing, if a Participant experiences a Termination of Employment within the two (2) year period following a Change in Control, the Participant shall receive a Termination Benefit equal to his or her Account Balance, with interest credited at the Preferred Rate. 7.2 PAYMENT OF TERMINATION BENEFIT. The Termination Benefit shall be paid in a lump sum within 60 days of the Termination of Employment. Any payment made shall be subject to the Deduction Limitation. ARTICLE 8 DISABILITY WAIVER AND BENEFIT 8.1 DISABILITY WAIVER. (a) WAIVER OF DEFERRAL. A Participant who is determined by the Committee to be suffering from a Disability shall be excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary and/or Annual Bonus for the Plan Year during which the Participant first suffers a Disability. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan. (b) RETURN TO WORK. If a Participant returns to employment, or service as a Director, with an Employer after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above. 8.2 CONTINUED ELIGIBILITY; DISABILITY BENEFIT. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed and shall be eligible for the benefits provided for in Articles 4,5,6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the -13- 18 Committee shall have the right, in its sole and absolute discretion and for purposes of this Plan only, to terminate a Participant's employment at any time after such Participant is determined to have a Disability. If, after the second anniversary of the date a Participant is determined to have a Disability, the Committee exercises such right under this Section or the Participant otherwise experiences a Termination of Employment, the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time of the termination, credited with the Preferred Rate; provided, however, that should the Participant otherwise have been eligible to Retire, he or she shall be paid in accordance with Article 5. The Disability Benefit shall be paid in a lump sum within 60 days of the Committee's exercise of such right. Any payment made shall be subject to the Deduction Limitation. ARTICLE 9 BENEFICIARY DESIGNATION 9.1 BENEFICIARY. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 9.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death. 9.3 ACKNOWLEDGMENT. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Committee or its designated agent. 9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above, or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's -14- 19 benefits, then the Participants designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. 9.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits. ARTICLE 10 LEAVE OF ABSENCE 10.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.4 10.3 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. ARTICLE 11 TERMINATION, AMENDMENT OR MODIFICATION 11.1 TERMINATION. Although the Employers anticipate that they will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to discontinue its sponsorship of the -15- 20 Plan and/or to terminate the Plan, at any time, with respect to its participating Employees and Directors by the actions of its board of directors. In addition, the Company may terminate the Plan with respect to any or all Employers by action of the Board. Upon the termination of the Plan with respect to any Employer, the Plan Agreements of the affected Participants who are employed by that Employer shall terminate and their Account Balances, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or she had Retired on the date of Plan termination, shall be paid to the Participants as follows. Prior to a Change in Control, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or in monthly installments for up to 15 years, with interest credited during the installment period as provided in Section 3.6. After a Change in Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who had become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Employer shall have the right to accelerate installment payments by paying the present value equivalent of such payments, using the Crediting Rate for the Plan Year in which the termination occurs as the discount rate, in a lump sum or pursuant to a different payment schedule (provided that, the present value of all payments that will have been received by a Participant at any given point in time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.2 AMENDMENT. The Company may, at any time, amend or modify the Plan in whole or in part with respect to any or all Employers by the action of the Board; provided, however, that no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification, or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Company shall have the right to accelerate installment payments by paying the present value equivalent of such payments, using the Crediting Rate for the Plan Year of the amendment or modification as the discount rate, in a lump sum or pursuant to a different payment schedule (provided that, the present value of all payments that will have been received by a Participant at any given point in time under the different payment -16- 21 schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.3 PLAN AGREEMENT. Despite the provisions of Sections 11.1 and 11.2 above, if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the consent of the Participant. 11.4 EFFECT OF PAYMENT. The full payment of the applicable benefit under Section 4.4 or Articles 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. ARTICLE 12 ADMINISTRATION 12.1 COMMITTEE DUTIES. This Plan shall be administered by a Deferred Compensation Committee (the "Committee"). Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. 12.2 AGENTS. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. 12.3 BINDING EFFECT OF DECISIONS. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan, in the absence of clear and convincing evidence that the Committee acted arbitrarily and capriciously. 12.4 INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold harmless the members of the Committee and any Employee to whom duties of the Committee may be delegated against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, or any such Employee. -17- 22 12.5 EMPLOYER INFORMATION. To enable the Committee to perform its functions, each Employer shall supply full and timely information to the Committee on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement. Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee may reasonably require. ARTICLE 13 OTHER BENEFITS AND AGREEMENTS 13.1 COORDINATION WITH OTHER BENEFITS. The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. ARTICLE 14 CLAIMS PROCEDURES 14.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. The claim must state with particularity the determination desired by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 14.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; -18- 23 (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 14.3 below. 14.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Committee, in its sole discretion, may grant. 14.4 DECISION ON REVIEW. The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and (c) such other matters as the Committee deems relevant. 14.5 LEGAL ACTION. A claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. -19- 24 ARTICLE 15 TRUST 15.1 ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and the Employers shall at least annually transfer over to the Trust such assets as the Employers determine, in their sole discretion, are necessary to provide, on a present value basis, for their respective future liabilities created with respect to the Annual Deferral Amounts and interest credits for that year. 15.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. 15.3 DISTRIBUTIONS FROM THE TRUST. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Agreement. ARTICLE 16 MISCELLANEOUS 16.1 LIMITATION ON BENEFIT PAYMENT. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited with interest in accordance with Section 3.5(a). The amounts so deferred and interest thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Code Section 162(m) or, if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control. -20- 25 16.2 STATUS OF PLAN. The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that "is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent. 16.3 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. 16.4 EMPLOYER'S LIABILITY. An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. 16.5 NONASSIGNABILITY. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable, except that the foregoing shall not apply to any court order specified in Section 16.4 below. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 16.6 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, either as an Employee or a Director, or to interfere with the right of any Employer to discipline or discharge the Participant at any time. -21- 26 16.7 FURNISHING INFORMATION. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 16.8 TERMS. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 16.9 CAPTIONS. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.10 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of New Hampshire without regard to its conflicts of laws principles. 16.11 NOTICE. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: Deferred Compensation Committee Healthsource, Inc. Two College Park Drive Hookset, NH 03106 Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. 16.12 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. 16.13 SPOUSE'S INTEREST. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the -22- 27 Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of interstate succession. 16.14 VALIDITY. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining part hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.15 INCOMPETENT. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetency, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 16.16 COURT ORDER. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Plan as the result of a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant to immediately distribute the spouse's or former spouse's interest in the Plan to that spouse or former spouse. 16.17 DISTRIBUTION IN THE EVENT OF TAXATION. (a) GENERAL. If, for any reason, all or any portion of a Participant's benefit under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be reasonably withheld, a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. -23- 28 (b) TRUST. If the Trust terminates in accordance with Section 3.6(e) of the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions. IN WITNESS WHEREOF, the Company has signed this Plan document this 20th day of October, 1995. Healthsource, Inc. -------------------------------------- a New Hampshire corporation By: /s/ ----------------------------------- Title: Vice President, General Counsel ------------------------------- -24- EX-99.14 15 1991 NON-QUALIFIED STOCK OPTION PLAN 1 HEALTHSOURCE, INC. 1991 NON-QUALIFIED STOCK OPTION PLAN A. PURPOSE AND SCOPE. The purposes of this Plan are to encourage stock ownership by key management employees of HEALTHSOURCE, INC. (herein called the "Company") and its Subsidiaries, to provide an incentive for such employees to expand and improve the profits and prosperity of the Company and its Subsidiaries, and to assist the Company and its Subsidiaries in attracting and retaining key personnel through the grant of Options to purchase shares of the Company's common stock. B. DEFINITIONS. Unless otherwise required by the context: 1. "Board" shall mean the Board of Directors of the Company. 2. "Committee" shall mean the Stock Option Plan Committee, which is appointed by the Board, and which shall be composed of three members of the Board. 3. "Company" shall mean Healthsource, Inc., a New Hampshire corporation. 4. "Code" shall mean the Internal Revenue Code of 1986, as amended. 5. "Employee" shall mean any person employed by the Company or any present or future Subsidiary of the Company. 6. "Fair Market Value" shall mean: (i) if the Stock is listed on a national securities exchange or the NASDAQ National Market System, then the value per share shall be not less than the closing price on the date of determination of fair market value, or if there were no sales on said date, then the value shall be not less than the closing price on the date next preceding the date of determination of fair market value on which there were sales; (ii) if the stock is traded over the counter and not listed on a national securities exchange, then the value per share shall be not less than the mean between the bid and asked price on the date of determination of fair market value or, if there is no bid and asked price on said date, then on the next prior business day on which there was a bid and asked price; (iii) if the Stock is not regularly traded over -1- 2 the counter or otherwise, then the value shall be as set by the Board based upon reasonable methods of valuation which the Board in its sole discretion shall employ based upon advice of counsel and experts as the Board shall retain to assist it in its determination, but in no event shall the Fair Market Value be less than the book value of the Stock if the Stock is not traded over the counter or otherwise. 7. "Option" shall mean a right to purchase Stock, granted pursuant to the Plan. 8. "Option Price" shall mean the purchase price for Stock under an Option, as determined in SECTION F below. 9. "Participant" shall mean an employee of the Company, or of any Subsidiary of the Company, to whom an option is granted under the Plan. 10. "Plan" shall mean this Healthsource, Inc. 1991 Non-Qualified Stock Option Plan. 11. "Stock" shall mean the common stock of the Company, par value $.10 per share. 12. "Subsidiary" shall mean any corporation in which the Company has an ownership interest. C. STOCK TO BE OPTIONED. Subject to the provisions of SECTION L of the Plan, the maximum number of shares of Stock that may be optioned or sold under the Plan is 400,000 shares. Such shares may be treasury, or authorized but unissued, shares of Stock of the Company. D. ADMINISTRATION. The Plan shall be administered by the Committee. All persons designated as members of the Committee shall be "disinterested persons" within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934. Two members of the Committee shall constitute a quorum for the transaction of business. The Committee shall be responsible to the Board for the operation of the Plan, and shall make recommendations to the Board with respect to participation in the Plan by employees of the Company and its Subsidiaries, and with respect to the extent of that participation. The interpretation and construction of any provision of the Plan by the Committee shall be final, unless otherwise determined by the Board. The Committee shall also have the authority to provide Participants, in -2- 3 any Option granted under the Plan, the right to require the Company to repurchase options or to reacquire shares of Stock acquired through exercise of an Option, on terms which the Committee in its sole discretion shall deem necessary and appropriate. No member of the Board or the Committee shall be liable for any action or determination made in good faith. E. ELIGIBILITY. The Board, upon recommendation of the Committee, may grant Options to any key management employee (including an employee who is a director or an officer) of the Company or its Subsidiaries. No options may be granted to such a person who is also a member of the Committee. Options may be awarded by the Board at any time and from time to time to new Participants, or to then Participants, or to a greater or lesser number of Participants, and may include or exclude previous Participants, as the Board, after reviewing the recommendations of the Committee, shall determine. Options granted at different times need not contain similar provisions. F. OPTION PRICE. The purchase price for Stock under each Option shall be one hundred ten percent (110%) of the fair market value of the Stock at the time the Option is granted, but in no event less than the par value of the Stock. G. TERMS AND CONDITIONS OF OPTIONS. Options granted pursuant to the Plan shall be authorized by the Board and shall be evidenced by agreements in such form as the Board, after reviewing the recommendations of the Committee, shall from time to time approve. Such agreements shall comply with and be subject to the following terms and conditions: 1. EMPLOYMENT AGREEMENT. The Board may, in its discretion, include in any Option granted under the Plan a condition that the Participant shall agree to remain in the employ of, and to render services to, the Company or any of its Subsidiaries for a period of time (specified in the agreement) following the date the Option is granted. No such agreement shall impose upon the Company or any of its Subsidiaries, however, any obligation to employ the Participant for any period of time. 2. TIME AND METHOD OF PAYMENT. The Option Price shall be paid in full in cash at the time an Option is exercised under the Plan. Otherwise, an exercise of any -3- 4 Option granted under the Plan shall be invalid and of no effect. Promptly after the exercise of an Option and the payment of the full Option Price, the Participant shall be entitled to the issuance of a stock certificate evidencing his ownership of such Stock. A Participant shall have none of the rights of a shareholder until shares are issued to him, and no adjustment will be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 3. NUMBER OF SHARES. Each Option shall state the total number of shares of Stock to which it pertains. 4. OPTION PERIOD AND LIMITATIONS ON EXERCISE OF OPTIONS. The Board may, in its discretion, provide that an Option may not be exercised in whole or in part for any period or periods of time specified in the Option agreement. Except as provided in the Option agreement, an Option may be exercised in whole or in part at any time during its term. No Option may be exercised after the expiration of ten (10) years from the date it is granted. No Option may be exercised for a fractional share of Stock. 5. CONSIDERATION. The consideration for issuance of Options by the Company shall be determined by the Board and the judgment of the Board as to the consideration and the sufficiency thereof shall be conclusive. E. TERMINATION OF EMPLOYMENT. Except as provided in Section I below, if a Participant ceases to be employed by the Company or any of its Subsidiaries, his Options shall terminate immediately; provided, however, that if a Participant's cessation of employment with the Company and its Subsidiaries is due to his retirement with the consent of the Company or any of its Subsidiaries, the Participant may, at any time within three (3) months after such cessation of employment, exercise his Options to the extent that he was entitled to exercise them on the date of cessation of employment, but in no event shall any Option be exercisable more than ten (10) years from the date it was granted. The Committee may cancel an Option during the three month period referred to in this paragraph, if the Participant engages in employment or activities contrary, in the opinion of the Committee, to the best interests of the Company or any of its Subsidiaries. The Committee shall determine in each case whether a termination of employment shall be considered a retirement with the consent of the Company or a Subsidiary, and, subject to applicable law, whether a leave of absence shall constitute a termination of employment. Any such - 4 - 5 determination of the Committee shall be final and conclusive, unless overruled by the Board. I. RIGHTS IN EVENT OF DEATH. If a Participant dies while employed by the Company or any of its Subsidiaries, or within three months after having retired with the consent of the Company or any of its Subsidiaries, and without having fully exercised his Options, the executors or administrators, or legatees or heirs, of his estate shall have the right to exercise such Options to the extent that such deceased Participant was entitled to exercise the Options on the date of his death; provided, however, that in no event shall the Options be exercisable more than ten (10) years from the date they were granted. J. NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall impose no obligation upon the Participant to exercise such Option. K. NONASSIGNABILITY. Options shall not be transferable other than by will or by the laws of descent and distribution, and during a Participant's lifetime shall be exercisable only by such Participant. L. EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN. The aggregate number of shares of Stock available for Options under the Plan, the shares subject to any Option and the price per share shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Stock subsequent to the effective date of the Plan resulting from: (i) a subdivision or consolidation of shares or any other capital adjustment; (ii) the payment of a stock dividend; or (iii) other increase or decrease in such shares effected without receipt of consideration by the Company. If the Company shall be the surviving corporation in any merger or consolidation, any Option shall pertain, apply, and relate to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled after the merger or consolidation. Upon dissolution or liquidation of the Company, or upon a merger or consolidation in which the Company is not the surviving corporation, all Options outstanding under the Plan shall terminate; provided, however, that each Participant (and each other person entitled under Section H to exercise an Option) shall have the right, immediately prior to such dissolution or liquidation, or such merger or consolidation, to exercise such Participant's Options in whole or in part, - 5 - 6 but only to the extent that such Options are otherwise exercisable under the terms of the Plan. M. AMENDMENT AND TERMINATION. The Board, by resolution, may terminate, amend, or revise the Plan with respect to any shares as to which Options have not been granted. The Board may alter, suspend or discontinue the Plan except that no action of the Board may materially increase the benefits accruing to Participants under the Plan, increase (other than as provided in Section L) the maximum number of shares permitted to be optioned under the Plan, or materially modify the requirements as to eligibility for participation in the Plan, unless such action of the Board shall be subject to approval or ratification by the shareholders of the Company. Neither the Board nor the Committee may, without the consent of the holder of an Option, alter or impair any Option previously granted under the Plan, except as authorized herein. Unless sooner terminated, the Plan shall remain in effect for a period of ten (10) years from the date of the Plan's adoption by the Board. Termination of the Plan shall not affect any Option previously granted. N. AGREEMENT AND REPRESENTATION OF EMPLOYEE. As a condition to the exercise of any portion of an Option, the Company may require the person exercising such Option to represent and warrant at the time of such exercise that any shares of Stock acquired at exercise are being acquired only for investment and without any present intention to sell or distribute such stock, if, in the opinion of counsel for the Company, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation, or rule or any government agency. Inability of the Company to obtain from any regulatory body or authority the approvals deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares of Stock shall relieve the Company of any liability in respect of the non-issuance or sale of such shares of Stock unless and until said approvals are obtained. O. RESERVATION OF SHARES OF STOCK. The Company, during the term of this Plan, will at all times reserve and keep available, and will seek or obtain from any regulatory body having jurisdiction any requisite authority necessary to issue and to sell, the number of shares of Stock that shall be sufficient to satisfy the requirements of this Plan. -6- 7 P. APPROVAL BY SHAREHOLDERS. The Plan shall be submitted for approval or ratification by the shareholders of the Company within ninety (90) days of its adoption by the Board of Directors. Q. EFFECTIVE DATE OF PLAN. The Plan shall be effective from the date that the Plan is approved by the shareholders of the Company. -7- EX-99.15 16 1992 DIRECTOR STOCK OPTION PLAN 1 HEALTHSOURCE, INC. 1992 DIRECTOR STOCK OPTION PLAN 1. PURPOSE The purpose of the Healthsource, Inc. 1992 Director Stock Option Plan (the "Plan") is to promote the interests of Healthsource, Inc. (the "Company") and its stockholders by strengthening the Company's ability to attract and retain the services of experienced and knowledgeable directors and by encouraging such directors to acquire an increased proprietary interest in the Company. 2. DEFINITIONS Unless otherwise required by the context: - "Board" shall mean the Board of Directors of the Company. - "Committee" shall mean the Compensation Committee, which is appointed by the Board, and which shall be composed of three members of the Board. - "Company" shall mean Healthsource, Inc., a New Hampshire corporation. - "Code" shall mean the Internal Revenue Code of 1986, as amended. - "Director" shall mean any person serving as a Director of the Company. - "Fair Market Value" shall mean: (i) if the Stock is listed on a national securities exchange or the NASDAQ National Market System, or any other national exchange system, then the value per share shall be not less than the closing price on the date of determination of fair market value, or if there were no sales on said date, then the value shall be not less than the closing price on the date next preceding the date of determination of fair market value on which there were sales; (ii) if the stock is traded over-the-counter and not listed on a national securities exchange, then the value per share shall be not less than the mean between the bid and asked price on the date of determination of fair market value or, if there is no bid and asked price on said date, then on the next prior business day on which there was a bid and asked price; (iii) -1- 2 if the Stock is not regularly traded over-the-counter or otherwise, then the value shall be as set by the Board based upon reasonable methods of valuation which the Board in its sole discretion shall employ based upon advice of counsel and experts as the Board shall retain to assist in its determination, but in no event shall the Fair Market Value be less than the book value of the Stock if the Stock is not traded over-the-counter or otherwise. -- "Plan" shall mean this Healthsource, Inc. 1992 Director Stock Option Plan. -- "Stock" shall mean the common stock of the Company, par value $.10 per share. -- "Subsidiary" shall mean any corporation in which the Company has an ownership interest. 3. STOCK SUBJECT TO THE PLAN The shares of Stock issued pursuant to Options shall be shares currently authorized but unissued or currently held or subsequently acquired by the Company as treasury shares. If any option granted under the Plan expires or terminates for any reason without having been exercised in full, the Stock subject to, but not delivered under, such Option may become available for the grant of other Options under the Plan. 4. ADMINISTRATION OF THE PLAN The plan shall be administered by the Committee. Subject to the terms of the Plan, the Committee shall have the power to construe the provisions of the Plan, to determine all questions arising thereunder, and to adopt and amend such rules and regulations for administering the Plan as the Committee deems desirable. All determinations by the Committee shall be final and binding upon the Company and holders of Options. 5. PARTICIPATION IN THE PLAN Each member of the Company's Board of Directors (a "Director") who is not otherwise an employee of the Company or any Subsidiary of the Company (an "Eligible Director") shall be eligible to participate in the Plan. 6. NON-STATUTORY STOCK OPTIONS All Options granted under the Plan shall be non-statutory options not intended to qualify under Section 422 of the Code. 2 3 7. OPTION TERMS Each Option granted to an Eligible Director under the Plan and the issuance of Stock thereunder shall be subject to the following terms: 7.1 Each Option granted under the Plan shall be evidenced by an Option instrument duly executed on behalf of the Company by an officer or officers delegated such authority by the Committee using either manual or facsimile signature. Each Option shall comply with and be subject to the terms and conditions of the Plan. Any Option may contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee. 7.2 An Option to purchase two thousand five hundred (2,500) shares of Stock (as adjusted pursuant to Section 8) shall be granted automatically in each year of the next five (5) years, immediately following the Annual Meeting of Shareholders of the Company ("Annual Meeting") to each Director who is an Eligible Director at such time; such grants to begin with the 1992 Annual Meeting and to end with and including the 1996 Annual Meeting (each, an "Annual Grant"). 7.3 The option exercise price per share for an Annual Grant shall be one hundred ten percent (110%) of the Fair Market Value of the Stock at the time the Option is granted, but in no event less than the par value of the Stock. 7.4 Options shall vest and become exercisable and nonforfeitable when, and only if, the optionee continues to serve as a Director until the Annual Meeting following the year in which the option was granted. 7.5 Any vested and exercisable Option is exercisable in whole or in part at any time or from time to time during the Option period by giving written notice, signed by the person exercising the Option, to the Company stating the number of shares of Stock with respect to which the Option is being exercised, accompanied by payment in full of the Option exercise price for the number of shares of Stock to be purchased. The date both such notice and payment are received by the office of the Secretary of the Company shall be the date of exercise of the Option as to such number of shares of Stock. No option may at any time be exercised with respect to a fractional share. 7.6 Payment of the Option exercise price may be in cash or by bank-certified, cashier's, or personal check. 7.7 Each Option shall expire five (5) years from its date of grant, but shall be subject to earlier termination as follows: 3 4 (a) In the event of the termination of an optionee's service as a Director, other than by reason of retirement, total and permanent disability, or death, the then-outstanding Options of such optionee shall automatically expire thirty (30) days after the effective date of such termination and the then outstanding Options that have vested pursuant to section 7.4 shall be exercisable during such thirty (30) day period. (b) In the event of the termination of an optionee's service as a Director by reason of retirement or total and permanent disability, the then-outstanding Options of such optionee that have vested pursuant to SECTION 7.4 shall become immediately exercisable and each such Option shall expire on the stated grant expiration date. (c) In the event of the death of an optionee while the optionee is a Director, the then-outstanding Options of such optionee that have vested pursuant to SECTION 7.4 shall become exercisable, to the full extent of the number of shares of Stock remaining covered by such Options, regardless of whether such Options were previously exercisable, and each such Option shall expire on the stated grant expiration date. Exercise of a deceased optionee's Options that are still exercisable shall be by the estate of such optionee or by a person or persons whom the optionee has designated in writing filed with the Company, of, if no such designation has been made, by the person or persons to whom the optionee's rights have passed by will or the laws of descent and distribution. 7.8 The right of any optionee to exercise an Option granted under the Plan shall, during the lifetime of such optionee, be exercisable only by such optionee and shall not be assignable or transferable by such optionee other than by will or the laws of descent and distribution. 7.9 Neither the recipient of an Option under the Plan, nor an optionee's successor or successors in interest shall have any rights as a stockholder of the Company with respect to any shares subject to an Option granted to such person until the date of issuance of a stock certificate for such shares. 7.10 Neither the Plan, nor the granting of an Option, nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that an Eligible Director has a right to continue as a Director for any period of time or at any particular rate of compensation. 4 5 8. EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN The aggregate number of shares of Stock available for Options under the Plan, the shares subject to any Option and the price per share shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Stock subject to the effective date of the Plan resulting from: (i) a subdivision or consolidation of shares or any other capital adjustment; (ii) the payment of a stock dividend; or, (iii) other increase or decrease in such shares effected without receipt of consideration by the Company. If the Company shall be the surviving corporation in any merger or consolidation, any Option shall pertain, apply, and relate to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled after the merger or consolidation. Upon dissolution or liquidation of the Company, or upon a merger or consolidation in which the Company is not the surviving corporation, all Options outstanding under the Plan shall terminate; provided, however, that each optionee (and each other person entitled under SECTION 7 to exercise an Option) shall have the right, immediately prior to such dissolution or liquidation, or such merger or consolidation, to exercise such Options in whole or in part, but only to the extent that such Options are otherwise exercisable under the terms of the Plan. 9. EXPENSES OF THE PLAN All costs and expenses of the adoption and administration of the Plan shall be borne by the Company, and none of such expenses shall be charged to any optionee. 10. AGREEMENT AND REPRESENTATION OF DIRECTOR As a condition to the exercise of any portion of an Option, the Company may require the person exercising such Option to represent and warrant at the time of such exercise that any shares of Stock acquired at exercise are being acquired only for investment and without any present intention to sell or distribute such Stock, if, in the opinion of counsel for the Company, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any government agency. Inability of the Company to obtain from any regulatory body or authority the approvals deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares of Stock shall relieve the Company of any liability in respect of the non-issuance or sale of such shares of Stock unless and until said approvals are obtained. 5 6 11. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall be effective immediately following approval by the Company's stockholders. 12. TERMINATION AND AMENDMENT OF THE PLAN The Board may amend, terminate or suspend the Plan at any time, in its sole and absolute discretion, provided, however, that if required to qualify the Plan under Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as amended, no amendment shall be made more than once every six months that would change the amount, price or timing of the Initial and Annual Grants, other than to comport with changes in the Internal Revenue Code of 1986, as amended, or the rules and regulations promulgated thereunder; and provided, further, that if required to qualify the Plan under Rule 16b-3, no amendment that would: (a) materially increase the number of shares of Stock that may be issued under the Plan, (b) materially modify the requirements as to eligibility for participation in the Plan, or (c) otherwise materially increase the benefits accruing to participants under the Plan shall be made without the approval of the Company's stockholders. 13. RESERVATION OF SHARES OF STOCK The Company, during the term of this Plan, will at all times reserve and keep available, and will seek or obtain from any regulatory body having jurisdiction any requisite authority necessary to issue and to sell, the number of shares of Stock that shall be sufficient to satisfy the requirements of this Plan. 14. APPROVAL BY SHAREHOLDERS The Plan shall be submitted for approval or ratification by the shareholders of the Company at the 1992 Annual Meeting. 6 EX-99.16 17 1994 DIRECTOR STOCK OPTION PLAN 1 HEALTHSOURCE, INC. 1994 STOCK OPTION PLAN A. PURPOSE AND SCOPE The purposes of this Plan are to encourage stock ownership by key management employees of HEALTHSOURCE, INC. (herein called the "Company") and its Subsidiaries, to provide an incentive for such employees to expand and improve the profits and prosperity of the Company and its Subsidiaries, and to assist the Company and its Subsidiaries in attracting and retaining key personnel through the grant of Options to purchase shares of the Company's common stock which Options may either (i) be qualified as "incentive" stock options under Section 422(b) of the Code (hereinafter "ISO" or ISOs") or (ii) be stock options which do not qualify as ISOs (hereinafter "Non-Qualified Options"). B. DEFINITIONS Unless otherwise required by the context: 1. "Board" shall mean the Board of Directors of the Company. 2. "Committee" shall mean the Stock Option Plan Committee, which is appointed by the Board, and which shall be composed of at least two members of the Board who qualify to administer this plan under Section 162(m) of the Code and Rule 16b-3 and Item 402(i) under the 1934 Act. 3. "Company" shall mean Healthsource, Inc., a New Hampshire corporation. 4. "Code" shall mean the Internal Revenue Code of 1986, as amended. 5. "Employee" shall mean any person employed by the Company or any present or future Subsidiary of the Company. 6. "Fair Market Value" shall mean: (i) if the Stock is listed on a national securities exchange or the NASDAQ National Market System, then the value per share shall be not less than the closing price on the date of determination of fair market value, or if there were no sales on said date, then the value shall be not less than the closing price on the date next preceding such date of determination on which there were sales; or (ii) if the Stock is not so listed on a national securities exchange or the NASDAQ National Market System, then the fair market value per share shall be as determined by the Committee in good faith from time-to-time, but in no event to be less than the book value of the Stock. 7. "Option" shall mean a right to purchase Stock granted pursuant to the Plan and shall include both ISOs and Non-Qualified Options. 8. "Option Price" shall mean the purchase price for Stock under an Option, as determined in Section F below. 9. "Participant" shall mean an employee of the Company, or of any Subsidiary of the Company, to whom an Option is granted under the Plan. 10. "Plan" shall mean this Healthsource, Inc. 1994 Stock Option Plan. 11. "Stock" shall mean the Common Stock of the Company, par value $.10 per share. 12. "Subsidiary" shall mean any corporation in which the Company has an ownership interest. A-1 2 13. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. C. MAXIMUM AVAILABLE OPTIONS The maximum number of shares of Stock that may be optioned under the Plan with respect to each fiscal year the Plan is in effect shall be 1 1/2% of the total number of shares of outstanding Stock of the Company on December 31 of each fiscal year plus the number of shares available under the Plan in prior fiscal years but not granted by the Committee; provided that an additional 1,000,000 shares shall be available for grant during 1994; provided further that under no circumstances shall Options which qualify as ISO Options aggregate more than 1,000,000 shares during the life of the Plan, subject to the provisions of Section N. Subject to the provisions of Section N, the maximum number of shares of Stock with respect to which Options may be granted to any Participant under the Plan with respect to each fiscal year of the Plan shall be 1,000,000 shares of Stock. D. EFFECTIVE DATE The Plan shall be effective as of January 1, 1994. No Options may be granted under the Plan after December 31, 1999 or after any earlier termination of the Plan by the Board. E. ADMINISTRATION The Plan shall be administered by the Committee. All persons designated as members of the Committee shall be "disinterested persons" within the meaning of Rule 16b-3 of the 1934 Act and "outside directors" within the meaning of Section 162(m) of the Code. Two members of the Committee shall constitute a quorum for the transaction of business. The Committee shall be responsible to the Board for the operation of the Plan, and shall make recommendations to the Board with respect to participation in the Plan by employees of the Company and its Subsidiaries, and with respect to the extent of that participation. The interpretation and construction of any provision of the Plan by the Committee shall be final, unless otherwise determined by the Board. The Committee shall also have the authority to provide Participants, in any Option granted under the Plan, the right to require the Company to repurchase Options or to reacquire shares of Stock acquired through exercise of an Option, on terms which the Committee in its sole discretion shall deem necessary and appropriate. The Committee shall determine in its sole discretion whether any Option is to be an ISO or a Non-Qualified Option. If the Committee determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Option is not treated as an ISO. No member of the Board or the Committee shall be liable for any action or determination made in good faith. F. ELIGIBILITY The Board, upon recommendation of the Committee, may grant Options to any key management employee (including an employee who is an officer) of the Company or its Subsidiaries; provided that such participation would not jeopardize the Plan's compliance with Rule 16b-3 under the 1934 Act or any successor rule. No Options may be granted to such a person who is also a member of the Committee. Options may be awarded by the Board at any time and from time-to-time to new Participants, or to then Participants, or to a greater or lesser number of Participants, and may include or exclude previous Participants, as the Board, after reviewing the recommendations of the Committee, shall determine. Options granted at different times need not contain similar provisions. A-2 3 G. OPTION PRICE The purchase price for Stock under each Option shall be at least one hundred ten percent (110%) of the fair market value of the Stock at the time the Option is granted, but in no event less than the par value of the Stock. Specifically the Options to purchase 1,000,000 shares of Stock, vesting at the rate of 200,000 shares per year over five (5) years, to be granted in May 1994 to Norman C. Payson, M.D., CEO of the Company, shall be at 130% of the fair market value of the Stock at the time the Options are granted. H. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS Options granted pursuant to the Plan shall be authorized by the Board and shall be evidenced by agreements in such form as the Board, after reviewing the recommendations of the Committee, shall from time-to-time approve. Subject to Section K, such agreements shall comply with and be subject to the following terms and conditions: 1. Employment Agreement. The Board may, in its discretion include in any Option granted under the Plan a condition that the Participant shall agree to remain in the employ of, and to render services to, the Company or any of its Subsidiaries for a period of time (specified in the agreement) following the date the Option is granted. No such agreement shall impose upon the Company or any of its Subsidiaries, however, any obligation to employ the Participant for any period of time. 2. Time and Method of Payment. The Option Price shall be paid in full in cash or by delivery of shares of Stock owned by the optionee having a fair market value equal to the Option Price (or in the case of an immediate sale, by Participant's 10 day note coupled with an assignment of the proceeds of the sale) at the time an Option is exercised under the Plan. Otherwise, an exercise of any Option granted under the Plan shall be invalid and of no effect. Promptly after the exercise of an Option and the payment of the full Option Price, the Participant shall be entitled to the issuance of a stock certificate evidencing his ownership of such Stock. A Participant shall have none of the rights of a shareholder until shares are issued to him, and no adjustment will be made for cash dividends or other rights for which the record date is prior to the date such stock certificate is issued. 3. Number of Shares: Type of Option. Each Option shall state the total number of shares of Stock to which it pertains and whether or not the Option is intended to qualify as an ISO. 4. Option Period and Limitations on Exercise of Options. The Board may, in its discretion, provide that an Option may not be exercised in whole or in part for any period or periods of time specified in the Option agreement, provided that not more than 50% of any Option may be exercised prior to the expiration of one (1) year from the date of grant, and further that the remaining shares under any Option shall not be exercisable prior to the expiration of two (2) years from the date of grant. Except as provided in the Option agreement, an Option may be exercised in whole or in part at any time during its term. The Options to purchase 1,000,000 shares to be granted to Norman C. Payson, M.D. in May 1994 shall be vested at the rate of 20% per annum over five (5) years. No Option may be exercised after the expiration of ten (10) years from the date it is granted. No Option may be exercised for a fractional share of Stock. The Committee shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Committee shall not accelerate the exercise date of any installment of any ISO (and not previously converted into a Non-Qualified Option) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code. 5. Consideration. The consideration for issuance of Options by the Company shall be determined by the Board and the judgement of the Board as to the consideration and the sufficiency thereof shall be conclusive. A-3 4 I. TERMS AND CONDITIONS APPLICABLE TO ISO OPTIONS. 1. With respect to ISOs, in no event shall the aggregate fair market value (determined at the time the Option is granted) of Stock for which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all stock option plans of the Company and any Subsidiary) exceed $100,000. 2. With respect to ISOs only, the term "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the ISO Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3. With respect to ISOs, the period of any election or exercise shall be extended automatically in the case of death or disability to the maximum period provided in Section 422 of the Code, as amended. J. TERMINATION OF EMPLOYMENT Except for termination of employment due to death or disability, or in connection with a "Change in Control" of the Company as governed in Section K below, if a Participant ceases to be employed by the Company or any of its Subsidiaries, his Options shall terminate within thirty (30) days of such termination of employment; provided, however, that if a participant's cessation of employment with the Company and its Subsidiaries is due to his retirement with the consent of the Company or any of its Subsidiaries, the Participant may, at any time within three (3) months after such cessation of employment, exercise his Options to the extent that he was entitled to exercise them on the date of cessation of employment, but in no event shall any Option be exercisable more than ten (10) years from the date it was granted. The Committee may cancel an Option during the three month period referred to in this paragraph, if the Participant engages in employment or activities contrary, in the opinion of the Committee, to the best interests of the Company or any of its Subsidiaries. The Committee shall determine in each case whether a termination of employment shall be considered a retirement with the consent of the Company or a Subsidiary, and subject to applicable law, whether a leave of absence shall constitute a termination of employment. Any such determination of the Committee shall be final and conclusive, unless overruled by the Board. K. CHANGE IN CONTROL In the event of a "Change in Control" of the Company (or a termination of employment of a Participant in connection with such a "Change in Control"), all Options granted pursuant to the Plan shall become immediately vested and each Participant shall have the right to exercise such Options pursuant to their terms without regard to (i) any future vesting requirements contained in such Options or (ii) whether the Participant is employed by the Company at the time of exercise of the Option; provided, however, that in no event shall the Options be exercisable more than ten (10) years from the date they were granted. A "Change in Control" is defined as any sale or transfer of a majority of the assets of the Company, a sale or transfer (through a merger or otherwise) of greater than fifty percent (50%) of the outstanding stock of the Company, a change in the composition of a majority of the Board of Directors of the Company, or the execution by the Company of an agreement for any of the foregoing or the public announcement of a tender offer for more than 30% of the shares of the Company. Any Option not so exercised prior to the consummation of the event giving rise to the Change in Control shall remain exercisable, subject to adjustment as provided herein, for the remainder of the term of the Option. A-4 5 L. NO OBLIGATION TO EXERCISE OPTION The granting of an Option shall impose no obligation upon the Participant to exercise such Option. M. RIGHTS IN EVENT OF DEATH/DISABILITY If a Participant dies or becomes permanently disabled while employed by the Company or any of its Subsidiaries, or within three months after having retired with the consent of the Company or any of its Subsidiaries, and without having fully exercised his Options, all Options granted to the Participant shall become immediately vested and the executors or administrators, or legatees or heirs, of his estate shall have the right to exercise such Options pursuant to their terms without regard to any future vesting requirement contained in such Options; provided, however, that in no event shall the Options be exercisable more than ten (10) years from the date they were granted. N. EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN The aggregate number of shares of Stock available for Options under the Plan, the shares subject to any Option and the price per share shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Stock subsequent to the effective date of the Plan resulting from: (i) a subdivision or consolidation of shares or any other capital adjustment (ii) the payment of a stock dividend; or (iii) any other increase or decrease in such shares effected without receipt of fair market value consideration by the Company. If the Company shall be a party to any merger or consolidation, any Option shall pertain, apply, and relate to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled under the agreements governing the merger or consolidation. Upon dissolution or liquidation of the Company, all Options outstanding under the Plan shall terminate; provided, however, that each Participant (and each other person entitled under Section H to exercise an Option) shall have the right, immediately prior to such dissolution or liquidation to exercise such Participant's Options in whole or in part. Nothing herein shall diminish optionees' rights under Section K. O. AMENDMENT AND TERMINATION The Board, by resolution, may terminate, amend, or revise the Plan with respect to any shares as to which Options have not been granted. The Board may alter, suspend or discontinue the Plan except that no action of the Board may materially increase the benefits accruing to Participants under the Plan, increase (other than as provided in Section N) the maximum number of shares permitted to be optioned under the Plan, or materially modify the requirements as to eligibility for participation in the Plan, unless such action of the Board shall be subject to approval or ratification by the shareholders of the Company. Neither the Board nor the Committee may, without the consent of the holder of an Option, alter or impair any Option previously granted under the Plan, except as authorized herein. Unless sooner terminated, the Plan shall remain in effect for a period of ten (10) years from the date of the Plan's adoption by the Board. Termination of the Plan shall not affect any Option previously granted. P. REGISTRATION OF OPTIONS AND STOCK Inability of the Company to obtain from any regulatory body or authority the approvals deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares of Stock shall relieve the Company of any liability in respect of the non-issuance or sale of such shares of Stock unless and until said approvals are obtained; provided the Company shall use its best efforts to obtain any such approvals and specifically shall register with the SEC all Options (and Stock issuable thereunder) on Form S-8 or other A-5 6 applicable SEC forms, shall list such Stock with the New York Stock Exchange and shall maintain such registration and listing in effect for the duration of the Options. Q. Reservation of Shares of Stock The Company, during the term of this Plan, will at all times reserve and keep available, and will seek or obtain from any regulatory body having jurisdiction, any requisite authority necessary to issue and to sell the number of shares of Stock that shall be sufficient to satisfy the requirements of this Plan. R. Conversion of ISOs Non-Qualified Options; Termination of ISOs The Committee, at the written request of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not theretofore been exercised into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an Employee of the Company or a Subsidiary at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such Options. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Committee takes appropriate action. The Committee, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such termination. S. Approval by Shareholders The Plan shall be submitted for approval by the shareholder of the Company at the 1994 Annual Meeting of Shareholders. T. Withholding of Additional Income Taxes Upon the exercise of a Non-Qualified Option or the making of a Disqualifying Disposition (as defined in Section U), the Company, in accordance with Section 3402 of the Code, may require the optionee to pay additional withholding taxes in respect of the amount that is considered compensation includible in such person's gross income. Alternatively, the Company, at its option, may issue shares of Stock net of the number of shares sufficient to satisfy the additional withholding taxes due. The Committee in its discretion may condition the exercise of an Option on the purchaser's or recipient's payment of such additional withholding taxes. U. Notice to Company of Disqualifying Disposition Each Employee who receives an ISO shall agree to notify the Company in writing immediately after the Employee makes a disqualifying disposition of any Stock received pursuant to the exercise of an ISO (a "Disqualifying Disposition"). Disqualifying Disposition means any disposition (including any sale) of such Stock before the later of (a) two years after the Employee was granted the ISO under which he acquired such Stock, or (b) one year after the Employee acquired such Stock by exercising such ISO. If the Employee has died before such Stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter. A-6 7 V. Governing Law, Construction The validity and construction of the Plan and the instruments evidencing Options shall be governed by the internal, substantive laws of the State of New Hampshire. In construing this Plan, the singular shall include the plural and the masculine gender shall include the feminine the neuter, unless the context otherwise requires. W. Company shall use its best efforts to protect the position of each Option holder in the event of a transaction (or agreement for same) constituting a Change in Control and specifically shall require the acquiring entity to cash out all Options at the closing of any such transaction or provide sufficient time after all conditions to such closing have been satisfied for the Option holders to exercise and sell their shares in the public market. X. Nonassignability Options shall not be transferable other than by will or by the laws of descent and distribution, and during a Participant's lifetime shall be exercisable only by such Participant. A-7 EX-99.17 18 1996 NON-EMPLOYEE STOCK OPTION PLAN 1 HEALTHSOURCE, INC. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN SECTION 1. PURPOSE The Healthsource, Inc. 1996 Non-Employee Director Stock Option Plan (the "Plan") has been adopted to promote the long-term growth and financial success of Healthsource, Inc. (the "Company") by attracting and retaining highly capable and knowledgeable non-employee directors and promoting a greater interest between the Company's non-employee directors and its stockholders. SECTION 2. DEFINITIONS * "Award" means any grant of an Option under the Plan. * "Board" means the Company's Board of Directors. * "Code" means the Internal Revenue Code of 1986, as amended from time to time. * "Committee" means the Compensation Committee appointed by the Company's Board of Directors which shall meet the requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as the same may be amended from time to time. * "Common Stock" means the Common Stock, $.10 par value, of the Company. * "Company" means Healthsource, Inc., a corporation established under the laws of the State of New Hampshire, and any Subsidiary. * "Eligible Director" means a Director of the Board who is not an employee of the Company or any Subsidiary as of the time Options are Awarded pursuant to the Plan. * "Fair Market Value" means (i) the last reported sale price at which the Common Stock is traded on such date or, if no Common Stock is traded on such date, the most recent date on which Common Stock was traded, as reflected on such public markets including but not limited to the New York Stock Exchange, NASDAQ National Market System or any other national securities exchange or association; (ii) the mean value between the bid and asked price on such date or the most recent trading date if the Common Stock is not listed on a national securities exchange and is traded over-the-counter; (iii) if the Common Stock is not traded over-the-counter or otherwise, the value will be set by the Board based upon reasonable methods of valuation which the Board, in its sole discretion, shall employ based upon the advise of counsel and experts as the Board shall retain to assist in its determination, but in no event shall the Fair Market Value be less than the book value of the Shares. * "1934 Act" means the Securities Exchange Act of 1934, as the same may be amended. * "Shares" means shares of the Common Stock, $.10 par value, of the Company. * "Option" means the right to purchase a specified number of Shares at a specified price during a specified period which is not intended to meet the requirements of Section 422A of the Code or any successor provision. * "Subsidiary" means a corporation, partnership or other business entity in which the Company has an ownership interest. 19 2 SECTION 3. EFFECTIVE DATES The Plan shall be in effect as of May 14, 1996 upon approval by the shareholders of the Company. No Awards may be made under the Plan after the Annual Meeting of Shareholders of the Company in 2002. SECTION 4. PLAN ADMINISTRATION The Plan shall be administered by the Committee. Subject to the terms of the Plan, the Committee shall have the power to construe the provisions of the Plan, to determine all questions arising thereunder, and to adopt and amend such rules and regulations for administering the Plan as the Committee deems necessary. All determinations by the Committee shall be final and binding upon the Company and the holder of any Option Awarded under the Plan. SECTION 5. STOCK AVAILABLE FOR AWARDS (a) Common Shares Available. The maximum number of Shares available from time to time for Awards under the Plan shall be a number equal to the number of Directors serving at such time multiplied by 90,000, subject to adjustment as provided in paragraph (b) below. (b) Adjustments and Reorganizations. The aggregate number of Shares available for Options under the Plan, the Shares subject to any Option and the price per Share shall all be proportionally adjusted for any increase or decrease in the number of issued Shares subsequent to the effective date of the Plan resulting from: (i) a subdivision or consolidation of shares or any other capital adjustment; (ii) the payment of a stock dividend; or (iii) any other increase or decrease in such shares effected without receipt of consideration by the Company. If the Company shall be the surviving corporation in any merger or consolidation, any Option shall pertain, apply, and relate to the securities to which a holder of the number of shares of stock subject to the Option would have been entitled after the merger or consolidation. Upon dissolution or liquidation of the Company, or upon a merger or consolidation in which the Company is not the surviving corporation, all Options outstanding under the Plan shall terminate; provided, however, that each holder of an Option (and each other person entitled under Section 7 to exercise an Option) shall have the right, immediately prior to such dissolution or liquidation, or such merger of consolidation, to exercise such Option in whole or in part, but only to the extent that such Option is otherwise exercisable under the terms of the Plan. (c) Common Stock Usage. The Shares underlying any Award which is forfeited, canceled, reacquired by the Company, satisfied without issuance of Common Stock or otherwise terminated (other than by exercise) shall be added back to the Shares of Common Stock available for issuance under this Plan. SECTION 6. STATUS OF AWARDS All Awards under the Plan shall be non-qualified stock options not intended to qualify under Section 422a of the Code. SECTION 7. GENERAL PROVISIONS AND TERMS APPLICABLE TO AWARDS Each Option Awarded to an Eligible Director under the Plan, and the issuance of Shares pursuant thereto, shall be subject to the following terms: (a) Form of Option. Each Option Awarded under the Plan shall be evidenced by an Option instrument duly executed on behalf of the Company by an officer delegated such authority by the Committee, using either manual or facsimile signature. Each Option shall comply with and be subject to the terms and conditions of the Plan. Any Option may contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee. 20 3 (b) Size of Award. An Option to purchase forty-five thousand (45,000) Shares of Common Stock (as adjusted pursuant to Section 5(b)) shall be Awarded automatically to each Eligible Director serving as such at the conclusion of the 1996 Annual Meeting of Shareholders of the Company (an "Annual Meeting"). An additional Option to purchase forty-five thousand (45,000) Shares (as adjusted pursuant to Section 5(b)) shall be awarded automatically to each Eligible Director serving as such at the conclusion of the 1999 Annual Meeting. An Eligible Director appointed or elected (i) subsequent to the 1996 Annual Meeting and prior to the 1999 Annual Meeting or (ii) subsequent to the 1999 Annual Meeting and prior to the 2002 Annual Meeting, shall be Awarded as of the date of such appointment or election an Option to purchase a number of Shares corresponding to the number of whole years remaining until the 1999 Annual Meeting or the 2002 Annual Meeting, as the case may be, multiplied by fifteen thousand (15,000) plus Pro-Rated Shares (as defined) (as adjusted pursuant to Section 5(b)). "Pro-Rated Shares" shall equal fifteen thousand (15,000) (as adjusted pursuant to Section 5(b)) multiplied by the fraction of a year represented by the number of whole months remaining from such director's appointment or election until the next Annual Meeting. In no event shall any individual Eligible Director be Awarded Options to purchase more than ninety thousand (90,000) Shares (as adjusted pursuant to Section 5(b)) over the term of the Plan. (c) Exercise Price. The Option exercise price per Share shall not be less that 110% of the Fair Market Value of the Shares (as defined in Section 2) at the time the Option is Awarded. (d) Vesting. Options granted at an Annual Meeting shall vest and become exercisable by an Eligible Director as to fifteen thousand (15,000) Shares (subject to adjustment in accordance with Section 5(b)) on each succeeding Annual Meeting date following the Award of such Options, provided the Eligible Director continues to serve as a director of the Company on such date. In the event that an Eligible Director is Awarded an Option which includes Pro-Rated Shares, such Option shall vest and become exercisable (i) as to such Pro-Rated Shares on the later of the next succeeding Annual Meeting date or the date which is six (6) months from the date such Option is Awarded and (ii) as to the remaining Shares for which options were granted fifteen thousand (15,000) Shares on each succeeding Annual Meeting date, provided the Eligible Director continues to serve as a director of the Company on such date. (e) Exercise Procedure. Any vested and exercisable Option may be exercised in whole or in part at any time during the Option period by giving written notice, signed by the person exercising the Option, to the Company stating the number of Shares for which the Option is being exercised, accompanied by payment in full of the Option exercise price for the number of Shares to be purchased. The date on which both such notice and payment are received by the office of the Secretary of the Company shall be the date of exercise of the Option as to such number of Shares. No Option may be exercised with respect to a fractional Share. (f) Payment of Exercise Price. Payment of the Option exercise price may be in cash equivalent (cash, bank-certified, cashier's or personal check), owned stock or some combination, including by means of any "cashless exercise" program then in effect and approved by the Company. (g) Termination. Each Option shall expire ten (10) years from its date of Award, but shall be subject to earlier termination as follows: (i) In the event of the termination of service as a director for any reason other than retirement, disability or death, any outstanding, vested (as pursuant to Section 7(d)), Options shall be exercisable within thirty (30) days after the effective date of such termination, following which any unexercised Options shall expire. 21 4 (ii) In the event of the termination of service as a director by reason of retirement, disability or death, any outstanding, vested Options (as pursuant to Section 7(d)) Options shall be immediately exercisable and each such Option shall expire on the stated expiration date. Exercise of a deceased director's Options that remain exercisable shall be by the estate of such Option holder or by a person or persons whom the Option holder has designated in writing and filed with the Company, or, if no such designation has been made, by the person or persons to whom the Option holder's rights have passed by will or the laws of descent and distribution. (h) Nontransferability. The right of any Option holder to exercise an Option Awarded under the Plan shall, during the lifetime of such Option holder, not be assignable or transferable other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined in the Code, the Employee Retirement Income Security Act, or the rules thereunder. (i) No Rights as a Stockholder. Neither the recipient of an Option under the Plan, nor an Option holder's successor(s) in interest, shall have any rights as a stockholder of the Company with respect to any Shares subject to an Option Awarded to such person until the date of issuance of a certificate for such Shares. (j) No Right to Employment. Neither the Plan, nor the Awarding of an Option, nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that an Eligible Director has a right to continue as a director for any period of time or at any particular rate of compensation. SECTION 8. CHANGE IN CONTROL PROVISION In the event of a "Change in Control" of the Company (or the removal of a director in connection with such a "Change in Control"), all Options Awarded pursuant to the Plan shall become immediately vested and each Option holder shall have the right to exercise such Options pursuant to their terms without regard to (i) any future vesting requirements contained in such Options or (ii) whether the recipient continues to serve as an Eligible Director of the Company at the time of exercise of the Option; provided, however, that in no event shall the Options be exercisable more than ten (10) years from the date of the corresponding Award. A "Change in Control" is defined as any sale or transfer of a majority of the assets of the Company, a sale or transfer (through a merger or otherwise) of greater than fifty percent (50%) of the outstanding stock of the Company, the public announcement of a tender offer for more than 30% of the outstanding stock of the Company, a change in the composition of a majority of the Board of Directors of the Company, or the execution by the Company of any agreement providing for any of the foregoing. Any Option not so exercised prior to the consummation of the event giving rise to the Change in Control shall remain exercisable, subject to adjustment as provided herein, for the remainder of the term of the Option. SECTION 9. EXPENSES OF THE PLAN All costs and expenses of the adoption and administration of the Plan shall be borne by the Company, and none of such charges shall be charged to any Option holder. SECTION 10. AGREEMENT AND REPRESENTATION OF DIRECTOR As a condition to the exercise of any portion of an Option, the Company may require the person exercising such Option to represent and warrant at the time of such exercise that any Shares acquired upon exercise are being acquired for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any government agency. Inability of the Company to -22- 5 obtain from any regulatory body or authority the approvals deemed necessary by the Company's counsel to be necessary to the lawful issuance and sale of any Shares shall relieve the Company from any liability in respect to the non-issuance or sale of such Shares unless and until said approvals are obtained. SECTION 11. TERMINATION AND AMENDMENT OF THE PLAN The Board may amend, terminate or suspend the Plan at any time, at its sole discretion; provided, however, that if required to qualify the Plan under Rule 16b-3 under Section 16 of the 1934 Act, as amended, no amendment shall be made more than once every six months that would change the amount, price or timing of Awards, other than to comply with changes in the Code, the Employee Retirement Income Security Act or the rules and regulations thereunder, and provided, further, that if required to qualify the Plan under Rule 16b-3, no amendment would: (a) materially increase the number of Shares that may be issued under the Plan; (b) materially modify the requirements as to eligibility for participation in the Plan; or (c) otherwise materially increase the benefits accruing to participants under the Plan. SECTION 12. RESERVATION OF SHARES OF STOCK The Company, during the term of the Plan, will at all times reserve and keep available, and will seek or obtain from any regulatory body having jurisdiction any requisite authority necessary to issue and to sell, the number of Shares that shall be sufficient to satisfy the requirements of the Plan. -23- -----END PRIVACY-ENHANCED MESSAGE-----