-----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, GKUffwCl3OI/bWar+f4BJbYEYM8J2aZPpLKaWKbZy6HRUzUH6MMPsDBOj6Le7XZ7 SuzzIPJBaHS72OLHjKvasg== 0000950135-96-003730.txt : 19960819 0000950135-96-003730.hdr.sgml : 19960819 ACCESSION NUMBER: 0000950135-96-003730 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960816 SROS: NYSE FILER: 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: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-05223 FILM NUMBER: 96616785 BUSINESS ADDRESS: STREET 1: 2 COLLEGE PARK DRIVE CITY: HOOKSETT STATE: NH ZIP: 03106 BUSINESS PHONE: 6032687000 S-3/A 1 HEALTHSOURCE, INC. 1 REGISTRATION NO. 333-5223 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM S-3/A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 HEALTHSOURCE, INC. (Exact Name of Registrant as Specified in Its Charter) NEW HAMPSHIRE 02-0387748 (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Organization) Identification No.) TWO COLLEGE PARK DRIVE HOOKSETT, NEW HAMPSHIRE 03106 (603) 268-7000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) NORMAN C. PAYSON, M.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER HEALTHSOURCE, INC. TWO COLLEGE PARK DRIVE HOOKSETT, NEW HAMPSHIRE 03106 (603) 268-7000 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) Copy to: DANIEL N. GREGOIRE, ESQ. SHEEHAN PHINNEY BASS + GREEN PROFESSIONAL ASSOCIATION 1000 ELM STREET MANCHESTER, NH 03105-3701 (603) 668-0300 1 2 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: ( ) If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: (X) If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ( ) If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ( ) If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: ( ) 2 3 SUBJECT TO COMPLETION, DATED AUGUST 16, 1996 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. HEALTHSOURCE, INC. $247,250,000 5% CONVERTIBLE SUBORDINATED NOTES DUE 2003 The 5% Convertible Subordinated Notes Due 2003 (the "Notes") of Healthsource, Inc., a New Hampshire corporation ("Healthsource" or the "Company"), and the shares of the Company's Common Stock, par value $.10 per share (the "Common Stock" and together with the Notes, the "Securities"), issuable upon conversion thereof, may be offered for sale from time to time for the account of certain holders of the Securities (the "Selling Holders") as described under "Selling Holders." The Selling Holders may from time to time sell the Securities offered hereby directly to other purchasers or through agents in ordinary brokerage transactions, in negotiated transactions or otherwise, at market prices prevailing at the time of sale, at prices related to then prevailing market prices or at negotiated prices. See "Plan of Distribution." The Notes will mature on March 1, 2003, unless previously redeemed or converted. Interest on the Notes is payable semi-annually on March 1 and September 1 of each year commencing September 1, 1996. The Notes bear interest from March 6, 1996. Holders of the Notes (the "Holders") are entitled through March 1, 2003, subject to prior redemption, to convert any Notes or portions thereof into Common Stock at a conversion price of $46.965 per share, subject to certain adjustments. See "Description of the Notes - Conversion of Notes." The Notes have been designated for trading in the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") market and listed for trading on the New York Stock Exchange (the "NYSE") under the symbol "HSO3". The Common Stock is traded on the NYSE under the symbol "HS." On August 14, 1996, the last reported sale price of the Common Stock on the NYSE was $13 3/8 per share. The Notes are redeemable, in whole or in part, at the option of the Company, at any time on or after March 1, 1999, at the declining redemption prices set forth herein plus accrued interest. In the event of a Change of Control (as defined herein), each Holder of Notes may require the Company to repurchase such Holder's Notes in whole or in part at a repurchase price of 101% of the principal amount thereof plus accrued interest. See "Description of Notes - - Change of Control." The Notes represent unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined herein) of the Company. In addition, because the Company's operations are conducted primarily through its operating subsidiaries, including regulated insurance companies and health maintenance organizations ("HMOs"), claims of regulators, creditors and holders of indebtedness of such subsidiaries will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including Holders of the Notes. The Notes were originally issued by the Company on March 6 and 8, 1996 to the Initial Purchasers (as defined herein) and were simultaneousy sold by the Initial Purchasers in transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), in the United States to persons reasonably believed to be "qualified institutional buyers" as defined in Rule 144A under the Securities Act, to certain qualified institutional buyers acting on behalf of institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and outside the United States to non-U.S. persons in offshore transactions in reliance on Regulation S under the Securities Act. 1 4 The Company will not receive any of the proceeds from the sale of any of the Notes or the Common Stock issuable upon conversion thereof offered by the Selling Holders hereunder. SEE "RISK FACTORS" ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AUGUST 16, 1996 2 5 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material also can be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site that contains reports, proxy statements and other information regarding registrants, like the Company, that file electronically with the Commission. Such reports, proxy statements and other information may be found at the Commission's Web site address http://www.sec.gov. The Common Stock is listed on the New York Stock Exchange and, in connection with such listing, the Company also files reports, proxy statements and other information with the NYSE. Such reports, proxy statements and other information filed by the Company can be inspected at the offices of the NYSE, 20 Broad Street, New York, NY 10005. The Company has filed with the Commission a Registration Statement on Form S-3 (together with any amendments or supplements thereto, the "Registration Statement") under the Securities Act with respect to the Securities to be offered and sold by means of this Prospectus. This Prospectus omits certain of the information contained in the Registration Statement and the exhibits and schedules thereto in accordance with the rules and regulations of the Commission. For further information regarding the Company and the Securities offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith, which may be inspected without charge at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of which may be obtained from the Commission at prescribed rates. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents heretofore filed with the Commission by the Company are incorporated by reference in their entirety in this Prospectus: 1. The Company's Annual Report on Form 10-K for the year ended December 31, 1995. 2. The Company's Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 1996. 3. The Company's Current Reports on Form 8-K dated June 14, 1995, as amended August 4, 1995, January 26, 1996, February 23, 1996, February 27, 1996, March 20, 1996, April 17, 1996, June 4, 1996, June 28, 1996 and August 2, 1996. 4. The Company's Proxy Statement for the Annual Meeting held on May 14, 1996. 5. The Company's Form 8-A Registration Statement dated August 2, 1996. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering of the Securities shall be deemed to be incorporated by reference in this Prospectus and to be a part of this Prospectus from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference in this Prospectus shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference in this Prospectus modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company hereby undertakes to provide without charge to each person to whom this Prospectus is delivered, upon the request of such person, a copy of any or all of the documents referred to above, other than exhibits to such documents unless such exhibits are specifically incorporated by reference herein or any incorporated document. Requests should be directed to Healthsource, Inc., Two College Park Drive, Hooksett, New Hampshire 03106, attention: Chief Financial Officer, telephone (603) 268-7000. 3 6 SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and consolidated financial statements and related notes included in and incorporated by reference in this Prospectus. In addition to other information in this Prospectus, the factors set forth under "Risk Factors" below should be considered carefully in evaluating an investment in the Securities offered hereby. THE OFFERING Issuer........................... Healthsource, Inc. Securities Offered............... $247,250,000 of 5% Convertible Subordinated Notes Due 2003 issued under an indenture (the "Indenture") between Healthsource and The Bank of New York, as trustee (the "Trustee"), and Common Stock issuable upon conversion thereof. Interest Payment Dates........... March 1 and September 1 of each year. The Notes bear interest from March 6, 1996. Maturity......................... March 1, 2003 Conversion Price................. Convertible into Common Stock, par value $.10 per share, of the Company at $46.965 per share, subject to adjustment as set forth herein. Redemption....................... The Notes are redeemable, in whole or in part, at the option of the Company, at any time on or after March 1, 1999, at the declining redemption prices set forth herein plus accrued interest. Change of Control................ In the event of a Change of Control (as defined herein), Holders of the Notes will have the right to require that the Company repurchase the Notes in whole or in part at a redemption price of 101% of the principal amount thereof plus accrued interest. See "Description of the Notes -- Change of Control." Ranking......................... The Notes are general unsecured obligations of the Company and are subordinated in right of payment to all existing and future Senior Indebtedness (as defined herein) of the Company. As of June 30, 1996, the Company had approximately $15 million of Senior Indebtedness outstanding. In addition, because the Company's operations are conducted primarily through its operating subsidiaries, including regulated insurance companies and HMOs, claims of holders of indebtedness of such subsidiaries, as well as claims of regulators and creditors of such subsidiaries, have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including Holders of the Notes. As of June 30, 1996, the aggregate liabilities of such subsidiaries were approximately $312 million. The Indenture does not limit the amount of additional indebtedness which the Company can create, incur, assume or guarantee, nor does the Indenture limit the amount of indebtedness which any subsidiary can create, incur, assume or guarantee. See "Description of the Notes -- Subordination." Use of Proceeds................. The Company will not receive any of the proceeds from the sale of any of the Notes or the Common Stock issuable upon conversion thereof. Trading......................... The Notes have been designated for trading in the PORTAL market and listed for trading on the NYSE under the symbol "HSO3." The Common Stock issuable upon conversion of the Notes has been listed for trading on the NYSE. The Common Stock is traded on the NYSE under the symbol "HS." On August 14, 1996, the last reported sale price of the Common Stock on the NYSE was $13 3/8 per share. 4 7 THE COMPANY Healthsource, a New Hampshire corporation established in 1985, is a geographically diversified provider of a broad range of managed healthcare services. Healthsource is a leading managed care provider with HMOs in North Carolina, South Carolina, New Hampshire, Massachusetts, Indiana, Maine, Tennessee, Arkansas, Syracuse, New York, Louisville, Kentucky, Georgia, north central Texas, southwestern Ohio and Connecticut. In a joint venture with Chubb Life Insurance Company, Healthsource also operates an HMO in the New York City and northern New Jersey areas. Healthsource acquired the group health, HMO and third-party administration ("TPA") business of Provident Life and Accident Insurance Company of America of Chattanooga, Tennessee ("Provident") in May 1995 (the "Provident Transaction"). The national indemnity insurance and TPA business acquired from Provident (collectively referred to as "Healthsource Provident") is concentrated in the Southeast and serves a total of over 2 million members. In February 1996, the Company completed the acquisition of substantially all of the HMO assets of Central Massachusetts Health Care, Inc. ("CMHC"), an 83,400 member HMO in Worcester, Massachusetts. As a result of the Provident Transaction and the membership of CMHC and strong enrollment gains in its existing plans, on January 1, 1996 Healthsource provided or administered healthcare benefits for approximately 3.5 million members. Healthsource also offers point of service ("POS") plans, preferred provider organization ("PPO") plans, utilization review ("UR") services, managed workers' compensation services, pharmacy benefit management services and other managed care consulting and administrative services to other healthcare payors including Provident and Liberty Mutual Insurance Company. The Company's principal executive offices are located at Two College Park Drive, Hooksett, New Hampshire 03106; telephone number (603) 268-7000. Healthsource seeks to enhance its position as a leader in providing quality and affordable healthcare in an expanding set of local markets. Healthsource's business strategy has three components: (i) to expand the number of geographic markets in which it offers HMOs and other services, (ii) to increase HMO enrollment in its existing markets by capitalizing on the historically low HMO penetration rate in most of those markets, emphasizing the conversion to HMO membership of members currently being served in the Company's indemnity and self-funded plans (especially those acquired in the Provident Transaction) and continuing to develop and offer new products for different segments of the population such as Medicare, and (iii) to continue positioning its HMOs to be less vulnerable to declining average premiums by linking a large portion of healthcare costs to premiums through global capitation arrangements or other suitable arrangements with healthcare providers. When entering new markets, Healthsource seeks to purchase existing plans or to seek strategic alliances with local providers to support start-up HMOs thereby lowering the risk of entry and enhancing the competitive position of such plans. In seeking to convert existing members to HMO membership, Healthsource continues to maintain close working relationships with local physicians and hospitals and, in certain markets, to provide operating and financial support to primary care practices in order to enhance the access to, and quality and cost effectiveness of, its managed care products. As part of its expansion strategy in all markets, Healthsource actively seeks opportunities to acquire, make significant investments in, or provide managed care services to HMOs, managed care companies, healthcare financing and administrative companies, healthcare providers and related businesses. The Company considers such opportunities in the ordinary course of its business. RECENT DEVELOPMENTS On August 5, 1996, the Company announced the mutual termination of negotiations with Advocate Health Care, an eight-hospital system, to acquire Health Direct, Inc., a 25,000 member HMO operating in the Chicago area. The Company had announced in April 1996 the signing of a letter of intent to acquire Health Direct and to enter into a long-term provider agreement with Advocate Health Care for an aggregate consideration of $27 million. On June 26, 1996, the Company announced that it had terminated its previously-reported agreement to acquire substantially all of the assets of PACC Health Plans and PACC HMO (together "PACC"), a 113,000 member HMO and managed care company based in the Portland, Oregon area. In January 1996, the Company signed an agreement to purchase PACC for an estimated cash purchase price of $80 million. Completion of the acquisition was subject to certain closing conditions which were not met. No further discussions with respect to such acquisition are expected. On May 31, 1996, the Company entered into an asset purchase agreement with Chubb Life Insurance Company of America ("Chubb Life") and various of its affiliates to acquire the remaining 85% interest in ChubbHealth, Inc. ("ChubbHealth"), a 45,000 member HMO operating in the New York City and northern New Jersey areas. The Company will acquire the stock of ChubbHealth for an estimated purchase price of $25 million, subject to adjustments. As part of the transition process, the Company will continue to manage ChubbHealth's operations and to plan the conversion to Healthsource systems. The Company has also agreed to provide certain guaranties relating to ChubbHealth's operating results during the transition period. Chubb Life and various of its affiliates have agreed to continue to write POS products for the benefit of ChubbHealth and to provide certain MIS and other services to ChubbHealth during the transition period. The transaction remains subject to the receipt of regulatory approvals and there can be no assurance as to when such approvals will be obtained. 5 8 Effective February 1, 1996, the Company acquired substantially all of the HMO assets of CMHC, a not-for-profit HMO with 83,400 members located in Worcester, Massachusetts. The Company paid approximately $46.5 million in cash for such HMO assets, which after post-closing adjustments will have a closing net worth of approximately $7.2 million (the "CMHC Transaction"). The Company continues to operate this HMO under the name Healthsource CMHC from the headquarters in Worcester and provides additional support and integration from the Company's corporate staff and HMO in New Hampshire. 6 9 RISK FACTORS Prospective purchasers of the Securities should carefully consider the following factors, in addition to other information contained or incorporated by reference in this Prospectus. Control and Predictability of Healthcare Costs. The Company's profitability depends in large part on predicting and maintaining effective control of the healthcare costs of its HMOs. The future profitability of the Company's HMOs is dependent upon controlling future healthcare costs in part through appropriate benefit design, utilization control and negotiation of favorable provider contracts, including global capitation arrangements with hospitals which generally link healthcare costs for assigned members to the premiums received for such members. The Company may be unable to predict accurately or to control healthcare costs because of many factors, including the inherent unpredictability of rates of utilization of services in any given period and the volatility of such use particularly in quarterly periods; major epidemics; undetected increases in costs of units of services (in some cases implemented by providers without prior notice); changes in risk profile of a rapidly increasing membership due to pre-existing medical conditions, changing demographics and other factors; and increased utilization driven by changes in physician practice patterns and new techniques (e.g., use of bone marrow transplants for an increasing number of diagnostic categories). There can be no assurance that the Company will be successful in predicting or mitigating the effect of any of these factors nor that its global capitation agreements will be able to effectively buffer these factors or costs for assigned members. Competition and Premium Pricing. The managed healthcare industry is highly competitive at both the local HMO level and in the regional and national employer markets. The principal competitive factors affecting the Company's products are premium rates and fees, plan design and flexibility, and physician/hospital network and reputation. The Company competes in all of its markets with Blue Cross plans, indemnity insurers, HMOs, TPAs, PPOs and other managed care companies. The Company also faces competition in many of its markets from hospitals and other provider groups who have organized their own networks to contract directly with employer groups. The cost of providing benefits is in many instances the controlling factor in obtaining and retaining employer groups, and in certain markets some competitors are underpricing the Company's products. In many historically under-penetrated markets such as the Carolinas, many new HMOs have been recently licensed which is reflected in premium pressure for new and renewal business. As a result of this competition, the Company experienced a 6.0% decline in average premium yield per member during the first six months of 1996. The Company expects the difficult premium pricing environment to continue and the Company's attempts to reverse the 1996 premium decline may not be successful. Accounting; MIS and Network Disruption Issues. Reserves for incurred but not reported claims ("IBNR") are a large component of the Company's medical claims payable reserve and are based upon an estimation of future claims using traditional actuarial techniques heavily influenced by historical claims experience; rapid growth and changing risk profiles could render the Company's IBNR estimates inaccurate and there can be no assurance as to the ultimate accuracy of such estimates or that subsequent adjustments will not cause fluctuations in the Company's operating results. The ability to predict IBNR, control costs in general and to manage increasingly complicated global capitation arrangements depends upon the use of sophisticated customized MIS systems; there can be no assurance that such systems can be developed quickly enough to effectively manage the increasing complexity of the Company's contractual arrangements nor that facility or equipment problems will not disrupt the Company's ability to effectively provide such MIS support. With the increasing complexity of contractual arrangements comes the potential for disagreements with major hospital providers over the reimbursement under such contracts, which disagreements (if not resolved) could disrupt relations with affiliated physician providers and could potentially affect the perception of the Company's plans in the affected markets. Acquisitions and New Products. A significant part of the Company's business strategy is to diversify into new geographic markets through acquisitions or start-up plans and to develop new products. Identifying and pursuing acquisition opportunities, integrating acquired businesses and managing growth requires a significant 7 10 amount of management time and skill. The Company may be unable to (i) negotiate acceptable terms with suitable acquisition candidates or ensure that, if negotiated, such acquisitions will be either approved by all relevant regulatory authorities or concluded, (ii) assimilate such acquired companies free from hidden risks undetected at the time of closing or (iii) manage future growth effectively. Until start-up HMOs reach a critical mass of membership, they generally produce operating losses (despite capitated provider contracts) and failure to generate sufficient membership in start-up markets could adversely affect operating results. The Company is expanding its product offerings, most notably by developing and seeking a license for Medicare risk products in most of its markets. The Company will expend approximately $5 million in 1996 in developing such Medicare products which will still require a substantial marketing program before the Company generates revenues from such products in any market; the failure to achieve Medicare membership quickly in various markets may further impact operating results as such development expenses are relatively fixed. There can be no assurance that the Company will successfully mitigate any of the foregoing risks. Impact of Healthcare Reform. Many federal and state proposals have been made in the past to reform the healthcare system. The Company anticipates that federal and state legislatures will continue to assess alternative healthcare systems and payment methodologies as well as mandated coverages, capitation limits, underwriting constraints and other measures that could affect the Company's business. The Company is unable to predict which, if any, of these healthcare reform proposals may be adopted. While the Company does not believe it would be materially adversely impacted by most of the proposed reforms, certain proposals could have such an impact; for example the imposition of a single-payor system in any state could potentially eliminate the Company's business in that state. See "Business - Governmental Regulation" in the Company's Form 10-K. Governmental Regulation. The Company's HMOs, insurance companies and certain of its other subsidiaries are licensed by and subject to periodic examination and extensive regulation by the states in which they operate and by the federal government. Such state and federal statutes and regulations are subject to change and such changes could adversely impact the Company's operations in the future. There can be no assurance that the Company will be able to obtain any regulatory approvals required to enter new markets or to offer new products. See "Business - Governmental Regulation" in the Company's Form 10-K. Subordination of Notes; Restricted Subsidiaries. The indebtedness evidenced by the Notes is subordinate to the prior payment in full of all Senior Indebtedness (as defined herein). As of June 30, 1996, the Company had approximately $15 million of Senior Indebtedness outstanding. In addition, because the Company's operations are conducted primarily through its operating subsidiaries, including regulated insurance companies and HMOs, claims of holders of indebtedness of such subsidiaries, as well as claims of regulators and creditors of such subsidiaries, have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including Holders of the Notes. As of June 30, 1996, the aggregate liabilities of such subsidiaries were approximately $312 million. The Indenture does not limit the amount of additional indebtedness, including Senior Indebtedness, which the Company or any of its subsidiaries can create, incur, assume or guarantee. During the continuance beyond any applicable grace period of any default in the payment of principal, premium, interest or any other payment due on the Senior Indebtedness, no payment of principal or interest on the Notes may be made by the Company. In addition, upon any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization, the payment of the principal and interest on the Notes is subordinated to the extent provided in the Indenture to the prior payment in full of all Senior Indebtedness and structurally subordinated to claims of regulators and creditors of each HMO and insurance subsidiary. By reason of these subordinations, in the event of the Company's dissolution, holders of Senior Indebtedness may receive more, ratably, and Holders of the Notes may receive less, ratably, than the other creditors of the Company. The Company's cash flow and ability to service debt, including the Notes, are heavily dependent upon the earnings of its subsidiaries and the distribution of those earnings to, or upon payments by those subsidiaries to, the Company. The subsidiaries are in many cases regulated HMO and insurance companies and the ability to make such distributions or payments may be substantially limited by, or subject to continuing approval of, the respective state insurance departments. See "Description of the Notes -- Subordination." Repurchase of Notes at the Option of Holders Upon a Change of Control; Availability of Funds. In the event of a Change of Control (as defined herein), each Holder will have the option to require the Company to 8 11 repurchase all or any part of the Holder's Notes for a purchase price equal to 101% of the principal amount thereof, plus accrued interest to the date of purchase. If a Change of Control were to occur, there can be no assurance that the Company would have sufficient funds to pay the Change of Control purchase price for all Notes tendered by the Holders thereof. See "Subordination of Notes; Restricted Subsidiaries" above. The Company's ability to pay the Change of Control purchase price is, and may in the future be, limited by the terms of the Company's bank credit facility or other agreements relating to borrowings which constitute Senior Indebtedness. Absence of Public Market; Volatility of Prices. The Notes have been designated for trading in the PORTAL market and listed for trading on the NYSE; and the Common Stock is traded on the NYSE. There can be no assurance that an active trading market will develop for the Notes and, as a result, there can be no assurance as to the liquidity of investments in the Notes. Also, there can be no assurance as to the price Holders may realize upon the sale of the Notes and the Common Stock into which the Notes are convertible. These prices are determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the Notes and Common Stock, the market price of the Common Stock, interest rates, investor perception of the Company, general economic and market conditions, fluctuations in quarterly earnings, general trends in the healthcare market, and by regulatory developments especially at the federal level. Accordingly, the market price of the Notes and Common Stock has been and in the future may be highly volatile. 9 12 SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA (UNAUDITED) In June 1996, the Company announced that it had signed an asset purchase agreement with Chubb Life to acquire the remaining 85% interest in ChubbHealth (the "Chubb Transaction"). The Company will acquire the stock of ChubbHealth for an estimated purchase price of $25 million, subject to adjustments. The agreement is subject to regulatory approvals. In February 1996, the Company acquired substantially all of the HMO assets of CMHC for approximately $46.5 million cash, subject to post-closing purchase price adjustments. The purchase price was funded with borrowings under the Company's revolving credit facility with Chase Manhattan Bank as administrative agent. Effective as of May 1, 1995, the Company acquired the medical services operations of Provident for $231 million in cash and newly issued preferred stock. The Company has formed two subsidiaries, Healthsource Provident Administrators, Inc. and Healthsource Provident Insurance Company to operate the acquired business. The following pro forma financial information has been prepared giving effect to the Provident Transaction, the CMHC Transaction and the pending Chubb Transaction as if each acquisition had taken place as of January 1, 1995 for the pro forma consolidated income statements and as if the pending Chubb Transaction had taken place as of June 30, 1996 for the pro forma condensed consolidated balance sheet. All three acquisitions have been accounted for as purchases. The carrying values of assets and liabilities for each entity have been estimated to approximate fair market value. Accordingly, no pro forma adjustments to these amounts were made to reflect the allocation and amount of the purchase price, the determination of which will be based upon final appraisals and valuations of all transferred assets and liabilities. Any adjustments to the allocation of the purchase price have been or will be made within one year from the acquisition date and are not expected to be material to the pro forma financial information taken as a whole. The pro forma financial information is not necessarily indicative of the results of operations or the financial position which would have been attained had the acquisitions been consummated at either of the foregoing dates or which may be attained in the future. The pro forma financial information should be read in conjunction with the historical consolidated financial statements of Healthsource. HEALTHSOURCE, INC. Pro Forma Condensed Consolidated Balance Sheet (unaudited) June 30, 1996 (all amounts in thousands)
Historical Pro Forma ------------ 1 Pro Forma Financial Healthsource ChubbHealth Adjustments Statements ------------ ----------- ----------- ---------- Cash & cash equivalents $ 99,395 $ 3,375 $ 102,770 Marketable securities 26,475 0 26,475 Premiums and administrative fees receivable 113,380 1,499 114,879 Restricted investments 116,711 116,711 Other current assets 65,551 134 65,685 -------- ------- ---------- Total current assets 421,512 5,008 426,520 -------- ------- ---------- Long term marketable securities 118,813 7,026 125,839 Property & leasehold improvements, net 122,962 699 123,661 Restricted investments 8,797 2,800 11,597 Intangible assets, net 306,666 23,020 (A) 329,686 Other assets 16,957 1,869 (2,250)(C) 16,576 -------- ------- ------- ---------- Total assets 995,707 17,402 20,770 1,033,879 ======== ======= ======= ========== Medical claims payable $172,415 $ 4,099 $ 176,514 Accounts payable & accrued expenses 129,290 8,702 137,992 Deferred revenue 16,549 1,358 17,907 Other current liabilities 716 32 748 -------- ------- ---------- Total current liabilities 318,970 14,191 333,161 -------- ------- ---------- Revolving note payable 15,000 25,750 (B) 40,750 Convertible subordinated notes 247,250 247,250 Other liabilities 5,826 0 5,826 -------- ------- ---------- Total liabilities 587,046 14,191 626,987 -------- ------- ---------- Common stock 6,377 1,000 (1,000) (C) 6,377 Additional paid in capital 224,724 16,500 (16,500) (C) 224,724 Retained earnings 180,479 (14,289) 12,520 (C) 178,710 Unrealized loss on marketable securities (2,919) 0 (C) (2,919) -------- ------- ---------- Total equity 408,661 3,211 406,892 -------- ------- ------- ---------- Total liabilities & equity 995,707 17,402 20,770 1,033,879 ======== ======= ======= ========== 1 INFORMATION DERIVED FROM INTERNAL FINANCIAL STATEMENTS. CHUBBHEALTH IS INCLUDED WITHIN A LARGE CONSOLIDATED GROUP. A SIGNIFICANT PORTION OF ITS OPERATING EXPENSES ARE ALLOCATED FROM THE PARENT. THESE FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF A STAND ALONE ORGANIZATION.
SEE NOTES TO THE PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ON PAGE 12. 10 13 HEALTHSOURCE, INC. Pro Forma Condensed Consolidated Statement of Operations (unaudited) For the Year to Date Period Ended June 30, 1996 (all amounts in thousands, except per share data)
Historical Pro Forma Pro Forma ---------- ProForma Financial 1 Pro Forma Financial Healthsource CMHC Adjustments Statements ChubbHealth Adjustments Statements ------------ ------- ----------- ---------- ----------- ----------- ---------- Medical premiums $730,806 $10,423 $741,229 $27,107 $768,336 Administrative and managed care fees 118,406 0 118,406 118,406 -------- ------- -------- ------- -------- Total Revenue 849,212 10,423 859,635 27,107 886,742 Expenses: Cost of medical premiums 590,935 10,638 (750)(D) 600,823 22,152 622,975 Selling, general & administrative 212,790 1,721 214,511 8,441 222,952 Depreciation & amortization 17,906 0 111 (D) 18,017 678 384 (A) 19,079 -------- ------- -------- ------- -------- Total Expenses 821,631 12,359 833,351 31,271 865,006 Operating Income 27,581 (1,936) 26,284 (4,164) 21,736 Interest & Other Income 12,032 127 12,159 380 12,539 Interest expense (5,854) (241)(D) (6,095) (773)(B) (6,868) -------- ------- -------- ------- -------- Income before taxes 33,759 (1,809) 32,348 (3,784) 27,407 Provision for taxes (11,699) 0 564 (D) (11,135) 1,316 462 (E) (9,357) -------- ------- -------- ------- -------- Net Income $ 22,060 $(1,809) $ 21,213 $(2,468) $ 18,050 -------- ------- -------- ------- -------- Preferred dividends (1,128) 0 (1,128) 0 (1,128) -------- ------- -------- ------- -------- Net income applicable to common shareholders $ 20,932 $(1,809) $ 20,085 $(2,468) $ 16,922 ======== ======= ======== ======= ======== Shares used to compute Net Income per share: 65,953 65,953 Net income per share: $ 0.32 $ 0.26 1 INFORMATION DERIVED FROM INTERNAL FINANCIAL STATEMENTS. CHUBBHEALTH IS INCLUDED WITHIN A LARGE CONSOLIDATED GROUP. A SIGNIFICANT PORTION OF ITS OPERATING EXPENSES ARE ALLOCATED FROM THE PARENT. THE FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF A STAND ALONE ORGANIZATION.
SEE NOTES TO THE PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ON PAGE 12. 11 14 HEALTHSOURCE, INC. NOTES TO THE PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (A) - Represents the recording of the excess of purchase price over the fair value of the net assets acquired along with the related amortization for the acquisition:
ChubbHealth ----------- Total purchase price: 25,000 Estimated acquisition costs: 750 ------ 25,750 Net assets acquired 2,730 ------ 23,020 Estimated useful life: 30 ------ Annual amortization: 767 Pro-rated for year to date 384
(B) - Represents the amount borrowed in conjunction with the purchase and the related interest expense calculated as follows:
ChubbHealth ----------- Amount borrowed: 25,750 Interest rate: 6.00% ------ Annual interest expense 1,545 Pro-rated for year to date 773
(C) - Represents the elimination of existing ChubbHealth equity in connection with the transaction. (D) - Represents pro-forma adjustments for the one month during the first quarter that Healthsource did not own CMHC. (E) - Represents the tax impact of adjustments calculated as follows:
ChubbHealth ----------- Adjustment A 384 Adjustment B 773 ----- 1,157 Effective tax rate: 40% ----- 462
12 15 HEALTHSOURCE, INC. Pro Forma Condensed Consolidated Statement of Operations (unaudited) For the Year Ended December 31, 1995 (all amounts in thousands, except per share data)
Historical ----------- Proforma Healthsource Provident Adjustments ------------ --------- ----------- Medical premiums $ 996,464 $ 94,768 Administrative and managed care fees 170,233 48,887 ---------- -------- Total Revenue 1,166,697 143,655 Expenses: Cost of medical premiums 771,284 76,519 Selling, general & administrative 299,666 57,052 (1,729)(A) Depreciation & amortization 24,129 11,305 1,896 (A) (3,717)(A) ---------- -------- Total Expenses 1,095,079 144,876 Operating Income 71,618 (1,221) (880)(A) Interest & Other Income 20,823 4,897 (700)(A) Interest expense (5,392) (2,266)(A) ---------- -------- Income before taxes 87,049 3,676 Provision for taxes (30,778) (1,170) 48 (A) ---------- -------- Net Income $ 56,271 $ 2,506 ---------- -------- Preferred dividends (4,167) 0 (2,083)(A) ---------- -------- Net income applicable to common shareholders $ 52,104 $ 2,506 ========== ======== Shares used to compute Net Income per share: 64,195 Net income per share: $ 0.81
Proforma Financial Pro Forma Statements CMHC Adjustments ---------- ---- ----------- Medical premiums $1,091,232 $129,389 Administrative and managed care fees 219,120 0 ---------- -------- Total Revenue 1,310,352 129,389 Expenses: Cost of medical premiums 847,803 112,056 3,200 (B) Selling, general & administrative 354,989 16,384 (403)(C) Depreciation & amortization 33,613 1,682 1,333 (D) ---------- -------- Total Expenses 1,236,405 130,122 Operating Income 73,947 (733) Interest & Other Income 24,140 2,223 Interest expense (7,658) (2,898)(E) ---------- -------- Income before taxes 90,429 1,490 Provision for taxes (31,900) 0 2,213 (F) ---------- -------- Net Income $ 58,529 $ 1,490 ---------- -------- Preferred dividends (6,250) 0 ---------- -------- Net income applicable to common shareholders $ 52,279 $ 1,490 ========== ======== Shares used to compute Net Income per share: Net income per share:
Pro Forma Pro Forma Financial 1 Pro Forma Financial Statements ChubbHealth Adjustments Statements ---------- ----------- ----------- ---------- Medical premiums $1,220,621 $35,788 $1,256,409 Administrative and managed care fees 219,120 219,120 ---------- ------- ---------- Total Revenue 1,439,741 35,788 1,475,529 Expenses: Cost of medical premiums 963,059 29,572 992,631 Selling, general & administrative 370,970 14,942 385,912 Depreciation & amortization 36,628 2,098 767 (D) 39,493 ---------- ------- ---------- Total Expenses 1,370,657 46,612 1,418,036 Operating Income 69,084 (10,824) 57,493 Interest & Other Income 26,363 942 27,305 Interest expense (10,556) (1,545)(E) (12,101) ---------- ------- ---------- Income before taxes 84,891 (9,882) 72,697 Provision for taxes (29,687) 3,447 925 (F) (25,315) ---------- ------- ---------- Net Income $ 55,204 $(6,435) $ 47,382 ---------- ------- ---------- Preferred dividends (6,250) 0 (6,250) ---------- ------- ---------- Net income applicable to common shareholders $ 48,954 $(6,435) $ 41,132 ========== ======= ========== Shares used to compute Net Income per share: 64,195 Net income per share: $ 0.64 1 INFORMATION DERIVED FROM INTERNAL FINANCIAL STATEMENTS. CHUBBHEALTH IS INCLUDED WITHIN A LARGE CONSOLIDATED GROUP. A SIGNIFICANT PORTION OF ITS OPERATING EXPENSES ARE ALLOCATED FROM THE PARENT. THESE FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF A STAND ALONE ORGANIZATION.
SEE NOTES TO THE PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ON PAGE 14. 13 16 HEALTHSOURCE, INC. NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (A)-Effective May 1, 1995, Healthsource acquired the group health, HMO and third party administration business of Provident Life and Accident Insurance Company of America, Inc. In connection with the agreement, Healthsource paid $131 million in cash and issued $100 million in preferred stock. Proforma adjustments include savings expected from economies of scale ($1,729); amortization of goodwill created in the transaction ($1,896); interest expense associated with debt incurred as a result of the transaction ($2,266); elimination of amortization expense associated with goodwill eliminated in the transaction ($3,717); lost interest ($880); the incremental reduction in interest income due to Provident's historical return being higher than Healthsource's expected return ($700); and the related tax impact of these adjustments. Additionally, an adjustment of $2,083 was made to reflect the preferred stock dividend for the entire year. (B)-Represents the payment of certain physician withholds in accordance with the terms of the purchase and sale agreement which was not reflected in the CMHC financial statements. (C)-Represents the elimination of non-recurring acquisition related expenses. (D)-Represents the recording of the excess of purchase price over the fair value of the net assets acquired along with the related amortization for each acquisition:
CMHC CHUBBHEALTH ------ ----------- Total purchase price: 46,800 25,000 Estimated acquisition costs: 1,500 750 ------ ------ 48,300 25,750 Net assets acquired: 8,320 2,730 ------ ------ 39,980 23,020 Estimated useful life: 30 30 ------ ------ Annual amortization: 1,333 767
(E)-Represents the amount borrowed in conjunction with the purchase and the related interest expense calculated as follows for each acquisition:
CMHC CHUBBHEALTH ------ ----------- Amount borrowed: 48,300 25,750 Interest rate: 6.00% 6.00% ------ ------ Annual interest expense 2,898 1,545
(F)-Represents the tax impact of adjustments calculated as follows for each acquisition:
CMHC CHUBBHEALTH ------ ----------- Adjustment B 3,200 Adjustment C (409) Adjustment D 1,333 767 Adjustment E 2,898 1,545 CMHC income (1,490) ------ ----- 5,532 2,312 Effective tax rate: 40% 40% ------ ----- 2,213 925
14 17 RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the Company's ratio of earnings to fixed charges on a historical basis in each of the five years in the period ended December 31, 1995, and for the six month periods ended June 30, 1996 and 1995.
Six Months Year Ended December 31, Ended June 30, ------------------------------------------------ ---------------- 1995 1994 1993 1992 1991 1996 1995 ------------------------------------------------ --------------- Ratio of earnings to fixed charges 7.8 -- -- -- -- 5.3 13.1
The following table sets forth the Company's ratio of earnings to fixed charges on a pro forma basis for the year ended December 31, 1995 and the six month period ended June 30, 1996:
December 31, 1995 June 30, 1996 ----------------- ------------- Ratio of earnings to fixed charges 3.9 4.0
For purposes of computing the ratio of earnings to fixed charges, earnings include pre-tax income and fixed charges include the total of interest expense and preferred stock dividends. For periods prior to June 30, 1995, the Company had no fixed charges. USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Notes or the Common Stock issuable upon conversion thereof by the Selling Holders. DESCRIPTION OF THE NOTES The Notes were issued under an Indenture dated as of March 6, 1996, as amended by the First Supplemental Indenture dated as of June 3, 1996 (the "Indenture"), between the Company and The Bank of New York, as trustee (the "Trustee"). Copies of the Indenture and the First Supplemental Indenture have been filed with the Commission as an exhibit to the Registration Statement. The following summaries of certain provisions of the Notes and the Indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and all the provisions of the Notes and the Indenture, including the definitions therein of certain terms which are not otherwise defined in this Prospectus. Wherever particular provisions or defined terms of the Indenture (or of the form of Notes which is a part thereof) are referred to, such provisions or defined terms are incorporated herein by reference. As used in this "Description of the Notes," the "Company" refers to Healthsource, Inc. and does not, unless the context otherwise indicates, include its subsidiaries. 15 18 GENERAL The Notes are general unsecured subordinated obligations of the Company and are convertible into Common Stock as described below under the subheading "Conversion of Notes." The Notes are limited to $247,250,000 aggregate principal amount, have been issued in fully registered form only in denominations of $1,000 in principal amount or any multiple thereof, and will mature on March 1, 2003, unless earlier redeemed at the option of the Company or at the option of the Holder upon a Change of Control. The Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the repurchase of securities of the Company or the incurrence of debt by the Company or any of its subsidiaries. The Notes bear interest from March 6, 1996 at the annual rate set forth on the cover page hereof, payable semi-annually on March 1 and September 1, commencing on September 1, 1996, to Holders of record at the close of business on the preceding February 15 and August 15, respectively. Interest is computed on the basis of a 360-day year composed of twelve 30-day months. Unless other arrangements are made, interest will be paid by check mailed to Holders entitled thereto. Principal will be payable, and the Notes may be presented for conversion, registration of transfer and exchange, without service charge, at the office of the Trustee in New York, New York. Reference is made to the information set forth below under the subheading "Form, Denomination and Registration" for information as to Notes held by "qualified institutional buyers" or by Holders outside of the United States in reliance upon Regulation S. The Notes are issued in fully registered form, without coupons, in denominations of $1,000 in principal amount and integral multiples thereof. CONVERSION OF NOTES The Holders of Notes are entitled at any time through the close of business on March 1, 2003, subject to prior redemption, to convert any Notes or portions thereof (in denominations of $1,000 in principal amount or multiples thereof) into Common Stock at a conversion price of $46.965, subject to adjustment as described below; provided that in the case of Notes called for redemption, conversion rights will expire at the close of business on the last Trading Day prior to the date fixed for redemption, unless the Company defaults in payment of the redemption price. A Note (or portion thereof) in respect of which a Holder is exercising its option to require redemption upon a Change of Control may be converted only if such Holder withdraws its election to exercise such redemption option in accordance with the terms of the Indenture. Except as described below, no adjustment will be made on conversion of any Notes for interest accrued thereon or for dividends paid on any Common Stock issued. If Notes not called for redemption are converted after the close of business on a record date for the payment of interest and prior to the opening of business on the next succeeding interest payment date, such Notes must be accompanied by funds equal to the interest payable on such succeeding interest payment date on the principal amount so converted. The interest payment with respect to a Note called for redemption on a date during the period from the close of business on or after any record date to the opening of business on the business day following the corresponding payment date will be payable on the corresponding interest payment date to the registered Holder at the close of business on that record date (notwithstanding the conversion of such Note before the corresponding interest payment date) and a Holder of Notes who elects to convert need not include funds equal to the interest paid. The Company is not required to issue fractional shares of Common Stock upon conversion of Notes and, in lieu thereof, will pay a cash adjustment based upon the closing price of the Common Stock on the last business day prior to the date of conversion. The conversion price is subject to adjustment (under formulae set forth in the Indenture) upon the occurrence of certain events, including: (i) the issuance of Common Stock as a dividend or distribution on the outstanding Common Stock, (ii) the issuance to all holders of Common Stock of certain rights or warrants to purchase Common Stock at less than the current market price, (iii) certain subdivisions, combinations and reclassifications of Common Stock, (iv) distributions to all holders of Common Stock of capital stock of the 16 19 Company (other than Common Stock) or evidences of indebtedness of the Company or assets (including securities, but excluding those dividends, rights, warrants and distributions referred to above and dividends and distributions in connection with the liquidation, dissolution or winding up of the Company and dividends and distributions paid exclusively in cash), (v) distributions consisting exclusively of cash (excluding any cash portion of distributions referred to in clause (iv) or in connection with a consolidation, merger or sale of assets of the Company as referred to in clause (ii) of the second paragraph below) to all holders of Common Stock in an aggregate amount that, together with (x) all other such all-cash distributions made within the preceding 12 months in respect of which no adjustment has been made and (y) any cash and the fair market value of other consideration payable in respect of any tender offers by the Company or any of its subsidiaries for Common Stock concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 20% of the Company's market capitalization (being the product of the then current market price of the Common Stock times the number of shares of Common Stock then outstanding) on the record date for such distribution and (vi) the purchase of Common Stock pursuant to a tender offer made by the Company or any of its subsidiaries which involves an aggregate consideration that, together with (x) any cash and the fair market value of any other consideration payable in any other tender offer by the Company or any of its subsidiaries for Common Stock expiring within the 12 months preceding such tender offer in respect of which no adjustment has been made and (y) the aggregate amount of any such all-cash distributions referred to in clause (v) above to all holders of Common Stock within the 12 months preceding the expiration of such tender offer in respect of which no adjustments have been made, exceeds 20% of the Company's market capitalization on the expiration of such tender offer. No adjustment of the conversion price will be made for shares issued pursuant to a plan for reinvestment of dividends or interest. Except as stated above, the conversion price will not be adjusted for the issuance of Common Stock or any securities convertible into or exchangeable for Common Stock or carrying the right to purchase any of the foregoing. No adjustment in the conversion price will be required unless such adjustment would require a change of at least 1% in the conversion price then in effect; provided that any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. In the case of (i) any reclassification or change of the Common Stock (other than changes in par value or from par value to no par value or resulting from a subdivision or a combination) or (ii) a consolidation or merger involving the Company or a sale or conveyance to another corporation of the property and assets of the Company as an entirety or substantially as an entirety, in each case as a result of which holders of Common Stock shall be entitled to receive stock, other securities, other property or assets (including cash) with respect to or in exchange for such Common Stock, the Holders of the Notes then outstanding will be entitled thereafter to convert such Notes into the kind and amount of shares of stock, other securities or other property or assets which they would have owned or been entitled to receive upon such reclassification, change, consolidation, merger, sale or conveyance had such Notes been converted into Common Stock immediately prior to such reclassification, change, consolidation, merger, sale or conveyance assuming that a Holder of Notes would not have exercised any rights of election as to the stock, other securities or other property or assets receivable in connection therewith. In the event of a taxable distribution to holders of Common Stock (or other transaction) which results in any adjustment of the conversion price, the Holders of Notes may, in certain circumstances, be deemed to have received a distribution subject to the United States income tax as a dividend; in certain other circumstances, the absence of such an adjustment may result in a taxable dividend to the holders of Common Stock. See "Certain Tax Considerations - U.S. Holders - Adjustments to Conversion Price." The Company from time to time may to the extent permitted by law reduce the conversion price by any amount for any period of at least 20 days, in which case the Company shall give at least 15 days' notice of such decrease, if the Board of Directors has made a determination that such decrease would be in the best interests of the Company, which determination shall be conclusive. The Company may, at its option, make such reductions in the conversion price, in addition to those set forth above, as the Company deems advisable to avoid or diminish any income tax to its stockholders resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. See "Certain Tax Considerations." SUBORDINATION 17 20 The payment of principal of, premium, if any, and interest on the Notes is, to the extent set forth in the Indenture, subordinated in right of payment to the prior payment in full of all Senior Indebtedness. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding related to the Company or its property, in an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, the holders of all Senior Indebtedness will first be entitled to receive payment in full of all amounts due or to become due thereon before the Holders of the Notes will be entitled to receive any payment in respect of the principal of, premium, if any, or interest on the Notes (except that Holders of Notes may receive securities that are subordinated at least to the same extent as the Notes to Senior Indebtedness and any securities issued in exchange for Senior Indebtedness). The Company also may not make any payment upon or in respect of the Notes (except in such subordinated securities) if (a) a default in the payment of the principal of, premium, if any, or interest on Senior Indebtedness occurs and is continuing beyond any applicable period of grace or (b) any other default occurs and is continuing with respect to Senior Indebtedness that permits holders of the Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the representative or representatives of holders of at least a majority in principal amount of Senior Indebtedness then outstanding. Payments on the Notes may and shall be resumed (i) in the case of a payment default, upon the date on which such default is cured or waived, or (ii) in the case of a non-payment default, 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Senior Indebtedness has been accelerated. No new period of payment blockage may be commenced within 360 days after the receipt by the Trustee of any prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been cured or waived for a period of not less than 180 days. "Senior Indebtedness" with respect to the Notes means the principal of, premium, if any, and interest on, and any fees, costs, expenses and any other amounts (including indemnity payments) related to the following, whether outstanding on the date of the Indenture or thereafter incurred or created: (a) indebtedness, matured or unmatured, whether or not contingent, of the Company for money borrowed evidenced by notes or other written obligations, (b) any interest rate contract, interest rate swap agreement or other similar agreement or arrangement designed to protect the Company or any of its subsidiaries against fluctuations in interest rates, (c) indebtedness, matured or unmatured, whether or not contingent, of the Company evidenced by notes, debentures, bonds or similar instruments or letters of credit (or reimbursement agreements in respect thereof), (d) obligations of the Company as lessee under capitalized leases and under leases of property made as part of any sale and leaseback transactions, (e) indebtedness of others of any of the kinds described in the preceding clauses (a) through (d) assumed or guaranteed by the Company and (f) renewals, extensions, modifications, amendments and refundings of, and indebtedness and obligations of a successor person issued in exchange for or in replacement of, indebtedness or obligations of the kinds described in the preceding clauses (a) through (f), unless the agreement pursuant to which any such indebtedness described in clauses (a) through (f) is created, issued, assumed or guaranteed expressly provides that such indebtedness is not senior or superior in right of payment to the Notes; provided, however, that the following shall not constitute Senior Indebtedness: (i) any indebtedness or obligation of the Company in respect of the Notes; (ii) any indebtedness of the Company to any of its subsidiaries or other affiliates; (iii) any indebtedness that is subordinated or junior in any respect to any other indebtedness of the Company other than Senior Indebtedness; and (iv) any indebtedness incurred for the purchase of goods or materials in the ordinary course of business. In the event that the Trustee (or paying agent if other than the Trustee) or any Holder receives any payment of principal or interest with respect to the Notes at a time when such payment is prohibited under the Indenture, such payment shall be held in trust for the benefit of, and shall be paid over and delivered to, the holders of Senior Indebtedness or their representative as their respective interests may appear. After all Senior Indebtedness is paid in full and until the Notes are paid in full, Holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Indebtedness. 18 21 As of June 30, 1996, the Company had approximately $15 million in principal amount of indebtedness that would be considered Senior Indebtedness under its unsecured revolving line of credit with Chase Manhattan Bank, as administrative agent, and a syndicate of other banks (the "Chase Facility"). The Company does not have any other material Senior Indebtedness outstanding as of such date. Pursuant to the recently amended terms of the Chase Facility, the Company will not be able to make aggregate borrowings under the Chase Facility in excess of $200 million. Such borrowings would constitute Senior Indebtedness and would rank prior in right of payment to the Holders of the Notes, notwithstanding that it is incurred subsequent to the issuance of the Notes. The Indenture does not prohibit or limit the incurrence of such Senior Indebtedness. In addition, because the Company's operations are conducted primarily through its operating subsidiaries, including regulated insurance companies and HMOs, claims of holders of indebtedness of such subsidiaries, as well as claims of regulators and creditors of such subsidiaries, have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including Holders of the Notes. As of June 30, 1996, the aggregate liabilities of such subsidiaries were approximately $312 million. Such HMO and insurance subsidiaries are subject to certain minimum capital requirements imposed by state insurance authorities. In addition, state insurance authorities have the power to disapprove of the payment of dividends and other intercompany payments by regulated HMO and insurance subsidiaries. Under certain circumstances, state insurance authorities have the power to impose increased minimum capital requirements and prohibit the payment of dividends and other upstream payments by such HMO and insurance subsidiaries, which could adversely affect the Company's ability to repurchase Notes whose Holders elect to cause the Company to repurchase their Notes upon a Change of Control, repay the Notes at maturity or make interest payments on the Notes. The Indenture does not limit the amount of additional indebtedness which any of the Company's subsidiaries can create, incur, assume or guarantee. Because of these subordination provisions, in the event of a liquidation or insolvency of the Company or any of its subsidiaries, Holders of Notes may recover less, ratably, than the holders of Senior Indebtedness. The Company expects from time to time to incur indebtedness constituting Senior Indebtedness other than debt under the Chase Facility. The Indenture does not prohibit or limit the incurrence of additional indebtedness, including Senior Indebtedness, by the Company or its subsidiaries. OPTIONAL REDEMPTION BY THE COMPANY The Notes are not redeemable at the option of the Company prior to March 1, 1999. At any time on or after that date, the Notes may be redeemed at the Company's option on at least 30 but not more than 60 days' notice, in whole at any time or in part from time to time, at the following prices (expressed in percentages of the principal amount), together with accrued interest to the date fixed for redemption if redeemed during the 12-month period beginning March 1:
REDEMPTION DATE PRICE ---- ----- 1999 102.5% 2000 101.7% 2001 100.8% and 100% on or after March 1, 2002
If fewer than all the Notes are to be redeemed, the Trustee will select the Notes to be redeemed in principal amounts of $1,000 or integral multiples thereof by lot or, in its discretion, on a pro rata basis. If any Note is to be redeemed in part only, a new Note or Notes in principal amount equal to the unredeemed principal portion thereof will be issued. If a portion of a Holder's Notes is selected for partial redemption and such Holder converts a portion of such Notes, such converted portion shall be deemed to be taken from the portion selected for redemption. No 19 22 sinking fund is provided for the Notes. CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder of Notes shall have the right to require that the Company repurchase such Holder's Notes in whole or in part in integral multiples of $1,000, at a purchase price in cash in an amount equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the date of purchase, pursuant to an offer (the "Change of Control Offer") made in accordance with the procedures described below and the other provisions in the Indenture. A "Change of Control" means an event or series of events in which (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) acquires "beneficial ownership" (as determined in accordance with Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total Voting Stock of the Company at an Acquisition Price (each term as defined herein) less than the conversion price then in effect with respect to the Notes and (ii) the holders of the Common Stock receive consideration which is not all or substantially all common stock that is (or upon consummation of or immediately following such event or events will be) listed on a United States national securities exchange or approved for quotation on the NASDAQ National Market or any similar United States system of automated dissemination of quotations of securities' prices; provided, however, that any such person or group shall not be deemed to be the beneficial owner of, or to beneficially own, any Voting Stock tendered in a tender offer until such tendered Voting Stock is accepted for purchase under the tender offer. "Voting Stock" means stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Acquisition Price" means the weighted average price paid by the person or group in acquiring the Voting Stock. Within 30 days following any Change of Control, the Company shall send by first-class mail, postage prepaid, to the Trustee and to each Holder of Notes, at such Holder's address appearing in the security register, a notice stating, among other things, that a Change of Control has occurred, the purchase price, the purchase date, which shall be a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed, and certain other procedures that a Holder of Notes must follow to accept a Change of Control Offer or to withdraw such acceptance. The Company will comply, to the extent applicable, with the requirements of Rule 13e-4 under the Exchange Act and other securities laws or regulations in connection with the repurchase of the Notes as described above. The occurrence of certain of the events that would constitute a Change of Control may constitute a default under the Chase Facility. Future indebtedness of the Company may contain prohibitions of certain events which would constitute a Change of Control or require the Company to offer to redeem such indebtedness upon a Change of Control. Moreover, the exercise by the Holders of Notes of their right to require the Company to purchase the Notes could cause a default under such indebtedness, even if the Change of Control itself does not, due to the financial effect of such purchase on the Company. Finally, the Company's ability to pay cash to Holders of Notes upon a purchase may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required purchases. Furthermore, the Change of Control provisions may in certain circumstances make more difficult or discourage a takeover of the Company and the removal of the incumbent management. MERGER, CONSOLIDATION AND SALE OF ASSETS The Company shall not consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets to any person unless: (i) either the Company is the resulting, surviving or transferee person (the "Successor Company") or the Successor Company is a person organized and existing under the laws of the United States or any State thereof or the District of Columbia, and the Successor Company (if not the Company) 20 23 expressly assumes by a supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Indenture and the Notes, including the conversion rights described above under "Conversion of Notes," (ii) immediately after giving effect to such transaction no Event of Default has happened and is continuing and (iii) the Company delivers to the Trustee an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture. EVENTS OF DEFAULT AND REMEDIES An Event of Default is defined in the Indenture as being: default in payment of the principal of or premium, if any, on the Notes when due at maturity, upon redemption or otherwise, including failure by the Company to purchase the Notes when required as described under "Change of Control" (whether or not such payment shall be prohibited by the subordination provisions of the Indenture); default for 30 days in payment of any installment of interest on the Notes (whether or not such payment shall be prohibited by the subordination provisions of the Indenture); default by the Company for 90 days after notice in the observance or performance of any other covenants in the Indenture; or certain events involving bankruptcy, insolvency or reorganization of the Company. The Indenture provides that the Trustee may withhold notice to the Holders of Notes of any default (except in payment of principal, premium, if any, or interest with respect to the Notes) if the Trustee considers it in the interest of the Holders of Notes to do so. The Indenture provides that if any Event of Default shall have occurred and be continuing, the Trustee or the Holders of not less than 25% in principal amount of the Notes then outstanding may declare the principal of and premium, if any, on the Notes to be due and payable immediately, but if the Company shall cure all defaults (except the nonpayment of interest on, premium, if any, and principal of any Notes which shall have become due by acceleration) and certain other conditions are met, such declaration may be canceled and past defaults may be waived by the Holders of a majority in principal amount of Notes then outstanding. The Holders of a majority in principal amount of the Notes then outstanding shall have the right to direct the time, method and place of conducting any proceedings for any remedy available to the Trustee, subject to certain limitations specified in the Indenture. The Indenture provides that, subject to the duty of the Trustee following an Event of Default to act with the required standard of care, the Trustee will not be under an obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the Holders, unless the Trustee receives satisfactory indemnity against any associated loss, liability or expense. SATISFACTION AND DISCHARGE; DEFEASANCE The Indenture will cease to be of further effect as to all outstanding Notes (except as to (i) rights of registration of transfer and exchange and the Company's right of optional redemption, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders of Notes to receive payments of principal of, premium, if any, and interest on, the Notes, (iv) rights of Holders of Notes to convert to Common Stock, (v) rights, obligations and immunities of the Trustee under the Indenture and (vi) rights of the Holders of Notes as beneficiaries of the Indenture with respect to the property so deposited with the Trustee payable to all or any of them), if (A) the Company will have paid or caused to be paid the principal of, premium, if any, and interest on the Notes as and when the same will have become due and payable or (B) all outstanding Notes (except lost, stolen or destroyed Notes which have been replaced or paid) have been delivered to the Trustee for cancellation or (C) (x) the Notes not previously delivered to the Trustee for cancellation will have become due and payable or are by their terms to become due and payable within one year or are to be called for redemption under arrangements satisfactory to the Trustee upon delivery of notice and (y) the Company will have irrevocably deposited with the Trustee, as trust funds, cash, in an amount sufficient to pay principal of and interest on the outstanding Notes, to maturity or redemption, as the case may be. Such trust may only be established if such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument pursuant to which the Company is a party or by which it is bound and the Company has delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions related to such defeasance have been complied with. 21 24 The Indenture will also cease to be in effect (except as described in clauses (i) through (vi) in the immediately preceding paragraph) and the indebtedness on all outstanding Notes will be discharged on the 123rd day after the irrevocable deposit by the Company with the Trustee, in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of Notes, of cash, U.S. Government Obligations (as defined in the Indenture) or a combination thereof, in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the principal of, premium, if any, and interest on the Notes then outstanding in accordance with the terms of the Indenture and the Notes ("legal defeasance"). Such legal defeasance may only be effected if (i) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Company is a party or by which it is bound, (ii) the Company has delivered to the Trustee an opinion of counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of this Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, based thereon, the Holders of the Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge by the Company and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred, (iii) the Company has delivered to the Trustee an opinion of counsel to the effect that after the 123rd day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and (iv) the Company has delivered to the Trustee an Officers' Certificate and an opinion of counsel stating that all conditions related to the defeasance have been complied with. The Company may also be released from its obligations under the covenants described above under "Change of Control" and "Merger, Consolidation and Sale of Assets" with respect to the Notes outstanding on the 123rd day after the irrevocable deposit by the Company with the Trustee, in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of Notes, of cash, U.S. Government Obligations or a combination thereof, in an amount sufficient in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the principal of, premium, if any, and interest on the Notes then outstanding in accordance with the terms of the Indenture and the Notes ("covenant defeasance"). Such covenant defeasance may only be effected if (i) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Company is a party or by which it is bound, (ii) the Company has delivered to the Trustee an Officers' Certificate and an opinion of counsel to the effect that the Holders of Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and covenant defeasance by the Company and will be subject to federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and covenant defeasance had not occurred, (iii) the Company has delivered to the Trustee an opinion of counsel to the effect that after the 123rd day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and (iv) the Company has delivered to the Trustee an Officers' Certificate and an opinion of counsel stating that all conditions related to the covenant defeasance have been complied with. Following such covenant defeasance, the Company will no longer be required to comply with the obligations described above under "Merger, Consolidation and Sale of Assets" and will have no obligation to repurchase the Notes pursuant to the provisions described under "Change of Control." Notwithstanding any satisfaction and discharge or defeasance of the Indenture, the obligations of the Company described under "Conversion of Notes" will survive to the extent provided in the Indenture until the Notes cease to be outstanding. MODIFICATIONS OF THE INDENTURE The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of not less than a majority in principal amount of the Notes at the time outstanding, to modify the Indenture or any supplemental indenture or the rights of the Holders of Notes, except that no such modification shall (i) extend the fixed maturity of any Note, reduce the rate or extend the time of payment of interest thereon, reduce the principal amount thereof or premium, if any, thereon, reduce any amount payable upon redemption thereof, change the obligation of the Company to make redemption of any Note upon the happening of a Change of Control, impair 22 25 or affect the right of a Holder to institute suit for the payment thereof, change the currency in which the Notes are payable, modify the subordination provisions of the Indenture in a manner adverse to the Holders of Notes or impair the right to convert the Notes into Common Stock subject to the terms set forth in the Indenture, without the consent of the Holder of each Note so affected or (ii) reduce the aforesaid percentage of Notes, without the consent of the Holders of all of the Notes then outstanding. REGISTRATION RIGHTS The Company agreed, under the terms of a registration rights agreement (the "Registration Rights Agreement") with the Initial Purchasers, for the benefit of the Holders of Notes, that the Company would use its best efforts to file with the Commission within 90 days after the original issuance date of the Notes a shelf registration statement (the "Shelf Registration Statement") on such form as the Company deems appropriate covering resales by the Holders of Notes and the shares of Common Stock issuable upon conversion of the Notes and would use all reasonable efforts to cause the Shelf Registration Statement to become effective as promptly as practicable and keep such Shelf Registration Statement effective until such date that is three years after the latest date of original issuance of the Notes. The Company will be permitted to suspend the use of the prospectus that is a part of such Shelf Registration Statement during certain periods of time and under certain circumstances relating to pending corporate developments and public filings with the Commission and similar events. A Holder who sells the Notes and the Common Stock issued upon conversion of the Notes pursuant to the Shelf Registration Statement generally will be required to be named as a selling stockholder in the related prospectus and to deliver a prospectus to purchasers and will be bound by the provisions of the Registration Rights Agreement which are applicable to such Holder (including certain indemnification provisions). At any time during the three-year period following the date of latest date of original issuance of the Notes when a registration statement under the Securities Act covering the Notes and the Shares is not effective or the Company has suspended use of the prospectus that is part of such registration statement, neither the Notes nor the Shares may be sold or otherwise transferred except in accordance with certain transfer restrictions set forth in the Indenture. CONCERNING THE TRUSTEE The Bank of New York, the Trustee under the Indenture, has been appointed by the Company as the paying agent, conversion agent, registrar and custodian with regard to the Notes. The Bank of New York also serves as the transfer agent and registrar of the Common Stock. The Trustee and/or its affiliates may in the future provide banking and other services to the Company in the ordinary course of their respective businesses. DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 800,000,000 shares of Common Stock, par value $.10 per share, and 10,000,000 shares of Preferred Stock (the "Preferred Stock"). As of August 6, 1996, 63,770,957 shares of Common Stock were issued and outstanding and no shares of Preferred Stock were issued and outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote per share in the election of directors and on all other matters to be voted upon by the stockholders. The Company's Board of Directors is divided into three classes, with the directors in each class holding office for a term of three years following election. Subject to the rights of holders of outstanding Preferred Stock, if any, the holders of Common Stock are entitled to receive such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. The Company has not paid cash dividends on its Common Stock since its inception and does not expect to pay cash dividends on the Common Stock in the foreseeable future. In the event of a liquidation, dissolution, or winding up of the Company, the holders of Common Stock have the right to a ratable portion of the assets remaining after payment to the Company's 23 26 creditors, subject to any preferential payments required to be made to holders of outstanding Preferred Stock, if any. Holders of Common Stock do not have cumulative voting, preemptive, redemption or conversion rights. All outstanding shares of Common Stock are, and the shares issuable upon conversion of the Notes sold in this offering will be, fully paid and nonassessable. The preferences and rights of holders of shares of Common Stock may become subject to those of holders of shares of any series of Preferred Stock which the Company may issue in the future. The Company adopted a Rights Agreement (the "Rights Agreement") with The Bank of New York, as Rights Agent, as of July 29, 1996. Pursuant to the Rights Agreement, each holder of Common Stock outstanding as of August 12, 1996 and thereafter (subject to certain exceptions) will receive rights ("Rights") to purchase additional shares of Common Stock at a price of $70 per share. The Rights Agreement provides that, upon any person or group acquiring, or announcing a bid which could result in the acquisition of, beneficial ownership of 20% or greater of the outstanding Common Stock, the Rights will be distributed to stockholders other than the acquiring person or group and will become exercisable. Upon the happening of certain further events, the purchase price of the Rights will be adjusted so that the holders of the Rights, other than the acquiring person or group, will be entitled to purchase Common Stock with a market value of twice the $70 purchase price. The Rights will remain outstanding until August 12, 2006, unless earlier redeemed by the Company. If exercised, the Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors. The existence of the Rights may have the effect of discouraging a person or group from taking a substantial equity interest in the Company or seeking to obtain control of the Company without negotiating with the Board of Directors. The terms and effects of the Rights Agreement are further described in the Company's Form 8-A Registration Statement dated August 2, 1996, which description is incorporated by reference herein. PREFERRED STOCK The Board of Directors has the authority, without further stockholder approval, to issue the shares of Preferred Stock in one or more series from time to time and to fix the powers, designations, preferences, and rights, and the qualifications, limitations, or restrictions of such preferences and/or rights. While the issuance of Preferred Stock could provide needed flexibility in connection with possible acquisitions and for other corporate purposes, such issuance could also make it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company or discourage an attempt to gain control of the Company, and might adversely affect the holders of Common Stock. Among other things, the Preferred Stock may be issued with extraordinary voting, dividend, redemption or conversion rights. TRANSFER AGENT AND REGISTRAR The Bank of New York has been appointed by the Company as the transfer agent and registrar of the Common Stock. CERTAIN TAX CONSIDERATIONS GENERAL The following is a discussion of certain U.S. federal income tax and estate tax consequences of the purchase, ownership and disposition of the Notes as of the date hereof. For purposes of this discussion, a "U.S. Holder" is a Holder that is an individual who is a citizen or resident of the United States, a corporation or a partnership that is organized under the laws of the United States or any state thereof or an estate or trust whose income is includible in gross income regardless of its source. A "Non-U.S. Holder" is a Holder that is not a U.S. Holder. This summary applies only to Notes and Common Stock held as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). It does not discuss all of the tax consequences that may be relevant to a Holder in light of its particular circumstances or to Holders subject to special rules, such as dealers in securities or foreign currencies, financial institutions, life insurance companies, or regulated investment companies, or to Holders whose functional currency is not the United States dollar or who hold the Notes or the Common Stock as part of a synthetic security, conversion transaction, or certain "straddle" or hedging transactions. The U.S. federal income tax and estate tax considerations set forth below are based upon the Code and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified, possibly with retroactive effect, so as to result in U.S. federal income tax consequences different from those presented below. U.S. HOLDERS Interest. Interest on a Note should be taxable to a U.S. Holder as ordinary interest income in accordance with the U.S. Holder's method of accounting for U.S. federal income tax purposes. Sale, Exchange or Redemption of a Note. A U.S. Holder should recognize gain or loss, if any, on the sale, redemption or other taxable disposition of a Note in an amount equal to the difference, if any, between the U.S. Holder's adjusted tax basis in the Note and the amount received therefor (other than amounts attributable to accrued and unpaid interest on the Notes, which should be treated as interest for U.S. federal income tax purposes). Subject to the market discount rules noted under "U.S. Holders -- Market Discount and Bond Premium" below, gain or loss, 24 27 if any, recognized on the sale, redemption or other taxable disposition of a Note generally should be long-term capital gain or loss if the Note was held for more than one year as of the date of disposition. Market Discount and Bond Premium. If a U.S. Holder acquires a Note subsequent to its original issuance and the Note's stated redemption price at maturity exceeds the U.S. Holder's initial tax basis in the Note by more than a de minimis amount, the U.S. Holder should generally be treated as having acquired the Note at a "market discount" equal to such excess. In addition, if a U.S. Holder's initial tax basis in a Note exceeds the stated redemption price at maturity of the Note, the U.S. Holder should generally be treated as having acquired the Note with "bond premium" in an amount equal to such excess. U.S. Holders should consult their tax advisers regarding the existence, if any, and tax consequences of market discount and bond premium. Conversion of the Notes. A U.S. Holder should not recognize gain or loss upon conversion of the Notes into Common Stock. The U.S. Holder's tax basis in shares of Common Stock received upon conversion should be the same as the U.S. Holder's adjusted tax basis of the Notes converted (reduced by the portion of such basis allocable to any fractional Common Stock interest for which the U.S. Holder receives a cash payment from the Company). The holding period of the Common Stock received in the conversion should include the holding period of the Notes that were converted. A U.S. Holder generally should recognize gain (or loss) upon a conversion to the extent that any cash paid in lieu of a fractional share of Common Stock exceeds (or is less than) its tax basis allocable to such fractional share. Dividends. Dividends paid on Common Stock received upon conversion will be taxable to a U.S. Holder as ordinary income, to the extent paid out of the Company's current or accumulated earnings and profits. Subject to certain restrictions, dividends received by a corporate U.S. Holder generally should be eligible for the 70% dividends received deduction. Sale of Common Stock. A U.S. Holder of Common Stock received on conversion who sells or otherwise disposes of such stock in a taxable transaction will recognize capital gain or loss equal to the difference between the cash and the fair market value of any property received on such sale and the U.S. Holder's tax basis in such stock. Such gain or loss will be long term gain or loss if the holding period for such Common Stock was more than one year. Redemption of Common Stock. A redemption by the Company of some or all of a U.S. Holder's Common Stock will be treated as a dividend to the redeeming U.S. Holder to the extent of the Company's current and accumulated earnings and profits unless the redemption meets one of the tests under Section 302(b) of the Code. If one of the tests under Section 302(b) is met, the redemption will be treated as an exchange giving rise to capital gain or loss, except to the extent of declared but unpaid dividends. Such gain or loss will be long term capital gain or loss if the holding period for such Common Stock was more than one year. U.S. Holders should consult their tax advisors as to the application of Section 302(b) to their particular circumstances. Adjustments to Conversion Price. Pursuant to Treasury Regulations promulgated under Section 305 of the Code, a U.S. Holder of a Note should be treated as having received a constructive distribution from the Company upon an adjustment in the conversion price of the Notes if (i) as a result of such adjustment, the proportionate interest of such U.S. Holder in the assets or earnings and profits of the Company is increased and (ii) the adjustment is not made pursuant to a bona fide, reasonable, anti-dilution formula. An adjustment in the conversion price would not be considered made pursuant to such a formula if the adjustment were made to compensate for certain taxable distributions with respect to the Common Stock into which the Notes are convertible. Thus, under certain circumstances, a decrease in the conversion price of the Notes may be taxable to a U.S. Holder of a Note as a dividend to the extent of the current or accumulated earnings and profits of the Company. In addition, the failure to adjust fully the conversion price of the Notes to reflect distributions of stock dividends with respect to the Common Stock may result in a taxable dividend to the U.S. Holders of the Common Stock. Backup Withholding and Information Reporting. A U.S. Holder of a Note, or of Common Stock issued upon conversion of a Note, may be subject to information reporting and possible backup withholding. If applicable, backup withholding would apply at a rate of 31% with respect to dividends or interest on, or the proceeds of a sale, 25 28 exchange, redemption, retirement, or other disposition of, such Note or Common Stock, as the case may be, unless (i) such U.S. Holder is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable backup withholding rules. NON-U.S. HOLDERS The Notes. The payment of interest on a Note should generally not be subject to U.S. federal withholding tax, if (1) the interest is not effectively connected with the conduct of a trade or business within the United States, (2) the Non-U.S. Holder does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote, (3) the Non-U.S. Holder is not a controlled foreign corporation that is related to the Company actually or constructively through stock ownership and (4) either (i) the beneficial owner of the Note certifies to the Company or its agent, under penalties of perjury, that it is not a U.S. Holder and provides its name and address on U.S. Treasury Form W-8 (or on a suitable substitute form) or (ii) a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "financial institution") and holds the Note certifies under penalties of perjury that such a Form W-8 (or suitable substitute form) has been received from the beneficial owner by it or by a financial institution between it and the beneficial owner and furnishes the payer with a copy thereof. A Non-U.S. Holder should generally not be subject to U.S. federal income tax on any gain or income realized in connection with the sale, exchange, retirement, or other disposition of a Note, including the exchange of a Note for Common Stock, unless the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition, and either (a) has a tax home in the United States and the gain from the disposition is not attributable to an office of other fixed place of business maintained by such non-U.S. Holder in a foreign country or (b) the gain from the disposition is attributable to an office or other fixed place of business maintained by such non-U.S. Holder in the United States. A Note held directly by an individual who, at the time of death, is not a citizen or resident of the United States should not be includible in such individual's gross estate for U.S. estate tax purposes as a result of such individual's death if the individual does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote and, at the time of the individual's death, if payments with respect to such Note would not have been effectively connected with the conduct by such individual of a trade or business in the United States. Even if the Note is includible in the gross estate under the foregoing rules, the Note may be excluded under the provisions of an applicable estate tax treaty. The Common Stock. In general, dividends (including any amounts that are treated as dividends as described above) paid to a Non-U.S. Holder of the Common Stock should be subject to U.S. federal income tax withholding at a 30% rate unless such rate is reduced by an applicable income tax treaty. Dividends that are effectively connected with such Non-U.S. Holder's conduct of a trade or business in the United States or, if a tax treaty applies, attributable to a permanent establishment, or, in the case of an individual, a "fixed base," in the United States ("U.S. trade or business income") are generally subject to U.S. federal income tax at regular rates, but are not generally subject to the 30% withholding tax if the Non-U.S. Holder files the appropriate form with the payer. Any U.S. trade or business income received by a Non-U.S. Holder that is a corporation may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be applicable under an income tax treaty. Dividends paid to an address in a foreign country are presumed (absent actual knowledge to the contrary) to be paid to a resident of such country for purposes of the withholding tax discussed above and, under the current interpretation of Treasury Regulations, for purposes of determining the applicability of a tax treaty rate. However, on April 22, 1996, the Internal Revenue Service (the "Service") proposed regulations (the "Proposed Regulations") which would generally be effective for payments made after December 31, 1997, under which a Non-U.S. Holder of the Common Stock who wishes to claim the benefit of an applicable tax treaty rate would be required to satisfy applicable certification and other requirements. Prospective investors who would be Non-U.S. Holders should consult their tax advisors regarding the possible application of these rules. 26 29 A Non-U.S. Holder of the Common Stock that is eligible for a reduced rate of U.S. federal withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS. A Non-U.S. Holder of the Common Stock should generally not be subject to U.S. income or withholding tax on gain realized on the sale, exchange or redemption (provided that the redemption is treated as the sale or exchange of the stock) of such stock, unless the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition, and either (a) has a tax home in the United States and the gain from the disposition is not attributable to an office or other fixed place of business maintained by such Non-U.S. Holder in a foreign country or (b) the gain from the disposition is attributable to an office or other fixed place of business maintained by such Non-U.S. Holder in the United States. Common Stock held directly by an individual who at the time of death is not a citizen or resident of the United States will nevertheless generally be includible in the gross estate of such individual for U.S. estate tax purposes, subject to contrary provisions of an applicable estate tax treaty. Backup Withholding and Information Reporting. Payments on the Notes made by the Company or any paying agent of the Company and payments of dividends on the Common Stock to certain noncorporate Non-U.S. Holders generally should be subject to information reporting and possibly to "backup withholding" at a rate of 31%. Information reporting and backup withholding do not apply, however, to payments made outside the United States by the Company or a paying agent on a Note or to payments of dividends on the Common Stock if the certification described under "Non-U.S. Holders -- The Notes" above is received, provided in each case that the payer does not have actual knowledge that the Holder is a U.S. Holder. Payment of proceeds from a sale of a Note or the Common Stock to or through the U.S. office of a broker is subject to information reporting and backup withholding unless the Non-U.S. Holder certifies as to its non-U.S. status or otherwise establishes an exemption from information reporting and backup withholding. Payment outside the United States of the proceeds of the sale of a Note or the Common Stock to or through a foreign office of a "broker" (as defined in applicable U.S. Treasury Regulations) should not be subject to information reporting or backup withholding, except that if the broker is a U.S. person, a controlled foreign corporation for U.S. federal income tax purposes or a foreign person 50% or more of whose gross income is from a U.S. trade or business, information reporting should apply to such payment unless the broker has documentary evidence in its records that the beneficial owner is not a U.S. Holder and certain other conditions are not met or the beneficial owner otherwise establishes an exemption. The Proposed Regulations could affect the procedures to be followed by a Non-U.S. Holder or a financial institution in establishing such Non-U.S. Holder's non-United States status. Each Non-U.S. Holder should consult its tax advisor regarding the effect, if any, of the Proposed Regulations on its purchase, ownership, conversion, and disposition of the Notes, and its ownership and disposition of the Common Stock obtained as a result of any such conversion. THE U.S. FEDERAL INCOME TAX AND ESTATE TAX DISCUSSION SET FORTH ABOVE IS INTENDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR HOLDER'S SITUATION. PERSONS CONSIDERING A PURCHASE OF THE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF THE NOTES AND THE COMMON STOCK, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL OR FOREIGN LAWS AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES (POSSIBLY INCLUDING RETROACTIVE CHANGES) IN U.S. FEDERAL AND OTHER TAX LAWS. SELLING HOLDERS The Notes were initially issued and sold to Bear, Stearns & Co., Inc., Goldman, Sachs & Co., Merrill Lynch & Co., Morgan Stanley & Co. Incorporated, Robertson, Stephens & Company and Smith Barney Inc. 27 30 (together, the "Initial Purchasers"). The Selling Holders acquired the Notes (a) from the Initial Purchasers in transactions complying with Rule 144A, Regulation D or Regulation S under the Securities Act or (b) in other permitted resale transactions exempt from registration under the Securities Act from the Initial Purchasers or holders who acquired the Notes from the Initial Purchasers or other prior holders thereof. The Company agreed to indemnify and hold the Initial Purchasers harmless against certain liabilities under the Securities Act that would arise in connection with the sale of the Notes by the Initial Purchasers. The Selling Holders may from time to time offer and sell pursuant to this Prospectus any or all of the Notes or Common Stock issued upon conversion thereof. Except as otherwise indicated, the table below sets forth certain information with respect to the Selling Holders and the Securities as of August 15, 1996. The term Selling Holders includes the beneficial owners of the securities listed below and their transferees, pledgees, donees or other successors. Unless otherwise noted, the nature of beneficial ownership is sole voting and/or investment power. Other than as a result of the ownership of Securities indicated below, none of the Selling Holders has had any material relationship with the Company or any of its affiliates within the past three years.
Aggregate Principal Number of Shares Amount of Notes of Common Stock Name That May Be Sold That May Be Sold* - ---- -------------------------- ------------------ 1. San Diego City Employees Retirement System 540,000 11,497 2. Occidental College 160,000 3,406 3. San Diego County Convertible 1,840,000 39,178 4. Boston Museum of Fine Arts 60,000 1,277 5. Wake Forest University 460,000 9,794 6. Presbyterian Healthcare 330,000 7,026 7. Equity Portfolio(1) 15,000,000 319,386 8. South Dakota Retirement System 3,500,000 74,523 9. The TCW Group, Inc. on behalf of the following accounts:(2) (a) TCW Convertible Value Fund 2,230,000 47,482 (b) General Motors Salaried Employees Convertible Fund 5,600,000 119,237 (c) State of Michigan Employees Retirement Fund 1,440,000 30,661 (d) TCW Convertible Securities Fund 3,325,000 70,797 (e) Cincinnati Bell Telephone Convertible Value Fund 625,000 13,307 (f) Massachusetts Mutual Life Insurance Company 590,000 12,562 (g) North Dakota State Workers Compensation Fund 845,000 17,992 (h) TCW/DW Income & Growth Fund 415,000 8,836 (i) Medical Malpractice Insurance Association 130,000 2,768 (j) TCW Convertible Strategy Fund 890,000 18,950 (k) TCW Convertible Value L.P. 340,000 7,239 (l) North Dakota State Land Dept. 310,000 6,600 10. Oppenheimer Bond Fund for Growth(3) 6,000,000 127,754 11. Allstate Insurance Co. 1,500,000 31,938 12. KD Offshore Fund, C.V. 500,000 10,646 13. Oppenheimer Main Street Funds, Inc. for the account of: Oppenheimer Main Street Income & Growth Fund 20,000,000 425,849 14. Kellner, Dileo & Co. 4,100,000 87,299 15. Fidelity Financial Trust:(4) Fidelity Convertible Securities Fund 3,000,000 63,877 16. Fidelity Management Trust Company on behalf of an account managed by it(5) 2,000,000 42,584 17. Franklin Investors Securities Trust, Convertible Securities Fund 2,250,000 47,908 18. ALCAN Corp. Master Retirement Trust 75,000 1,596 19. Benjamin Moore & Co. Retirement Income 85,000 1,809 20. Nestle USA 40,000 851 21. Fairfax County Supplemental Retirement 420,000 8,942 22. Fluor Corp. Master Retirement Trust-BEA 90,000 1,916 23. Halliburton Company Employee Benefit 1,000,000 21,292 24. Holton-Arms School Pooled Investment FD 30,000 638 25. C.I. American Fund 260,000 5,536 26. Taliac Inv. TRAF 8,500,000 180,985 27. General Motors Corp. LAMG 17,000,000 361,971 28. GM JP Morgan Covertible 10,000,000 212,924 29. Boston Harbor Trust Co., N.A. (6) 400,000 8,516 30. Goldman Sachs International 1,000,000 21,292 31. Goldman, Sachs & Co. 17,510,000 372,830 32. Lord Abbett Bond Debenture Trust 1,200,000 25,550 33. Lord Abbett Bond Debenture Fund Agreement 6,000,000 127,754 34. Elisabeth Ingalls Gillet Trust 89,000 1,895 35. General Motors Foundation Inc. 700,000 14,904 36. Lipco Partners, L.P. 8,000,000 170,339 37. Multi Commercial Bank 50,000 1,064 Any other Selling Holder or future transferee from any such Selling Holder 96,821,000 2,061,623 ------------ --------- Total $247,250,000 5,264,600 ============ =========
*Rounded to nearest whole share. Assumes a conversion price of $46.965 per share, and a cash payment in lieu of fractional share interest. (1) Equity Portfolio is a portfolio in the Preferred Master Trust Group (the "Trust Group") and is a series of a registered investment company. American Express Financial Corporation ("AEFC"), formerly known as IDS Financial Corporation, a registered investment adviser, provides investment advisory services to the Trust Group and to certain other registered investment companies. AEFC is a wholly-owned subsidiary of American Express Company. The information set forth in the table with respect to the portfolio and the information set forth in this footnote was provided by AEFC. (2) TCW Brokerage Services, Inc., an affiliate of the TCW Group, Inc., is a registered broker-dealer. (3) Oppenheimer Funds Distributor, Inc. ("OFDI"), the general distributor of the open-end Oppenheimer mutual funds (including Oppenheimer Bond Fund for Growth) is a registered broker-dealer. OFDI is a wholly-owned subsidiary of Oppenheimer Funds, Inc. the registered investment adviser to the Oppenheimer mutual funds (including Oppenheimer Bond Fund for Growth). (4) Fidelity Financial Trust is a portfolio of a registered investment company or a private investment account advised by Fidelity Management & Research Company ("FMR Co."). FMR Co. is a Massachusetts corporation and a registered investment adviser and provides investment advisory services to such entity above. FMR Co. is a wholly-owned subsidiary of FMR Corp. ("FMR"), a Massachusetts corporation. (5) The indicated securities are owned directly by a private employee benefit plan for which Fidelity Management Trust Company ("FMTC") serves as trustee or managing agent. FMTC is a wholly-owned subsidiary of FMR and a bank as defined under the Exchange Act. (6) The indicated figure for Common Stock does not include 323,725 shares currently held by Boston Harbor Trust Co., N.A. which are not included in the Registration Statement and Prospectus. The preceding table has been prepared based upon information furnished to the Company by the Depository Trust Company and by or on behalf of the Selling Holders. Additional information concerning ownership of the Securities offered hereby rests with certain holders of the Securities who are not named in the preceding table, with whom the Company believes it has no affiliation and from whom the Company has received no response to its request for such information. In view of the fact that Selling Holders may offer all or a portion of the Notes or shares of Common Stock held by them pursuant to the offering contemplated by this Prospectus, and because this offering is not being underwritten on a firm commitment basis, no estimate can be given as to the amount of Notes or the number of shares of Common Stock that will be held by the Selling Holders after completion of the offering made hereby. In addition, the Selling Holders may have sold, transferred or otherwise disposed of all or a portion of their Notes and/or Common Stock since the date on which they provided the information set forth above, in transactions exempt from the registration requirements of the Securities Act. Information concerning the Selling Holders may change from time to time and any such changed information will be set forth in supplements to this Prospectus if and when necessary. In addition, the per share conversion price, and therefor the number of shares issuable upon conversion of the Notes, is subject to adjustment under certain circumstances. Accordingly, the aggregate principal amount of Notes and the number of shares of Common Stock issuable upon conversion of the Notes offered hereby may increase or decrease. PLAN OF DISTRIBUTION The Securities covered hereby may be offered and sold from time to time by the Selling Holders. The Selling Holders will act independently of the Company in making decisions with respect to the timing, manner and size of each sale. Sales of the Securities are, in general, expected to be made at the market price prevailing at the time of each such sale; however, prices in negotiated transactions may differ considerably. Such sales may be made 28 31 on the NYSE or otherwise, at market prices prevailing at the time of sale, at prices related to the then prevailing market prices or in negotiated transactions, including without limitation pursuant to one or more of the following methods: (a) purchases by a broker-dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (b) ordinary brokerage transactions and transactions in which a broker solicits purchasers; and (c) block trades in which a broker-dealer so engaged will attempt to sell the Securities as agent but may take a position and resell a portion of the block as principal to facilitate the transaction. The Selling Holders have agreed that they will not participate in any underwritten offering of the Securities and the Company has no obligation to conduct or cooperate in such an offering for their benefit. The Company has been advised that, as of the date hereof, the Selling Holders have made no arrangement with any broker for the offering or sale of the Notes or the shares of Common Stock issuable upon conversion thereof. Brokers, dealers or agents may participate in such transactions as agents and may, in such capacity, receive brokerage commissions from the Selling Holders or purchasers of such securities. Such brokers, dealers or agents may also purchase the Notes or shares of Common Stock issuable upon conversion thereof and resell such securities for their own account. The Selling Holders and such brokers, dealers or agents may be considered "underwriters" as that term is defined by the Securities Act, although the Selling Holders disclaim such status. Any commissions, discounts or profits received by such brokers, dealers or agents in connection with the foregoing transactions may be deemed to be underwriting discounts and commissions under the Securities Act. To comply with the securities laws of certain jurisdictions, if applicable, the Notes and Common Stock issuable upon conversion thereof will be offered or sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain jurisdictions, the Notes and Common Stock issuable upon conversion thereof may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or unless an exemption from such registration or qualification is available and is complied with. Under applicable rules and regulations under the Exchange Act, any person engaged in a distribution of the Notes or the shares of Common Stock issuable upon conversion thereof may be limited in its ability to engage in market activities with respect to such Notes or the shares of Common Stock issuable upon conversion thereof. In addition and without limiting the foregoing, each Selling Holder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Rules 10b-2, 10b-5, 10b-6 and 10b-7, which provisions may limit the timing of purchases and sales of any of the Notes and shares of Common Stock issuable upon conversion thereof by the Selling Holders. All of the foregoing may affect the marketability of the Notes and shares of Common Stock issuable upon conversion thereof. The Company may suspend the use of this Prospectus and any supplements hereto in certain circumstances due to pending corporate developments, public filings with the Commission or similar events. The Company is obligated in the event of such suspension to use its reasonable efforts to ensure that the use of the Prospectus may be resumed as soon as practicable. The Company has agreed to pay substantially all of the expenses incident to the registration, offering and sale of the Notes or the shares of Common Stock issuable upon conversion thereof to the public other than commissions and discounts of brokers, dealers or agents and other than the fees and disbursements of counsel to the Holders, which shall be paid by the Initial Purchasers of the Notes. Such expenses (excluding such commissions and discounts and fees and disbursements of counsel to the Holders) are estimated to be approximately $275,300. The Company has also agreed to indemnify the Selling Holders against certain liabilities, including certain liabilities under the Securities Act. LEGAL MATTERS The validity of the Securities offered hereby and certain additional legal matters will be passed upon for the Company by Sheehan Phinney Bass + Green, Professional Association, Manchester, New Hampshire. Certain members of Sheehan Phinney Bass + Green, Professional Association beneficially own an aggregate of 60,840 shares of Common Stock as of the date hereof. 29 32 EXPERTS The consolidated financial statements and the related financial statement schedules incorporated in this prospectus by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. With respect to the unaudited interim financial information for the period ended June 30, 1996 and 1995 which is incorporated herein by reference, Deloitte & Touche LLP have applied limited procedures in accordance with professional standards for a review of such information. However, as stated in their report included in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated by reference herein, they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. Deloitte & Touche LLP are not subject to the liability provisions of Section 11 of the Securities Act for their report on the unaudited interim financial information because such report is not a "report" or a "part" of the registration statement prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Securities Act. 30 33 No dealer, sales representative, or any other person has been authorized to give any information or to make any representation not contained in this Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or any Selling Holder. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to the date hereof or that there been no change in the affairs of the Company since such date. ---------------------- TABLE OF CONTENTS Page ---- Available Information................. 3 Incorporation of Certain Documents by Reference...................... 3 Summary............................... 4 Risk Factors.......................... 7 Selected Pro Forma Consolidated Financial Data.................... 10 Ratio of Earnings to Fixed Charge..... 15 Use of Proceeds....................... 15 Description of the Notes.............. 15 Description of Capital Stock.......... 23 Certain Tax Considerations............ 24 Selling Holders....................... 27 Plan of Distribution.................. 28 Legal Matters......................... 29 Experts............................... 30 HEALTHSOURCE, INC. $247,250,000 5% CONVERTIBLE SUBORDINATED NOTES DUE 2003 AND COMMON STOCK - ------------------------------------- PROSPECTUS - ------------------------------------- AUGUST 16, 1996 31 34 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses in connection with the distribution of the Securities being registered are estimated as follows: Securities and Exchange Commission Registration Fee $ 85,300 Legal Fees and Expenses 75,000 Accounting Fees and Expenses 75,000 State Securities Laws Registration Fees and Expenses 10,000 Trustee and Registrar Fees and Expenses 10,000 Miscellaneous 20,000 -------- Total $275,300 ========
All such expenses will be borne by the Company, other than the fees and expenses of counsel to the Selling Holders, which will be borne by the Initial Purchasers of the Notes. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The By-Laws of the Company and the New Hampshire Business Corporation Act provide that the Company shall indemnify any person who is or was a party to any pending or completed action, other than an action by or in the right of the Company, by reason of the fact that he is or was a director, officer, employee or agent of the Company, against expenses, judgments, fines and amounts paid in settlement if he acted in good faith and he reasonably believed, (i) in the case of conduct in his official capacity that his conduct was in the best interests of the Company, or (ii) in all other cases, that his conduct was not opposed to its best interests; or, in the case of a criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. Any such director, officer, employee or agent shall be indemnified by the Company in an action by or in the right of the Company to the same extent and under the same circumstances, except that no indemnification may be made for any claim as to which the person shall have been adjudged to be liable to the Company. The Company may not indemnify any such director, officer, employee or agent in connection with any proceeding charging improper personal benefit to him if he is adjudged liable on that basis. Prior to and as a condition of any indemnification by the Company of any such director, officer, employee or agent, the Board of Directors must make a determination that under the facts of the matter, the person seeking indemnification met the applicable standard of conduct. However, the Company must indemnify a director who is wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party because he is or was a director of the Company. In the case of the advancement by the Company of expenses before the final disposition of a proceeding involving any such person, such person must affirm his good faith belief that his conduct met the applicable standard of conduct and must undertake to repay the advance if it is ultimately determined that he did not meet the applicable standard of conduct, and the Board of Directors must make a determination that the facts then known would not preclude indemnification of such person. The Company is obligated pursuant to indemnity agreements with its directors and executive officers to indemnify them to the full extent permitted by law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in II-1 35 the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 16. EXHIBITS
Exhibit Source or Page No. Document of This Report - ------- -------- -------------- (2) Plan of Acquisition 2.1 Asset Purchase Agreement dated as of Filed herewith May 31, 1996 among Chubb Life Insurance Company of America, ChubbHealth Holdings, Inc., Healthsource Metropolitan New York Holding Company, Inc., ChubbHealth, Inc. and The Chubb Corporation. (4) Instruments Defining the Rights of Security Holders 4.1 Indenture dated as of March 6, 1996 by and Exhibit 4.1 to Form S-3 between Healthsource, Inc. and The Bank of New Registration Statement, York as Trustee and the form of First No. 333-5223 Supplemental Indenture dated as of June 3, 1996 4.2 Note Resale Registration Rights Agreement dated Exhibit 4.2 to Form 10-Q for as of March 6, 1996 by and between the Quarter Ended March 31, Healthsource, Inc. and Bear, Stearns & Co., 1996 Inc. for itself and on behalf of the Initial Purchasers (5) Opinion regarding Legality 5.1 Opinion of Sheehan Phinney Bass + Green, Exhibit 5 to Form S-3 Professional Association Registration Statement, No. 333-5223 (12) Computation of Historical Financial Ratios Exhibit 12 to Form S-3 Registration Statement, No. 333-5223 (15) Letter regarding Unaudited Interim Financial Information Filed herewith (23) Consents of Experts and Counsel 23.1 Consent of Deloitte & Touche LLP Filed herewith 23.2 Consent of Sheehan Phinney Bass + Green, Included in Exhibit 5.1 above Professional Association (24) Power of Attorney Signature page to Form S-3 Registration Statement, No. 333-5223 (25) Statement of Eligibility of Trustee 25.1 Statement of The Bank of New York Exhibit 25.1 to Form S-3 Registration Statement, No. 333-5223
ITEM 17. UNDERTAKINGS The Company hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to include any material information with respect to the plan of distribution not previously II-2 36 disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The Company hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Company's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described in Item 15 above, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim of indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in a successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Company hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Act. II-3 37 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Healthsource, Inc. has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Hooksett, State of New Hampshire, on August 16, 1996. HEALTHSOURCE, INC. /s/ Norman C. Payson, M.D. By:________________________________ Norman C. Payson, M.D. President and Chief Executive Officer (Principal Executive Officer) /s/ Joseph M. Zubretsky By:________________________________ Joseph M. Zubretsky Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Date Title Signature - ---- ----- --------- August 16, 1996 Director /s/ Norman C. Payson, M.D. __________________________ Norman C. Payson, M.D. August 16, 1996 Director and Chairman /s/ Merwyn Bagan, M.D.* of the Board __________________________ Merwyn Bagan, M.D.
II-4 38 August 16, 1996 Director /s/ Paul D. Baron, M.D.* ______________________________ Paul D. Baron, M.D. August 16, 1996 Director /s/ Daniel F. Eubank, M.D.* ______________________________ Daniel F. Eubank, M.D. Director ______________________________ Robert A. Leipold, M.D. August 16, 1996 Director /s/ Robert S. Cathcart, M.D.* ______________________________ Robert S. Cathcart, M.D. August 16, 1996 Director /s/ Francis G. Middleton, M.D.* ______________________________ Francis G. Middleton, M.D. August 16, 1996 Director /s/ Robert H. Bilbro, M.D.* ______________________________ Robert H. Bilbro, M.D. August 16, 1996 Director /s/ David W. Schall, M.D.* _______________________________ David W. Schall, M.D. August 16, 1996 Director /s/ J. Harold Chandler* _______________________________ J. Harold Chandler *By /s/ Norman C. Payson, M.D. ---------------------------- Norman C. Payson, M.D. Attorney-in-Fact
II-5 39 EXHIBIT INDEX
Sequentially Exhibit Source or Page Numbered No. Document of This Report Pages - ------- -------- -------------- --------------- (2) Plan of Acquisition 2.1 Asset Purchase Agreement dated as of Filed herewith May 31, 1996 among Chubb Life Insurance Company of America, ChubbHealth Holdings, Inc., Healthsource Metropolitan New York Holding Company, Inc., ChubbHealth, Inc. and The Chubb Corporation. (4) Instruments Defining the Rights of Security Holders 4.1 Indenture dated as of March 6, 1996 by and Exhibit 4.1 to Form S-3 between Healthsource, Inc. and The Bank of New Registration Statement, York as Trustee and the form of First No. 333-5223 Supplemental Indenture dated as of June 3, 1996 4.2 Note Resale Registration Rights Agreement dated Exhibit 4.2 to Form 10-Q for as of March 6, 1996 by and between the Quarter Ended March 31, Healthsource, Inc. and Bear, Stearns & Co., 1996 Inc. for itself and on behalf of the Initial Purchasers (5) Opinion regarding Legality 5.1 Opinion of Sheehan Phinney Bass + Green, Exhibit 5 to Form S-3 Professional Association Registration Statement, No. 333-5223 (12) Computation of Historical Financial Ratios Exhibit 12 to Form S-3 Registration Statement, No. 333-5223 (15) Letter regarding Unaudited Interim Financial Information Filed herewith (23) Consents of Experts and Counsel 23.1 Consent of Deloitte & Touche LLP Filed herewith 23.2 Consent of Sheehan Phinney Bass + Green, Included in Exhibit 5.1 above Professional Association (24) Power of Attorney Signature page to Form S-3 Registration Statement, No. 333-5223 (25) Statement of Eligibility of Trustee 25.1 Statement of The Bank of New York Exhibit 25.1 to Form S-3 Registration Statement, No. 333-5223
EX-2.1 2 ASSET PURCHASE AGREEMENT 1 Exhibit 2.1 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT dated as of the 31st day of May, 1996 ("Agreement") by and between CHUBB LIFE INSURANCE COMPANY OF AMERICA, an insurance corporation organized under the laws of New Hampshire with a principal address at One Granite Place, Concord, New Hampshire 03301 (referred to herein as "Chubb Life"), CHUBBHEALTH HOLDINGS, INC., a New Hampshire Corporation with a principal address at One Granite Place, Concord, New Hampshire 03301 (referred to herein as "Seller"), HEALTHSOURCE METROPOLITAN NEW YORK HOLDING COMPANY, INC., (formerly Healthsource New York, Inc.) a New Hampshire corporation with a principal office at Two College Park Drive, Hooksett, New Hampshire 03106 ("Buyer"), and CHUBBHEALTH, INC., a corporation duly organized as a health maintenance organization under the laws of the State of New York ("Plan"), and only for purposes of Section 8(e), THE CHUBB CORPORATION, a New Jersey corporation with a principal office at 15 Mountain View Road, Warren New Jersey 07061. WHEREAS, Chubb Life is the owner of 85% and Buyer is the owner of 15% of the outstanding stock of Seller, a New Hampshire corporation which in turn owns 100% of the stock of Plan; WHEREAS, Chubb Life and Buyer are parties to an Investment Agreement dated as of April 8, 1993 (the "Investment Agreement") relating to the formation of the Seller and Plan and a Shareholders Agreement dated as of April 23, 1993 (the "Shareholder Agreement") which the parties desire to terminate at Closing; WHEREAS, Plan is a party to (i) the Management Services Agreement with Buyer dated as of April 23, 1993 (the "Management Agreement") which the parties desire to terminate at Closing and (ii) the Administrative Services Agreement with Chubb Life dated as of April 23, 1993 (the "Administrative Services Agreement"), which the parties desire to terminate at Closing; and WHEREAS, Seller wishes to sell its assets (consisting of a 100% stock interest in the Plan) and Buyer wishes to purchase such assets NOW, THEREFORE, in consideration of the mutual promises herein set forth, and subject to the terms and conditions hereof, the parties agree as follows: 1. DEFINITIONS As used in this Agreement, terms defined in the preamble and recitals of this Agreement shall have the meanings set forth therein and the following terms shall have the meanings set forth below: (a) "Closing" shall mean the closing of the purchase of the Assets (as defined 2 below) contemplated by this Agreement on the Closing Date. (b) "Closing Date" shall mean a date not more than ten (10) days after the satisfaction of all conditions precedent to the obligations of Buyer, Seller and Chubb Life as defined in Sections 9 and 10. (c) "Tax" or "Taxes" means all forms of taxation, whether of the United States or elsewhere and whether imposed by a local, municipal, state, federal body or instrumentality, and shall include, without limitation, income, flat, sales, use, ad valorem, gross receipts, value added, privilege, franchise, license, transfer, recording, withholding, payroll, employment, excise, occupation, premium and property taxes, together with any related interest, penalties and additional amounts imposed by any taxing authority. (d) "Asset Sale Net After-Tax Proceeds" means $20,229,000 as illustrated in Schedule 2, Line 12, representing an amount equal to the Purchase Price less Taxes resulting from both (1) the Plan's deemed sale of assets as a result of an election under Internal Revenue Code Section 338(h)(10) and, where applicable, related to the Seller's sale of Assets to Buyer and (2) the Plan's other income, gain, losses and deductions. (e) "Distribution Proceeds to Chubb Life" means 85% of Asset Sale Net After-Tax Proceeds or $17,195,000 as illustrated in Schedule 2, Line 13. 2. SALE OF ASSETS; PURCHASE PRICE; REDEMPTION OF BUYER STOCK IN SELLER; TIMING (a) Sale of Assets. At the Closing, Seller shall sell and assign to Buyer the assets of Seller consisting of all of the outstanding Common Stock of the Plan (the "Assets") and the Buyer shall purchase and accept from Seller the Assets. (b) Purchase Price; Payment. The purchase price (currently estimated to be $28,681,000 as illustrated in Schedule 2, Line 1) for the Assets at the Closing ("Purchase Price") shall be an amount which will result in Distribution Proceeds to Chubb Life of $17,195,000. The final Purchase Price will be determined in accordance with the calculation presented in Schedule 2 and will guarantee Distribution Proceeds to Chubb Life of $17,195,000. The Purchase Price shall be paid to Seller at the Closing by certified or bank check payable to Seller or by wire transfer of funds to 2 3 Seller's account. (c) Redemption of Buyer's Stock in Seller. After transfer of the Assets to Buyer at Closing, both Chubb Life and Buyer shall vote their shares in Seller to cause a redemption of Buyer's 15,000 shares of Common Stock of Seller (which shall constitute Buyer's entire stock holdings of Seller) in return for payment of 15% of Asset Sale Net After-Tax Proceeds and Seller shall complete such redemption at Closing. (d) Closing Efforts. Buyer, Seller and Chubb Life hereby acknowledge that each desires the earliest possible Closing and each agree to use their best efforts, and to fully cooperate with each other and the regulatory authorities and any other parties, to close this transaction as soon as possible. 3. PLAN OF INTERIM OPERATIONS From the date of this Agreement until the Closing Date, Chubb Life and Buyer each agree to work together to position the Plan to withstand potential market dislocation caused by the announcement of this transaction, to permit the Plan to continue to aggressively market its products in the New York and New Jersey markets and to permit Plan to continue to develop and extend Plan's provider networks. The parties specifically agree as follows: (a) to implement the communication plan for communications by both Chubb Life and Buyer/Plan as separately agreed to by the parties; provided that the parties shall keep the fact of this Agreement and the transactions contemplated herein strictly confidential until the open of business on Monday, June 3, 1996; (b) to recognize that protecting the value of the Plan during the transition process requires that Plan have competitive products in the marketplace and in support of such recognition, that, until Closing, Chubb life shall permit Plan, after discussions with Chubb Life, to propose competitive rates for each Plan product based on Buyer's assessment of Plan's competition (and the latest competitor rates) and shall cooperate with Plan to make such rates effective by making all necessary regulatory filings therefor. If Chubb Life objects to a specified product rate proposed by Buyer as non-competitive, then all other proposed Plan rates will be filed with the appropriate regulators and the disputed rate shall be resolved by mediation (using a mutually acceptable mediation service in New York City) or, failing a resolution through mediation within 10 days, by binding 3 4 arbitration under Section 14 in which arbitration, Chubb Life shall have the burden of showing that the proposed Plan rate is not competitive with the identified competitors. Chubb Life or Colonial, as the case may be, shall use its best efforts to keep Plan products in full compliance with applicable law by making all necessary regulatory filings and, moreover, will make new policy filings required to allow Plan to create POS/SCA products to meet the terms of any POS/SCA product offering by Plan's major competitors. After Closing, Chubb Life or Colonial, as the case may be, shall file rates specified by Buyer which are consistent with law and regulations. (c) to allow Plan to continue to develop its business, prospects and products and otherwise not impede Plan's progress by, for example, permitting the recruiting of additional Plan managers, and the planning and pre-implementation work related to the ultimate conversion of Plan's MIS system to a Healthsource, Inc. system and the reassessment (and replacement with third-parties, if necessary) of Plan's levels of stop-loss insurance coverage for all lines; (d) to allow Buyer and Plan to develop Plan's provider networks by the negotiation of new provider contracts containing capitation and other payment methodologies for various lines of business; (e) that Chubb Life shall continue to provide MIS support (as well as conversion assistance) both through Closing under the Administrative Services Agreement and thereafter until services are withdrawn under the Transitional Services Agreement and specifically Chubb Life shall not reassign any personnel now working substantially full-time on Plan MIS matters and shall further permit Buyer to make current employment offers to the Concord-based MIS personnel and to any other Chubb employees assigned in whole or in part to Plan matters effective only at Closing; (f) that Chubb Life shall continue to provide treasury, actuarial, compliance and financial reporting services to Plan under the Administrative Services Agreement and shall share all such detailed financial and accounting information promptly and fully with Plan and Plan's accounting staff; (g) to cause Plan and Seller's Board of Directors to (i) take all action from time-to-time necessary or desirable to give full effect to the operational goals of this Agreement and (ii) recognizing the indemnifications and protections afforded Seller under Sections 4(a) and 13, permit Buyer to 4 5 exercise the maximum authority under the Management Agreement to implement all terms of this Agreement including, at Buyer's discretion, any and all services Buyer customarily provides its other HMO affiliates and, subject to the limits of Section 4 below, the customary corporate service charges it makes to such affiliates. (h) in calculating Plan expense or the amount of any charge-back to Plan by Chubb Life, except for specific exceptions provided for in this Agreement, Chubb Life agrees to make no change in the assumptions supporting the allocation of costs now absorbed by Chubb Life/Colonial for at least until September 30, 1996 and thereafter to continue as part of its transitional status with Plan to (whenever reasonably requested by Buyer) mitigate the services it provides, and the charges it therefore makes, to Plan and not to have Plan directly or indirectly pay more for services resulting from Chubb Life's contemplated exit from the Group Health and Ancillary Business and, by way of example only, not to have Plan absorb a higher proportion of the facility costs of Plan's field offices at 100 Williams Street and in Plainville, New York, until Closing whether or not the Chubb Life/Colonial field support staff remain located in such field offices. Chubb Life shall bear the cost of all support staff on Plan's payroll providing support to Chubb Life/Colonial products until that function is re-assumed by Chubb Life. Chubb Life shall be responsible for the cost of severance of any field office employee currently on Plan payroll and terminated in connection with Chubb Life's plan to cease performing sales and service of the group indemnity health insurance and Ancillary Business products in the field offices. 4. 1996 OPERATING RESULTS; CAPITAL (a) Operating Results. In order to protect the Plan from adverse effects of the transition process leading to Closing and recognizing that the Plan will necessarily need to incur additional costs to secure its membership and provider networks, to the extent that Plan's cumulative 1996 net income before federal income taxes is less than the cumulative net income before federal income taxes of Plan as shown on Schedule 4, two receivables due from the Buyer shall be accrued as follows: (i) On a calendar quarterly basis, a Schedule 4(a) will be prepared by Chubb Life in the form of Schedule 4, showing only the results of health care claims payments under the Colonial SCA products for New Jersey members. If 5 6 Schedule 4(a) shows a net income before Federal Income Tax (without any allocation of overhead or indirect costs to such line of business) that is less than zero, then Colonial shall accrue a receivable due from the Buyer in an amount sufficient to cover such shortfall. (ii) Also on a calendar quarterly basis, a Schedule 4(b) will be created by Chubb Life in the form of Schedule 4, showing the combined results of all products utilizing the Plan's managed care network (whether underwritten by the Plan directly or underwritten or reinsured by Colonial) eliminating any duplicate expenses and including the effect of any receivable accrued by Colonial under clause (i) above. If Schedule 4(b) shows a net income before Federal Income Tax result that is less than that which is shown in Schedule 4, then the Plan shall accrue a receivable due from the Buyer sufficient to cover such shortfall. (iii) Should any taxing authority deem the receipt of the receivables under clauses (i) and (ii) ("Receivables") to create income not fully offset in Plan's or Colonial's Returns by the expenses giving rise to the Receivables, Buyer covenants and agrees to reimburse Chubb Life on an after-tax basis for any Taxes resulting from such lack of offset. (iv) Settlement in full of the receivables under clauses (i) and (ii) shall occur as of the earlier of December 31, 1996, or Closing. In the event that Closing does not occur by December 31, 1996, and the Plan and Colonial continue operations as shown in Schedule 4 beyond 1996, the Buyer, Seller, Plan, Chubb Life and Colonial agree to create a mechanism whereby the Buyer shall cause the after-tax net income effect to Chubb Life of all Plan and Plan-related Colonial managed care operations to be not less than zero. (b) Capital. In addition, if New York or New Jersey regulatory authorities require additional capital to support Plan's business, Buyer will loan such capital to Plan on a note meeting regulatory requirements for a surplus note. 5. REPRESENTATIONS AND WARRANTIES OF CHUBB LIFE AND SELLER 6 7 Chubb Life and Seller represent and warrant to Buyer as follows: (a) Organization; Good Standing. The Seller and the Plan are each corporations, duly organized and incorporated, validly existing, and in good standing under the laws of their respective states of incorporation, with all requisite power and authority, corporate or otherwise, and legal right to own, operate, and lease their properties, to carry on their business as now being conducted and, to enter into this Agreement, and perform their obligations hereunder. The Seller (except for the Plan) and the Plan, each has no subsidiary or any other equity interest in any other corporation, Company, firm, association, trust, partnership, joint venture, enterprise, or other entity. (b) Capitalization and Share Ownership of the Seller and Plan. The number of authorized shares, stated value, and number of issued and outstanding shares of the Seller and the Plan are set forth in Schedule 5(b) hereto. All of the issued and outstanding shares of the Seller and the Plan are owned, beneficially and of record, by those persons listed on Schedule 5(b). The issued and outstanding shares of Plan have been duly authorized and validly issued and are fully paid and non-assessable. All of the issued and outstanding shares of Plan and the shares of Seller owned by Chubb Life are owned, respectively, free and clear of any options, liens, trusts, encumbrances, security interests, charges, or claims of any kind. Neither the Seller nor the Plan holds any shares of its own stock in its treasury. Except for the Buyer's rights under this Agreement and as disclosed in Schedule 5(b), no person has any agreement, subscription, option, or warrant, or any other right or commitment, entitling him or it to acquire from the Seller or the Plan any shares of capital stock of any class of the Seller or the Plan, whether outstanding or unissued or any securities or other instruments, whether outstanding or unissued, convertible into or exchangeable for shares of capital stock of any class of the Seller or the Plan. All of the officers and directors of the Seller and the Plan are listed on Schedule 5(b). (c) Corporate Record Books, etc. The corporate records and minute books of the Plan containing the minutes of all board meetings of the Plan and copies of all minute books and corporate records of 7 8 Seller have been furnished to the Buyer. (d) Title to Property and Assets; Liens. Except as set forth in Schedule 5(d), the Seller and the Plan each have good and marketable title to all their respective properties and assets, real, personal, and intangible, including all property and assets reflected in the December 31, 1995 Financial Statements contained in Appendix I (except as disposed of thereafter in the ordinary course of business) subject to no mortgage, pledge, lien, security interest, lease, charge, easement, encumbrance, conditional sale, or other title retention agreement. Except as set forth in Schedule 5(d), the Seller has no assets other than the Assets. (e) Real Property. Neither the Seller nor the Plan now owns or has ever owned any real property. (f) Agreements with Affiliates. Other than agreements listed on Schedule 5(f), neither the Seller nor the Plan is a party to any written contract (or any enforceable oral contract) with Chubb Life or any affiliate. Complete copies of all agreements listed on Schedule 5(f) have been provided to Buyer. Plan shall not have any further liability whatsoever after the date of this Agreement for rent under the lease for space at the 100 Williams Street building in New York City owned by a Chubb Life affiliate. Plan shall, however, bear its proportionate share of the costs of the space occupied by its employees servicing Plan products and located at 100 Williams Street under existing charge-back allocation agreements. (g) Financial Statements. The audited consolidated financial statements of the Seller and the Plan for the year ended December 31, 1994 and December 31, 1995 contained in Appendix I have each been prepared in accordance with general accepted accounting principles and fairly present the financial position of the Seller and the Plan and the results of their operations and cash flow for such periods. (h) Agreements. All agreements executed by employees of Chubb Life or Colonial or any of their affiliates (whether or not such person 8 9 serves as an employee or officer of Plan) to which Seller or Plan are parties or by which Seller or Plan are contractually bound and which involve more than $5,000 in total payments or are not terminable on less than 45 days notice are listed on Schedule 5(h); provided that Plan shall not deemed an "affiliate" for the purpose of this representation. (i) Tax Return and Payments. All federal, state and local tax returns and reports (collectively, "Returns") which either include or are filed separately by the Seller and the Plan have been filed in a timely manner, or timely extension of the filing thereof has been secured. All information provided in such Returns and extensions is true, complete and accurate in all material respects and all taxes shown in such Returns have been paid or adequate reserves for the payment of Taxes have been established, assuming that all such information furnished by Buyer acting under the Management Agreement is true, complete and accurate. (j) Books and Records. All of the business records of the Seller and the Plan are located at Issuer's principal offices at 380 Madison Avenue, New York City, New York, except for certain financial and claim records located at Chubb Life's offices in Parsippany, New Jersey, and corporate and financial records located in Concord, New Hampshire. (k) Seller's Assets. Other than those disclosed on Schedule 5(k), Seller has no assets other than stock in Plan and no liabilities of any kind and will have no other assets nor any such liabilities at Closing. (l) Protection of Existing Tax Status. Seller shall be maintained solely as a holding company from the date hereof through the Closing Date with no assets or liabilities added to its balance sheet nor shall Seller be permitted to enter into any transaction or agreement which would alter the contemplated tax status of Seller for the purpose of the Purchase Price and related tax calculations under Section 2. 6. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Chubb Life as follows: 9 10 (a) Organization; Good Standing. Buyer is a corporation duly organized and incorporated, validly existing and in good standing under the laws of its state of incorporation hereto, with all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. (b) Authority. The Buyer has full corporate authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Buyer and constitutes the legal, valid and binding obligation of the Buyer. 7. POINT OF SERVICE RISKS (a) New York - To the extent that Plan as a New York licensed HMO desiring to offer a Point of Service ("POS") plan is effectively barred (as defined) from providing such out-of-network benefits except through separate POS contracts issued by a New York licensed indemnity accident and health insurer, or by reinsuring some of the POS risk with a third-party indemnity accident and health insurer, Chubb Life agrees to cause its affiliate, Colonial Life Insurance Company of America ("Colonial") to continue to write directly or reinsure such New York POS risk for the benefit of the Plan on the following terms: (i) all such New York POS risk will, to the maximum extent feasible under New York regulations, be transferred from Colonial to any other entity which may bear or share that risk; this may be done by any method or methods legally acceptable, including, but not limited to, indemnity reinsurance of such risk to the maximum extent possible with Buyer's Tennessee affiliate; any such reinsurance shall be pursuant to forms and/or agreements which comply with New York law, shall be on the terms which permit Colonial to take full credit for such reinsurance on its financial statements, and are on terms reasonably acceptable to Colonial and Buyer; (ii) Plan shall pay Colonial for writing or reinsuring such New York POS risk as follows: 10 11 (aa) during the first year after Closing, Colonial shall be reimbursed for its direct and indirect actual costs and paid an additional amount of $20,000 per month. (bb) during the second year, in addition to being reimbursed for its direct and indirect actual costs, Colonial shall also be paid in the amount of $40,000 per month unless Plan POS/SCA membership shall exceed 100,000 members (including New Jersey members) at the end of the first year after Closing, in which event Colonial shall be paid in the amount of $60,000 per month. (cc) during the third and subsequent years after Closing, in addition to being reimbursed for its direct and indirect actual costs, Colonial shall also be paid in the amount of $80,000 per month unless Plan POS/SCA membership shall exceed 200,000 members (including New Jersey members) at the end of the second year after Closing, in which event Colonial shall be paid in an amount of $120,000 per month. (dd) "direct and indirect actual costs" shall mean Colonial or affiliates' actual direct and indirect costs of providing such New York POS Contracts or reinsuring such New York POS risk, including but not limited to, actuarial and compliance, commissions, overrides, policy benefits, premium taxes, demographic pool charges, SMC pool payments, third-party reinsurance payments; provided such costs shall be determined without commingling or averaging with other Chubb business and solely with respect to Plan's New York POS Contracts; and otherwise without causing such costs to be higher due to allocations resulting from the closing down, discontinuation or 11 12 reduction in size of Chubb Life's other businesses. (iii) Colonial shall have no continuing obligation to provide POS contracts or reinsurance after December 31, 1999. If, at the end of such period, an arrangement contemplated by Section 7(a)(iv) is not in place, Buyer, Chubb Life and Colonial will cooperate to quickly arrange, at Buyer's cost, to substitute POS reinsurance or contracts from third-party carriers so as not to disrupt Plan's business. (iv) The parties agree that the arrangement described in this subsection (a) of Section 7 shall continue only for the minimum period of time required, and that the Plan shall use its best efforts to implement one or more alternative arrangements under which such out-of-network risk may be (i) partially borne by the Plan under subdivision 2 of Section 4406 of the New York Public Health Law or (ii) insured or reinsured by, shared with, transferred to, or otherwise borne by another entity affiliated with Buyer. Buyer or an affiliate shall provide the indemnification described in Section 13 of this Agreement. When such alternative arrangement(s) have become fully implemented, Chubb Life's obligation to provide such New York POS Contracts or reinsure such New York POS risk shall cease. (v) Buyer will seek to charter a new indemnity accident and health insurance company in New York or will seek to license or redomesticate its New Hampshire indemnity affiliate to New York. Chubb Life agrees that it shall provide such assistance, good will, and resources as Chubb Life determines will best facilitate the regulatory approval of such applications, as well as policy forms, rate approvals, and other approvals necessary to permit such Buyer's affiliate to fully substitute for Colonial on all Plan POS plans in New York. In addition, Colonial and Chubb Life agree to provide assistance in the substitution of any third-party insurer for Colonial on all POS contracts in New York. (vi) The term "effectively barred" means New York law does not permit Plan to write directly any specific form of POS 12 13 coverage sought to be written or that any permission granted by New York law to directly write POS coverage contains uneconomic conditions, percentage limitations on POS benefits, penalties, taxes or other costs or restraints which render a permitted POS product non-competitive with a separately insured POS rider. Section 4406 of New York Public Health Law is agreed to effectively bar Plan from now offering POS products directly. (b) New Jersey - The parties recognize that POS plans are currently offered in New Jersey by Colonial, on its own paper, via an approved Selective Contracting Arrangement ("SCA plans"), and that Colonial's SCA plans permit access to the ChubbHealth network. The parties further note the adoption of new regulations (N.J. ADC 8:38-14) by the New Jersey Department of Health (the "regulations"), which appear to permit New Jersey licensed HMOs to directly write POS plans on their own paper. Chubb Life agrees to cause its affiliate Colonial to continue to write directly, or to reinsure, all New Jersey POS risk on the following terms: (i) Plan shall, upon execution of this agreement, take such necessary steps and make such necessary applications and filings to obtain the authority under the regulations to write POS coverage on its own paper without supporting indemnity reinsurance, such that Chubb Life and its affiliate will no longer have to write such coverage on their paper and ultimately will bear no risk on POS coverage at the earliest practicable time. (ii) to the extent any Colonial SCA plans or reinsurance arrangements for POS risk remain in effect in New Jersey on and after Closing, Buyer shall cause one or more of its affiliated insurance companies to 100% reinsure all Colonial risk under such New Jersey POS coverage as soon as possible, on terms which comply with New Jersey law, which permit Colonial to take full reinsurance credit on its financial statements and which provide that Colonial is reimbursed for all of its direct and indirect actual costs in conjunction with such POS risk ("acceptably reinsure"). If Buyer is not able to acceptably reinsure all New Jersey POS risk, then Buyer shall indemnify and hold harmless Colonial from any underwriting losses incurred by Colonial on such POS risks 13 14 and all of its direct and indirect actual costs in conjunction with such POS risks; such reimbursement and indemnification shall be as provided in Section 13 of this Agreement. (iii) the parties shall develop reasonable methods for moving groups having coverage under Colonial SCA contracts to POS contracts issued by Plan at Closing or (if Plan's POS plans are not then approved) at the earliest practical date or dates following Closing. (iv) subject to clause (f) below, the obligations of the parties under this Subsection 7(b) shall cease after December 31, 1999, (except for any obligations which arose prior to such termination date). If, at the end of such period, an arrangement of the type contemplated by Section 7(a)(iv) is not in place, Buyer, Chubb Life and Colonial will cooperate to quickly arrange, at Buyer's cost, to substitute POS reinsurance or SCA contracts from third-party carriers so as not to disrupt Plan's business. (c) Buyer hereby acknowledges that Chubb Life desires to cease providing the POS Contracts or reinsuring any POS risk as soon as possible and Buyer hereby assures Chubb Life it will use its best efforts to accomplish this replacement at the earliest possible date. (d) Chubb Life hereby acknowledges that until alternative arrangements are arrived at in accordance with this Agreement, Plan is totally dependent on Colonial providing such POS Contracts or reinsuring such POS risk for Plan's products in the marketplace; therefore Chubb Life agrees to use its best efforts to cooperate with Buyer and to use its best efforts to continue to keep Colonial's POS/SCA Contracts or reinsurance commitments in force and fully accessible to Plan without interruption until December 31, 1999 consistent with the language in Section 7(a)(ii) of this Agreement and to use its best efforts to keep such products in regulatory compliance. If due to unforseen regulatory changes or for whatever reason Plan's products and Colonial's POS/SCA Contracts or reinsurance agreements need modification, Buyer and Chubb Life agree to use their best efforts to re-paper or otherwise amend such arrangements to comply with regulatory requirements and to avoid any disruption or interruption of Plan's growth in the market. In any such circumstances, Buyer agrees to 14 15 pay Chubb Life any additional costs it incurs for any such revised arrangements or modifications. The mutual commitment to support Plan shall not detract from Buyer's obligation in clause (c) above. (e) Chubb Life warrants to Buyer that neither it, Colonial nor any other affiliate of either of them shall make any profit, directly or indirectly, on the writing of POS/SCA contracts or reinsuring of POS /SCA risk except for the agreed monthly fixed dollar payments specified in clause (a)(ii). Buyer, in turn, warrants that there shall be no expense or underwriting loss to Colonial or Chubb Life as a result of activity contemplated by Section 7. (f) Medicare POS Plans. Buyer represents that it has no current intention to cause Plan to offer POS options on any Medicare product which Plan develops, but the parties recognize that competitive forces might require the offering of such options in Plan's market. Thus, Chubb Life agrees that Colonial will write all necessary riders for or reinsure such Medicare POS products on the same terms as provided in clauses (a) and (b) subject to the following additional terms: (i) Plan will not offer Medicare POS options requiring Colonial riders or reinsurance unless one of Plan's principal competitors announces its intent to offer, or files for regulatory approval of, such a Medicare POS/SCA option; and (ii) If Plan elects to write Medicare POS-type coverage, it will not use Colonial riders or reinsurance for more than twelve (12) months under any circumstance. (g) Change of Control in Healthsource, Inc. If there occurs at any time during the period of Chubb Life's and Colonial's obligations under this Section 7 a Change of Control in Healthsource, Inc. (parent company of Buyer) then Colonial's obligations to offer POS/SCA riders or reinsurance under this Section 7 shall cease on July 1, 1999. If any action occurs which results, directly or indirectly, in less than 50% ownership in Plan being held by Healthsource, Inc., and all other companies which, directly or indirectly, are wholly-owned by Healthsource, Inc., then Colonial's obligations to offer POS/SCA riders or reinsurance under this Section 7 shall, notwithstanding any other language herein, cease 90 days after such action occurs. The term "Change in Control" shall mean an event by which any "person" or "group" acquires "beneficial ownership" (as such 15 16 terms are defined in Securities Exchange Act of 1934 and regulations thereunder) directly or indirectly of more than 50% of the voting stock of Healthsource, Inc., but shall exclude any merger or reorganization in which Healthsource, Inc., is the surviving or resulting entity. Buyer shall immediately notify Chubb Life as soon as it becomes aware of any event which might or would result in a Change of Control. 8. COVENANTS OF CHUBB LIFE, SELLER AND BUYER. Unless stated otherwise, all covenants in this Section 8 shall survive the Closing: (a) Change of Name. Buyer agrees to change the name of the Plan to remove the name "Chubb" at Closing; promotional and contract materials which contain the Chubb or Colonial names shall be discarded or stickered appropriately on or before the Closing Date, in the case of Chubb, and on or before the date Colonial ceases to provide POS riders or SCA Plans under Section 7, in the case of Colonial. (b) Interim Conduct. Except as otherwise provided in this Agreement, Chubb Life and Seller agree that neither the Seller nor the Plan shall, without Buyer's consent (i) declare or pay any dividends on its common stock or make any distribution of assets to the holders of its common stock, (ii) incur any indebtedness exceeding fifty thousand dollars ($50,000) other than routine trade debt, (iii) enter into any agreement with an affiliate of Chubb Life, (iv) issue or sell any shares of stock of the Seller or the Plan or any option or right with respect thereto, or (v) make any change to its capital structure. Buyer agrees that it shall not permit Plan to enter into any agreement prior to Closing with any affiliate of Buyer which is not terminable in the event that regulatory approvals necessary for the Closing are not received. (c) Tax Sharing Agreements. All tax sharing/tax allocation agreements in effect between the Seller and the Plan, on the one hand, and The Chubb Corporation, on the other hand, shall be canceled effective on the Closing Date. In the interim, the existing agreement shall remain in effect and Chubb Life shall pay to the Seller the net tax benefit of losses incurred by the Seller and Plan prior to Closing. Taxes related to the Plan's deemed sale of assets as a result of an election under Internal Revenue Code Section 338(h)(10) and, where applicable, related to the Seller's sale of Assets to Buyer, shall be paid by the Plan or the Seller, as the case may be. (d) Settlement of Inter-entity Accounts. The parties will conduct an 16 17 accounting wherein the tax receivable from Chubb Life carried on the books of the Seller and Plan shall be applied to the balance on the Seller's or Plan's accounts payable to Chubb Life and the remaining balance of such account payable and any other inter-entity arrangements shall be settled and any amount owed between the parties shall be paid at Closing. (e) Section 338(h)(10) Election; Allocation. The Chubb Corporation as the common parent of an affiliated group (as that term is defined under Internal Revenue Code Section 1504) which files a consolidated federal income tax return and which includes the Plan, and Buyer covenant and agree to make the election pursuant to Internal Revenue Code Section 338(h)(10) and the Department of Treasury regulations promulgated thereunder, and to cooperate with each other in preparing, executing and filing, and each will file, any Tax forms and other documents required under Internal Revenue Code Section 338 and the Department of Treasury regulations thereunder to be filed by the respective party. In particular, and not by way of limitation, in order to effect such election, on or prior to the Closing, The Chubb Corporation and Buyer shall jointly execute necessary copies of Internal Revenue Service Form 8023 and all attachments required to be filed therewith, pursuant to applicable Department of Treasury regulations. In connection therewith, Seller and Buyer covenant and agree that the allocation among the assets of the Plan shall be as determined by Buyer (acting reasonably and in good faith) in accordance with applicable Department of Treasury regulations within one hundred twenty (120) days of Closing. Chubb Life, the Seller, the Plan and Buyer shall be bound by the allocation determined in accordance with this section; Chubb Life, the Seller, the Plan and Buyer covenant and agree to report this transaction for all domestic Tax purposes in each and every respect in a fashion consistent with the allocation made by Buyer. If the allocation is disputed by any taxing authority, the party receiving notice of such dispute shall promptly notify and consult with the other parties. Buyer shall resolve any such dispute in its sole discretion (the "Resolution") and Chubb Life, the Seller and the Plan agree to be bound by said Resolution. Should the Resolution result in additional Tax to the Seller or any other member of The Chubb Corporation's affiliated group (as that term is defined under Internal Revenue Code section 1504, Seller and all members of The Chubb Corporation's affiliated group collectively or individually, as the case may be, the "Affiliated Group"), Buyer covenants and agrees to reimburse the Affiliated Group for all Taxes resulting from the Resolution and to pay Chubb Life any additional amounts necessary to ensure 17 18 Distribution Proceeds to Chubb Life as defined in Section 1(e). (f) Governmental and Other Consents, etc. No consent, approval, or authorization of, or designation, declaration, or filing with, any governmental authority or other persons or entities on the part of Chubb Life, the Seller or the Plan, is required in connection with the execution or delivery of this Agreement or the consummation of the transactions contemplated hereby other than notification to and consents from the persons specified in Schedule 8(f) hereto, which the parties agree to use their best efforts to obtain as soon as practicable. (g) Recoverable Severance Payments. Chubb Life shall, within 10 days from the date of this Agreement, provide to Buyer a list which sets forth: (i) the name of each person employed by the Plan, and (ii) the amount of severance which Plan would legally be obligated to pay to each such person, if Plan were to terminate such employee on December 31, 1996, any additional amount due for tenure past such date (on a monthly basis) and the cost of all other rights of continued benefits after termination (including, without limitation, life insurance, disability insurance and COBRA rights (collectively the "Severance Amount"). The Severance Amount shall not include out placement assistance. At Closing, Buyer shall deliver to Chubb Life a list of Plan employees who will be given notice on the Closing Date that their employment is to be terminated within six (6) months after Closing. Buyer alone is responsible for compilation of the list and Chubb Life shall have no role or involvement in the selection of employees to be terminated or the compilation of the list and further shall have no knowledge of employees on the list prior to Closing. Upon termination of any employee on such list within six (6) months after Closing, Plan shall: (i) promptly notify Chubb Life of such termination, (ii) pay the Severance Amount to such employee, and (iii) provide from time-to-time to Chubb Life documentation as to the Severance Amount then actually paid by Plan to or for the benefit of the terminated employee; Chubb Life shall thereafter pay to Plan within fifteen (15) days of Plan's statement therefor the cumulative Severance Amount. The decision to terminate any Plan employee shall be the sole responsibility of Buyer and/or Plan. Chubb Life shall have no role or involvement in such decision and shall have no obligation, other than to pay to Plan the cumulative Severance Amount described in this Section 8. Buyer and Plan shall jointly and severally indemnify and hold harmless 18 19 Chubb Life and its affiliates from any and all claims, causes of action, charges, suits, regulatory actions, and other legal actions which any terminated employee may assert in connection with the termination of his/her employment excluding any claim grounded on actions occurring prior to Closing and excluding any claim for severance benefits in excess of the severance benefits included in the Severance Amount on the list delivered at Closing. If Plan rehires any such terminated employee within one (1) year or his/her original termination, Plan shall immediately refund any amount previously paid by Chubb Life to Plan in conjunction with Plan's termination of such employee. Plan shall be permitted to make employment offers to any employee of Chubb Life or its affiliates previously working on Plan matters, provided that such offers will take effect only at Closing. (h) Use of Name. To the extent that Plan must disclose in advertising and promotional materials, the name of Colonial as underwriter of the POS products offered by the Plan, such advertising and promotional materials shall receive the prior written approval by Colonial, such approval which will not be unreasonably withheld. Colonial shall respond (by fax to Plan) to all such advertising and other materials within 2 business days of receipt. The Plan may use the Colonial name in its contract forms and riders, but will not use the Colonial name anywhere else except where required by law. (i) Office Space. Chubb Life shall continue to provide Plan with the existing Plan space in the Parsippany, New Jersey building for up to one year from Closing at a rate of $20 per square foot for actual space used (but any space occupied by personnel supporting Chubb Life products shall be excluded from such charge). (j) Exchange of Data. Except where Colonial is able to retrieve the necessary data from its own MIS systems, Plan shall forthwith provide to Colonial any and all data which Colonial requires to perform any duties which it must perform under this Agreement. Likewise, Chubb Life and Colonial shall provide all data to Buyer and Plan relative to Plan or the POS Contracts which are useful to manage Plan's future operations. Each party may audit the books and other records of the other regarding any matter covered by this Agreement. Each party shall provide adequate advance notice to the other and such audit shall be performed only during 19 20 normal business hours on days when the audited party is generally open for business. (k) Withdrawal from Group Health, Ancillary Business and POS Coverages. Buyer recognizes that Chubb Life and Colonial will continue their actions relating to the withdrawal from the group indemnity health insurance business and nothing in this Agreement is intended to keep Chubb Life and affiliates from publicly discussing Colonial's strategic exit from the group health insurance business. Chubb Life agrees to continue to offer POS/SCA contracts in New York and New Jersey for as long as contemplated under Section 7 (including new products developed under Section 3(b)) and to offer Ancillary Business products (defined as the offering of group life, group short and long term disability and group dental insurance policies) in New York and New Jersey until December 31, 1996 and agrees to consider the contemplated withdrawal from the Ancillary Business in New York and New Jersey after December 31, 1996 confidential and especially therefore not to notify the public, the brokerage community or its employees of such contemplated withdrawal until at least ninety (90) days from signing of this Agreement. Chubb Life agrees not to lower the broker commission structure on any Ancillary Business products prior to September 30, 1996. Plan shall also be free after the date of this Agreement to contract with other insurance companies writing group health and Ancillary Business products for the sale of any such products in tandem with Plan products through any brokers proposing to sell Plan products. (l) ERISA. The parties recognize that all current Plan employees will be ineligible to participate in current Chubb Life pension and other benefit plans after Closing. Chubb Life shall have sole financial and other responsibility for taking any and all actions required and/or permitted by ERISA in connection with such discontinuance of benefits at Closing. Neither Buyer nor Plan shall have any duties or financial responsibilities in connection with such discontinuance of benefits. (m) SEC Consents. Chubb Life has provided the audited annual financial statements for Plan in Appendix I and shall provide similar audited financials for Plan for each subsequent annual period ending prior to Closing; in connection therewith, Chubb Life agrees to cause its auditor, Ernst & Young, LLP, to consent without charge to (i) the filing of any such financial statements (together with unaudited stub periods) with the Securities Exchange Commission ("SEC") in connection with any 20 21 registration statement or Forms 8-K/ 10-Q/10-K filings by Healthsource, Inc., when such statements are required, and (ii) to such firm being named as accounting experts in any such SEC filing. (n) Warrants. Buyer agrees that it will not exercise the Warrants for the Purchase of Shares of Common Stock of Seller ("Warrants") dated April 23, 1993 before Closing so that, at Closing, there shall be a redemption of Buyer's 15,000 shares of Common Stock of Seller which shall constitute Buyer's entire stock holdings of Seller. (o) Stop-Loss Insurance. Colonial and Plan shall as soon as possible after execution of this Agreement place so-called stop-loss insurance on all members covered by Plan products (including the POS products under Section 7) which shall reimburse Plan or Colonial, as the case may be, for all health costs on any case in excess of $100,000. This coverage may be written on a combined policy. The cost to Colonial of such stop-loss premiums will be an expense reimbursed to Colonial. 9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF CHUBB LIFE AND SELLER All obligations of Chubb Life and Seller under this Agreement are subject to the fulfillment, at or prior to the Closing Date, of each of the following conditions: (a) Buyer's Covenants. The Buyer shall have performed all of its obligations and agreements and complied with all its covenants contained in this Agreement to be performed and complied with by it prior to the Closing Date. (b) Consents and Regulatory Approvals. Chubb Life and Seller shall have received evidence, satisfactory to them, that (i) all of the consents disclosed in Schedule 8(f) have been duly obtained, and (ii) that all regulatory approvals necessary to permit Seller to sell and Buyer to acquire the Assets and to exercise statutory control (within the meaning of the New York HMO act) over Plan have been received. (c) No Litigation. No action, suit, or proceeding before any court or any governmental or regulatory authority shall have been commenced, no investigation by any governmental or regulatory authority shall have been commenced, and no action, suit, or proceeding by any governmental or regulatory authority shall have 21 22 been threatened against Chubb Life, Seller, the Plan or Buyer: (i) which might restrict or affect the right of Seller to sell the Assets (and indirectly the stock of the Plan) or to exercise any rights in respect thereto, under this Agreement or under any agreement contemplated to be delivered at Closing; or (ii) which seeks to subject Chubb Life or Seller, or any of their directors, officers or affiliates, to any liability, fine, forfeiture, or penalty by reason of the transactions contemplated by this Agreement. There shall not have been issued any injunction or order restraining or otherwise preventing the transactions contemplated by this Agreement. (d) Transitional Services Agreement. The Buyer shall have entered into the Transitional Services Agreement in the form of Exhibit A. 10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER All obligations of the Buyer under this Agreement are subject to the fulfillment, at or prior to the Closing Date, of each of the following conditions: (a) Covenants of Chubb Life and Seller. Chubb Life and Seller shall have performed all of their obligations and agreements and complied with all their covenants contained in this Agreement to be performed and complied with by them prior to the Closing Date and the representation contained in Section 5(k) shall be true at Closing. (b) Consents and Regulatory Approvals. The Buyer shall have received evidence, satisfactory to the Buyer, that (i) all of the consents disclosed in Schedule 8(f) have been duly obtained, (ii) and that all permits, licences, franchises, governmental approvals, and other authorizations necessary to the operations of the Plan as now conducted have been issued to Buyer or the Plan and will remain in full force and effect after Closing; (iii) that all regulatory approvals necessary to permit Buyer to acquire the Assets and to exercise statutory control (within the meaning of the New York HMO act) over Plan have been received; (iv) confirmation has been received from the New York and New Jersey Insurance and Health Departments that the Plan is in good standing; and (v) all regulatory, license, permits, forms, governmental approvals, authorizations and any other requirements are in place for the Plan to continue to market, without interruption or impediment, its then existing POS products, whether such products are written directly 22 23 by Buyer or affiliates of Buyer, Chubb or any affiliate of Chubb or through a third-party. (c) No Litigation. No action, suit, or proceeding before any court or any governmental or regulatory authority shall have been commenced, no investigation by any governmental or regulatory authority shall have been commenced, and no action, suit, or proceeding by any governmental or regulatory authority shall have been threatened against Chubb Life, Seller, Plan or Buyer: (i) seeking to challenge the transactions contemplated hereby or questioning the validity or legality of any such transactions which would, if resolved adversely, severally or in the aggregate, materially adversely affects the financial condition, business, property, assets or prospects of the Seller or the Plan; (ii) which might restrict or affect the right of Buyer to acquire and own (directly or indirectly through Seller) the stock of the Plan or to exercise any rights in respect thereto, under this Agreement or under any agreement contemplated to be delivered at Closing; or (iii) which seeks to subject Buyers, or any of its directors, officers or affiliates, to any liability, fine, forfeiture, or penalty by reason of the transactions contemplated by this Agreement. There shall not have been issued any injunction or order restraining or otherwise preventing the transactions contemplated by this Agreement. (d) Financial Statements. The Seller shall have delivered to Buyer consolidated audited financial statements of the Seller for the year ending December 31, 1995 in the form of Appendix I, together with an opinion of Ernst & Young, LLP which concludes that the financial statements of the Seller present fairly the financial position, results of operations and cash flows of the Seller in conformity with generally accepted accounting principles. (e) Transitional Services Agreement. The Seller shall have entered into the Transitional Services Agreement in the form of Exhibit A. 11. LACK OF IMPLIED WARRANTIES. Buyer, Chubb Life and Seller represent and acknowledge (i) that they are institutional accredited investors within the meaning of the Securities Act of 1933, (ii) that they each have had an opportunity to investigate the condition, management and future prospects of both the Seller and the Plan and to ask all 23 24 pertinent questions they might have, (iii) that each is relying only upon the information and representations contained in this Agreement and (iv) that neither party shall have any obligation to the other to supplement the representations contained herein, nor any claim against the other for any alleged failure to disclose matters not specifically represented herein. 12. CHUBB LIFE'S, SELLER'S AND BUYER'S DELIVERIES; FURTHER ASSURANCES (a) Seller's Deliveries. At the Closing Seller shall deliver to the Buyer: (i) original stock certificate in the Seller's name evidencing all outstanding shares of common stock in Plan duly endorsed for transfer to Buyer; (ii) copies of all minute and stock record books of the Seller and the original minute and stock record books of the Plan; (iii) copies of the Certificate of Incorporation of the Seller and Plan certified by the Secretary of State of the States of New Hampshire and New York, respectively, and the By-Laws of the Seller and Plan, certified by the Secretary of each corporation; (iii) such other instrument or instruments of transfer, in such form as shall be necessary or appropriate to vest in the Buyer marketable title to the Assets; (iv) certificates issued by appropriate governmental authorities evidencing the good standing (including tax good standing) of the Seller as a corporation in the State of New Hampshire and the good standing (including tax good standing) of the Plan as a corporation in New York and certificates evidencing the good standing of the Seller and the Plan (as the case may be) in each state where the Seller or the Plan is doing business, as of a date not more than ten days prior to the Closing Date; (v) a list of all bank accounts of Plan with signatures changed to Buyer's designees; (vi) certified or bank check in the amount to be determined in accordance with Section 2 in redemption of Buyer's stock interest in Seller; 24 25 (b) Chubb Life's Deliveries. At the Closing, Chubb Life shall deliver to the Buyer: (i) the Transitional Services Agreement duly executed on its behalf in the form of Exhibit A; (ii) resignations of Chubb America Service Corporation or Chubb Corp. employees who act as directors and officers of the Plan effective at the Closing Date; and (iii) Chubb Life's vote of its shares in Seller in favor of redemption of Buyer's entire stock interest in Seller as contemplated in Section 2(c). (c) Buyer's Deliveries. At the Closing, the Buyer shall deliver: (i) certified or bank checks in the aggregate amount of the Purchase Price due in accordance with Section 2 hereof; (ii) the Transitional Services Agreement duly executed on behalf of Buyer and in the form of Exhibit A; i (iii) Buyer's vote of its shares in Seller in favor of redemption of Buyer's entire stock interest in Seller as contemplated in Section 2(c); and (iv) original stock certificates in Buyer's name evidencing the 15% stock interest of Buyer in Seller for redemption by Seller (d) Further Assurances. Following the Closing, at the request of the Buyer, Chubb Life and the Seller shall deliver to the Buyer such further documents and take such reasonable action as may be necessary or appropriate to vest in the Buyer all the right, title, and interest to the Assets. 13. INDEMNIFICATION FOR UNDERWRITING LOSSES OR GAINS. (a) To the extent not solved by other agreements or by reinsurance proceeds for POS/SCA business from Buyer's affiliates under Sections 7(a) and (b), Buyer agrees to indemnify and hold harmless Colonial from any and all underwriting losses incurred by Colonial on the POS/SCA plans which it 25 26 continues to offer or reinsure for Plan after Closing, as provided in Section 7 of this Agreement. Colonial agrees to indemnify and hold harmless Buyer from any underwriting gain accrued by Colonial on the POS/SCA Plans offered or reinsured under Section 7 (excluding the amount of the fee under Sections 7(a)(ii), (aa), (bb) or (cc). Colonial shall make a determination each calendar quarter as to the presence or absence of an underwriting loss or gain on such POS/SCA business; such determination shall (i) use standard actuarial practices consistently applied with those used by Chubb Life or Colonial on December 31, 1995, (ii) include estimates of incurred but not paid claims, and (iii) include cumulative adjustments, based on updated claims experience, of determinations made in prior calendar quarters. Such determination shall continue to be made for one year after all such POS/SCA business has ceased to be effective with Colonial, at which time Colonial shall make a final cumulative determination as to the presence of absence of an underwriting loss or gain on such POS/SCA business taking into account all payments or discounts or credits received by Colonial with respect to health care expenses under such POS/SCA business; provided, however, that if Colonial determines there are outstanding unresolved claims or other issues in amounts which may materially affect the determination of the presence or absence of an underwriting loss or gain and/or the amount thereof, Colonial may continue to make quarterly determinations, until such time as such claims or other issues no longer materially affect the determination of the presence or absence of an underwriting loss and/or the amount thereof. (b) Any amounts due to Colonial or Buyer as a result of a determination of an underwriting loss or gain under clause (a) shall be paid by the respective party within fifteen (15) calendar days after the determination. (c) For purposes of determining the presence or absence of an underwriting loss or gain under clause (a) Colonial shall, consistent with the accounting principles used in preparing Schedule 4: (i) include not only all claims incurred during the period post Closing, net of reinsurance, together with an estimate for incurred but not paid claims, but also all actual direct and indirect costs in connection with Colonial's offering of the POS/SCA plans (as defined in Section 7(a)(ii)(dd), including, all premiums payable by Colonial for stop-loss coverage 26 27 limiting Plan's or Colonial's exposure to individual cases to a maximum of $100,000, all fines, penalties and sanctions imposed upon Chubb Colonial which result from actions taken or insisted upon by Plan; in determining expenses incurred, only reasonable expenses assigned to the product (consistent with the assumed level and types of expenses) shall be included, and (ii) exclude all expenses recovered from or paid by other sources, including but not limited to amounts borne by ChubbHealth and paid by the stop-loss insurer or any other reinsurer (Chubb Life agreeing not to make any change from the above agreed level of stop-loss coverage for such POS/SCA book of business). (d) The obligations in this Section 13 shall survive after Closing. 14. ARBITRATION. Except as provided in Section 3(b), any controversy or claim arising out of or relating to this Agreement, shall be exclusively settled by binding arbitration which shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association in New York, New York, as such rules shall be in effect on the date of delivery of the demand for arbitration. Any such arbitration shall be heard and conducted in the State of New York. Judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof, provided, however, the arbitrator shall have no authority to award any punitive, treble or any other like style of multiple damages that exceed the purchase price under Section 2(b). The prevailing party (if any) shall be entitled to recover its reasonable attorney's fees and costs. All conclusions of law reached by the arbitrators shall be made in accordance with the substantive law of the State of New York. 15. MISCELLANEOUS. (a) Waivers. No action taken pursuant to this Agreement, including, without limitation, proceeding with Closing, shall be deemed to constitute a waiver by any party taking such action of compliance with any representations, warranties, covenants, or agreements contained in this Agreement. The waiver by any of the parties of a breach of any provision of this Agreement shall not operate or be construed as a waiver or a breach of any other provision of this Agreement. 27 28 (b) Amendments, Supplements, Termination, etc. Subject to applicable law, this Agreement may be amended, modified, and supplemented, only by written agreement of Chubb Life, the Seller, the Plan and Buyer. (c) Notices. All notices and other communications which are required or may be given hereunder shall be in writing and shall be deemed to have been duly given if by hand or overnight courier or mailed certified first class mail, postage prepaid. Notice shall be deemed effective on the date actually received: (i) If to Chubb Life: Chubb Life Insurance Company of America One Granite Place Concord, NH 03301 Attn: Theresa M. Stone, President & CEO with a copy to: Chubb Life Insurance Company of America One Granite Place Concord, NH 03302 Attn: J. Michael Gannon, Esq. (ii) If to the Seller: ChubbHealth Holdings, Inc. c/o Chubb Life Insurance Company of America, Inc. One Granite Place Concord, NH 03302 Attn: J. Michael Gannon, Esq. (iii) If to the Buyer: Healthsource, Inc. Two College Park Drive Hooksett, NH 03106 Attn: Norman C. Payson, M.D. 28 29 President & CEO with a copy to: Healthsource, Inc. Two College Park Drive Hooksett, NH 03106 Attn: Jon S. Richardson, Esq. or to such other person or persons at such address or addresses as may be designated by written notice to the other party hereunder. (d) Entire Agreement. This Agreement, together with the other writings delivered in connection herewith, embodies the entire agreement and understanding of the parties hereto with respect to the subject matters hereof and thereof and supersedes any prior agreement and understanding between the parties. (e) Governing Law and Binding Effect. This Agreement shall be governed by the laws of the State of New York without regard to principles of conflicts of law and shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. (f) Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction, provided such prohibited or unenforceable provision does not affect the essence of this Agreement. 16. TERMINATION OF PRIOR AGREEMENTS. Upon the Closing of the purchase of the Assets under this Agreement, the terms and conditions of the Investment Agreement, the Shareholders Agreement, the Administrative Services Agreement and the Management Services Agreement are hereby terminated with no further obligation of any party thereunder after the Closing Date. IN WITNESS WHEREOF, the parties have executed this Agreement as of the 29 30 date first written above. WITNESS: HEALTHSOURCE METROPOLITAN NEW YORK HOLDING COMPANY, INC. /s/ By: /s/ Norman C. Payson, M.D. - ---------------------------- -------------------------------------- Norman C. Payson, M.D. President & CEO CHUBB LIFE INSURANCE COMPANY OF AMERICA /s/ By: /s/ Theresa M. Stone - ---------------------------- -------------------------------------- Theresa M. Stone President & CEO CHUBBHEALTH HOLDINGS, INC. /s/ By: /s/ Richard V. Werner - ---------------------------- -------------------------------------- Duly Authorized CHUBBHEALTH, INC. /s/ By: /s/ Richard V. Werner - ---------------------------- -------------------------------------- Duly Authorized THE CHUBB CORPORATION (only with respect to the obligations under Section 8(e) /s/ By: /s/ - ---------------------------- -------------------------------------- Duly Authorized 30 31 GUARANTY The undersigned corporation hereby guarantees the performance of all obligations of Healthsource Metropolitan New York Holding Company, Inc. and affiliates under this Agreement. HEALTHSOURCE, INC. By: /s/ Norman C. Payson, M.D. ------------------------------- Norman C. Payson, M.D. President & CEO 31 EX-15 3 LETTER REGARDING UNAUDITED INTERIM FINANCIALS 1 DELOITTE & TOUCHE LLP - ------------ ---------------------------------------------------------- [Logo] 125 Summer Street Telephone: (617) 261-8000 Boston, Massachusetts 02110-1617 Facsimile: (617) 261-8111 August 14, 1996 EXHIBIT 15 ---------- Healthsource, Inc. Two College Park Drive Hooksett New Hampshire 03106 We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Healthsource, Inc. and Subsidiaries for the periods ended June 30, 1996 and 1995, and March 31, 1996 and 1995, as indicated in our reports dated August 9, 1996 and May 10,1996 respectively; because we did not perform an audit, we expressed no opinion on that information. We are aware that our reports referred to above, which were included in your Quarterly Reports on forms 10-Q for the quarters ended June 30, 1996 and March 31, 1996 respectively, are being used in this Registration Statement. We also are aware that the aforementioned reports, pursuant to Rule 436(c) under the Securities Act of 1933, are not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ Deloitte & Touche LLP - --------------- DELOITTE TOUCHE TOHMATSU INTERNATIONAL - --------------- EX-23.1 4 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 ------------ INDEPENDENT AUDITORS' CONSENT - ----------------------------- We consent to the incorporation by reference in this Amendment No. 1 to Registration Statement No. 333-5223 of Healthsource, Inc. and Subsidiaries on Form S-3 of our report dated February 16, 1996, appearing in the Annual Report on Form 10-K of Healthsource, Inc. and Subsidiaries for the year ended December 31, 1995. /s/ Deloitte & Touche LLP Boston, Massachusetts August 14, 1996 -----END PRIVACY-ENHANCED MESSAGE-----