<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-19147
COVENTRY HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2073000
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
6705 ROCKLEDGE DRIVE, SUITE 900, BETHESDA, MARYLAND 20817
(Address of principal executive office)
(Zip Code)
(301) 581-0600
(Registrant's telephone number, including area code)
------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at November 3, 1998
- ----- -------------------------------
<S> <C>
Common stock $.01 Par Value 58,831,515
</TABLE>
<PAGE> 2
COVENTRY HEALTH CARE, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 1
Condensed Consolidated Statements of Operations for the quarter
and nine months ended September 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3: Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 18
Items 2, 3, 4 and 5 18
Item 6 18
Signatures 19
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
--------------- -------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 310,081 $ 153,979
Short-term investments 43,486 3,870
Accounts receivable, net 52,609 40,005
Other receivables 41,627 16,663
Deferred income taxes 75,098 17,920
Other current assets 3,943 4,687
----------- -----------
Total current assets 526,844 237,124
Long-term investments 159,461 82,242
Property and equipment, net 43,738 21,937
Goodwill and intangible assets, net 371,998 108,637
Other assets 9,927 19,391
----------- -----------
Total assets $ 1,111,968 $ 469,331
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Medical claims liabilities $ 358,978 $ 118,022
Accounts payable and other accrued liabilities 180,481 102,981
Deferred revenue 22,235 39,093
Current portion of long-term debt and notes payable 45,592 765
----------- -----------
Total current liabilities 607,286 260,861
Convertible exchangeable subordinated notes 44,589 42,042
Long-term debt 825 43,677
Other long-term liabilities 27,313 4,933
Stockholders' equity:
Common Stock, $.01 par value; 200,000,000 shares
authorized; 59,271,075 issued (including 439,560 shares
owned by a subsidiary), 58,831,515 shares outstanding in 1998
and 33,712,665 shares issued (including 439,560 shares
owned by subsidiary), 33,273,105 outstanding in 1997 593 337
Additional paid-in capital 475,653 146,426
Net unrealized investment gain 3,227 592
Accumulated deficit (42,518) (24,537)
Treasury stock, at cost, 439,560 shares (5,000) (5,000)
----------- -----------
Total stockholders' equity $ 431,955 $ 117,818
----------- -----------
Total liabilities and stockholders' equity $ 1,111,968 $ 469,331
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine months ended
September 30, September 30,
------------------------------ -----------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating revenues:
Managed care premiums $ 568,280 $ 300,904 $ 1,454,022 $ 892,357
Management services 24,998 5,790 53,269 14,763
----------- ----------- ----------- -----------
Total operating revenues 593,278 306,694 1,507,291 907,120
Operating expenses:
Health benefits 505,518 254,551 1,261,817 772,363
Selling, general and administrative 78,077 43,287 206,434 124,892
Depreciation and amortization 7,504 2,880 18,141 9,913
Restructuring charge -- -- 7,780 --
AHERF charge -- -- 55,000 --
----------- ----------- ----------- -----------
Total operating expenses 591,099 300,718 1,549,172 907,168
----------- ----------- ----------- -----------
Operating earnings (loss) 2,179 5,976 (41,881) (48)
Other income, net of interest expense 5,809 (1,542) 13,113 14,075
----------- ----------- ----------- -----------
Earnings (loss) before income taxes
and minority interest 7,988 4,434 (28,768) 14,027
Provision for (benefit from) income taxes 2,920 1,774 (10,787) 5,611
Minority interest in loss of consolidated
subsidiary, net of income tax -- 2 -- 19
----------- ----------- ----------- -----------
Net earnings (loss) $ 5,068 $ 2,658 $ (17,981) $ 8,397
=========== =========== =========== ===========
Net earnings (loss) per common and
common equivalent share
Basic $ 0.09 $ 0.08 $ (0.36) $ 0.25
=========== =========== =========== ===========
Diluted $ 0.09 $ 0.08 $ -- $ 0.25
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
<S> <C> <C>
Net cash provided by operating activities $ 22,606 $ 1,107
--------- ---------
Cash flows from investing activities:
Capital expenditures, net (8,249) (4,902)
Sale of investments 85,093 27,885
Purchase of investments (94,044) (21,367)
Proceeds from sale of subsidiary and medical offices -- 51,862
Cash acquired with purchase of PHC 148,600 --
--------- ---------
Net cash provided by investing activities 131,400 53,478
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt and notes payable 2,478 40,000
Payments of long-term debt and notes payable (1,797) (43,217)
Net proceeds from issuance of stock and warrants 1,415 4,222
--------- ---------
Net cash provided by financing activities 2,096 1,005
--------- ---------
Net increase in cash and cash equivalents 156,102 55,590
Cash and cash equivalents at beginning of the period 153,979 85,646
--------- ---------
Cash and cash equivalents at end of the period $ 310,081 $ 141,236
========= =========
Supplemental disclosures of cash flow information
Cash paid (received) during the period was as follows:
Interest $ 2,586 $ 6,119
========= =========
Income taxes $ 13,600 $ (6,508)
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
COVENTRY HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Coventry Health
Care, Inc. and subsidiaries (the "Company") contained in this report are
unaudited but reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for the fair
presentation of financial position and results of operations of the interim
periods reflected. Certain information and footnote disclosures normally
included in the consolidated financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
applicable rules and regulations of the Securities and Exchange Commission (the
"SEC"). Certain reclassifications have been made to 1997 amounts to conform to
the 1998 presentation. The results of operations for the interim periods
reported herein are not necessarily indicative of results to be expected for the
full year. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements,
notes thereto and management's discussion and analysis included in the Company's
most recent Annual Report on Form 10-K, filed with the SEC on March 24, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
Earnings per Share - In the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." SFAS 128 establishes new standards for computing and presenting earnings
per share ("EPS"), replacing primary EPS with "basic EPS." Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. All
prior periods have been restated to comply with SFAS 128. See Note 7 for
calculation of EPS.
Comprehensive Income - Effective January 1, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires that
changes in the amounts of certain items, including unrealized gains and losses
on certain securities, be shown in the financial statements. The adoption of
this standard did not have a material effect on the Company's consolidated
financial statements. See Note 4 for disclosures on comprehensive income.
Segment reporting - Effective January 1, 1998, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This standard requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 also requires that all public business enterprises
report information about the revenues derived from the enterprise's products or
services (or groups of similar products and services), about the countries in
which the enterprise earns revenues and holds assets and about major customers
regardless of whether that information is used in making operating decisions.
The Company is still evaluating the impact of SFAS No. 131 and expects to
complete its evaluation in the fourth quarter of 1998. As allowed under SFAS No.
131, this standard will not be applied to the Company's interim financial
statements during 1998, the initial year of its application.
4
<PAGE> 7
3. ACQUISITIONS
Effective April 1, 1998, the Company completed its acquisition of
certain assets of Principal Health Care, Inc. ("PHC") from Principal Mutual Life
Insurance Company ("Mutual") for a total purchase price including transaction
costs (approximately $10.0 million) of approximately $334.5 million.
The acquisition was accounted for using the purchase method of
accounting, and accordingly the operating results of PHC have been included in
the Company's consolidated financial statements since the date of acquisition.
The purchase price consisted of 25,043,704 shares of the Company's common stock
at an assigned value of $11.96 per share. In addition, a warrant valued at $25.0
million ("the Warrant") was issued that gives Mutual the right to acquire
additional shares of stock in the event that their ownership percentage is
diluted.
Coincident with the closing of the transaction, the Company entered
into a Marketing Services Agreement and a Management Services Agreement with
Mutual. Both agreements extend through December 31, 1999. The Company expects to
receive payments of approximately $24.7 million and $26.4 million in 1998 and
1999, respectively. The Company recognized approximately $7.7 million and $15.2
million for the quarter and nine month period ended September 30, 1998,
respectively, related to these agreements.
The purchase price has been preliminarily allocated to the assets,
including identifiable intangible assets, and liabilities based on estimated
fair values. The excess of the purchase price over the net identified tangible
and intangible assets acquired of approximately $229.0 million was allocated to
goodwill. The amounts allocated to identifiable intangible assets and goodwill
and their related useful lives are as follows:
<TABLE>
<CAPTION>
USEFUL
DESCRIPTION AMOUNT LIFE
- ----------- ------ ----
<S> <C> <C>
Marketing Service Agreement $ 1,500,000 1.75 years
Customer Lists 7,233,000 5 years
HMO Licenses 10,000,000 20 years
Management Services
Agreement 4,687,500 1.75 years
Renewal Rights Agreement 20,312,500 35 years
Goodwill 229,016,629 35 years
------------
Total $272,749,629
============
</TABLE>
Due to the inherent variability in the estimates made when determining
the value of certain assets and liabilities acquired, such as accounts
receivable and medical claims liabilities, the preliminary allocation of the
purchase price may be adjusted as additional information becomes available
during 1998 to make such estimates more precise. The Company does not expect any
final allocations to be material to the financial statements.
In connection with the acquisition of PHC, the Company also maintains
an agreement with Mutual, whereby Mutual pays a fee for access to the Company's
PPO network based on a rate per contract and a percentage of savings based on
the Company's negotiated fee schedule. The maximum amount that can be paid under
the percentage of savings component of the agreement is $12.0 million for 1998
and $8.0 million for 1999. The Company recognized $4.0 million and $8.0 million
for the
5
<PAGE> 8
quarter and nine months ended September 30, 1998, respectively, related to this
agreement.
The following unaudited pro-forma condensed consolidated results of
operations assumes the acquisition occurred on January 1, 1998 and excludes the
restructuring charge of $7.8 million, see note 5 (in thousands, except per share
data):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPT. 30, 1998
--------------
(UNAUDITED)
<S> <C>
Operating revenues $1,743,023
Net loss (46,286)
Earnings per share, basic (0.79)
</TABLE>
4. COMPREHENSIVE INCOME
Comprehensive income is as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
9/30/98 9/30/97
------- -------
<S> <C> <C>
Net income $5,068 $2,658
Other comprehensive income, net of tax:
Unrealized gains on securities 1,345 274
------ ------
Comprehensive income $6,413 $2,932
====== ======
</TABLE>
<TABLE>
<CAPTION>
NINE NINE
MONTHS ENDED MONTHS ENDED
9/30/98 9/30/97
------- -------
<S> <C> <C>
Net (loss) income $(17,981) $ 8,397
Other comprehensive income, net of tax:
Unrealized gains on securities 2,635 44
-------- -------
Comprehensive (loss) income $(15,346) $ 8,441
======== =======
</TABLE>
5. RESTRUCTURING CHARGE
In connection with the acquisition of PHC, the Company relocated its
Corporate Headquarters from Nashville, Tennessee to Bethesda, Maryland. As a
result, the Company established a reserve of $7.8 million for the incurred and
anticipated costs related to the transition of the Corporate office. The reserve
is primarily comprised of severance costs related to involuntary terminations,
relocation costs for management personnel, and lease costs related to the unused
space remaining at the old headquarters location. Through September 30, 1998,
the Company has paid approximately $3.0 million related to this reserve. The
Company expects to make payments through December 2002 related to these
restructuring charges.
6. AHERF CHARGE
In March 1997, the Company entered into a global capitation agreement
with Allegheny Health, Education and Research Foundation ("AHERF") covering
approximately 250,000 members in the western Pennsylvania market. Under the
Agreement AHERF was paid 78% to 82% of the premium to cover all of the medical
expenses of the capitated members. In July 1998, AHERF filed for bankruptcy
protection under Chapter 11. As a result, the Company, which is ultimately
responsible for the medical costs of the
6
<PAGE> 9
capitated members, recorded a charge of $55.0 million to establish a reserve for
the medical costs incurred by members under the AHERF agreement at the time of
the bankruptcy filing and other potential bankruptcy related charges. The
reserve provides for the contingency that, under applicable bankruptcy laws,
AHERF could reject and refuse to perform under the agreement. Generally, under
Chapter 11 a debtor company such as AHERF may affirm or reject its contractual
obligations prior to confirmation of a plan of reorganization, and if a contract
is rejected, the contractual damages become an unsecured claim in the Chapter 11
proceeding. The Company anticipates that AHERF will reject the risk-sharing
agreement, but AHERF has not done so as of the date of this filing. The Company
has filed a lawsuit against certain affiliated hospitals of AHERF that were not
included in the bankruptcy filing. The lawsuit is seeking a court order
declaring that the Company is not liable for the payment of medical services
provided by the hospitals to the Company's members prior to the date of AHERF's
bankruptcy filing and compelling the hospitals to fulfill their contractual
obligations to continue to provide health care services to the membership in
western Pennsylvania. The lawsuit also includes a claim for damages to recover
the losses incurred by the Company as a consequence of AHERF's default of its
obligations under the risk-sharing agreement. The Company believes this reserve
is adequate to provide for the claims incurred related to the AHERF arrangement
and other related AHERF bankruptcy uncertainties, including the recoverability
of AHERF related receivables. For the three months ended September 30, 1998
$30.3 million has been paid for medical claims related to this reserve.
7. EARNINGS (LOSS) PER SHARE
The following table summarizes the earnings (loss) and the average
number of common shares used in the calculation of basic and diluted earnings
per share (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED SEPT. 30, 1998
----------------------------
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net income 5,068
Basic EPS 5,068 58,785 0.09
Effect of Dilutive Securities:
Options and warrants 114
----- ------
Diluted EPS 5,068 58,899 0.09
<CAPTION>
QUARTER ENDED SEPT. 30, 1997
----------------------------
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net income 2,658
Basic EPS 2,658 33,186 0.08
Effect of Dilutive Securities:
Options and warrants 1,766
Convertible notes 467 4,000
------ ------
Diluted EPS 3,125 38,952 0.08
<CAPTION>
NINE MONTHS ENDED SEPT. 30, 1998
--------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss (17,981)
Basic EPS (17,981) 50,242 (0.36)
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT. 30, 1997
--------------------------------
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net income 8,397
Basic EPS 8,397 33,196 0.25
Effect of Dilutive Securities:
Options and warrants 803
Convertible notes 649 1,834
------ ------
Diluted EPS 9,046 35,833 0.25
</TABLE>
8. SUBSEQUENT EVENTS
On October 5, 1998, the Company announced that it had signed a
definitive agreement with First American Group of Companies, Inc., the parent of
American Health Care Providers, Inc., to sell its subsidiary, Principal Health
Care of Illinois, Inc. The Illinois health plan accounted for 56,358 risk
members and 2,459 non-risk members in Chicago and surrounding counties as of
September 30, 1998 and reported approximately $28.3 million in revenues for the
quarter ended September 30, 1998.
On October 15, 1998, the Company announced that it had signed a
definitive agreement with Blue Cross and Blue Shield of Florida's HMO, Health
Options, Inc., to sell its subsidiary, Principal Health Care of Florida, Inc.,
for $95.0 million in cash. The Florida health plans accounted for 142,024
commercial members as of September 30, 1998 and reported approximately $56.4
million in revenues for the quarter ended September 30, 1998.
Consummation of the transactions will be subject to regulatory approval
and other conditions, and are currently anticipated to occur in the fourth
quarter of 1998. The proceeds from both sales will be used to reduce bank debt,
assist in improving the capital position of the Company's regulated entities,
and for other general corporate purposes.
8
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
GENERAL
Coventry Health Care, Inc., headquartered in Bethesda, Maryland is a
managed health care company that provides comprehensive health benefits and
services to a broad cross section of employer and government-funded groups in
the Midwest, Mid-Atlantic and Southeastern United States.
The Company serves a membership of 1,352,874 full-risk members and
228,273 self-insured members as of September 30, 1998. The following tables show
the total number of enrollees as of September 30, 1998 and 1997 and the
percentage increases in enrollment. The September 30, 1998 enrollment figures
reflect the acquisition of the PHC health plans effective April 1, 1998.
<TABLE>
<CAPTION>
SEPT. 30, PERCENT
1998 1997 CHANGE
---- ---- ------
<S> <C> <C> <C>
St. Louis(1) 315,516 253,375 24.5%
Western Pennsylvania 258,175 257,584 0.2%
Central Pennsylvania 167,509 186,899 (10.4%)
Florida (2) 146,647 - N/A
Iowa 80,516 - N/A
Illinois/Chicago (2) 56,358 - N/A
Richmond 54,596 55,343 (1.4%)
Delaware/Baltimore 53,948 - N/A
Kansas City 46,496 - N/A
Louisiana 38,881 - N/A
Wichita 33,839 - N/A
Nebraska 33,825 - N/A
Indiana 27,275 - N/A
Carolinas 21,530 - N/A
Georgia 17,763 - N/A
--------- -------
Total at-risk membership by market 1,352,874 753,201 79.6%
Total non-risk membership by market(3) 228,273 144,557 57.9%
--------- -------
Total membership by market 1,581,147 897,758 76.1%
========= =======
<CAPTION>
SEPT. 30, PERCENT
1998 1997 CHANGE
---- ---- ------
<S> <C> <C> <C>
Commercial HMO 927,037 388,575 138.6%
Commercial PPO/POS 253,468 224,070 13.1%
Medicare risk 70,869 34,588 104.9%
Medicare cost 1,954 3,697 (47.1%)
Medicaid 99,546 102,271 (2.7%)
--------- -------
Total at-risk membership by product 1,352,874 753,201 79.6%
Non-risk membership by product(3) 228,273 144,557 57.9%
--------- -------
Total membership by product 1,581,147 897,758 76.1%
========= =======
</TABLE>
(1) Includes 32,703 PHC of St. Louis members.
9
<PAGE> 12
(2) Subsequent to September 30, 1998, the Company entered into agreements to
sell its Illinois and Florida health plans.
(3) 1998 Non-risk membership includes 85,385 members attributable to PHC plans.
The Company's operating expenses are primarily medical costs including
medical claims under contracted relationships with a wide variety of providers,
capitation payments and, during a portion of 1997, expenses relating to the
operation of the Company's health centers. Medical claims expense also includes
an estimate of claims incurred but not reported ("IBNR"). The Company currently
believes that the estimates for IBNR liabilities relating to its businesses are
adequate in order to satisfy its ultimate claims liability with respect thereto.
In determining the Company's medical claims liabilities, the Company employs
plan by plan standard actuarial reserve methods (specific to the plan's
membership, product characteristics, geographic territories and provider
network) which consider utilization frequency and unit costs of inpatient,
outpatient, pharmacy and other medical costs as well as claim payment backlogs
and the changing timing of provider reimbursement practices. Calculated reserves
are reviewed by underwriting, finance and accounting, and other appropriate plan
and corporate personnel and judgments are then made as to the necessity for
reserves in addition to the calculated amounts. Changes in assumptions for
medical costs caused by changes in actual experience, changes in the delivery
system, changes in pricing due to ancillary capitation and fluctuations in the
claims backlog could cause these estimates to change in the near term. The
Company periodically monitors and reviews its IBNR reserves, and as actual
settlements are made or accruals adjusted, differences are reflected in current
operations. The Company continually refines its reserving practices to
incorporate new events and trends.
On October 5, 1998, the Company announced that it had signed a
definitive agreement with First American Group of Companies, Inc., the parent of
American Health Care Providers, Inc., to sell its subsidiary, Principal Health
Care of Illinois, Inc. The Illinois health plan accounted for 56,358 risk
members and 2,459 non-risk members in Chicago and surrounding counties as of
September 30, 1998 and reported approximately $28.3 million in revenues for the
quarter ended September 30, 1998.
On October 15, 1998, the Company announced that it had signed a
definitive agreement with Blue Cross and Blue Shield of Florida's HMO, Health
Options, Inc., to sell its subsidiary, Principal Health Care of Florida, Inc.,
for $95.0 million in cash. The Florida health plans accounted for 142,024
commercial members as of September 30, 1998 and reported approximately $56.4
million in revenues for the quarter ended September 30, 1998.
Consummation of the transactions will be subject to regulatory approval
and other conditions, and are currently anticipated to occur in the fourth
quarter of 1998. The proceeds from both sales will be used to reduce bank debt,
assist in improving the capital position of the Company's regulated entities,
and for other general corporate purposes.
RESULTS OF OPERATIONS
Effective April 1, 1998 the Company completed its acquisition of PHC
for a total price including transaction costs (approximately $10.0 million) of
approximately $334.5 million. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the operating results of PHC
have been included in the Company's consolidated financial statements since the
date of acquisition (see Note 3 of the Condensed Consolidated Financial
Statements).
10
<PAGE> 13
In connection with the acquisition of PHC, the Company relocated its
Corporate headquarters from Nashville, Tennessee to Bethesda, Maryland. As a
result, the Company established a reserve of $7.8 million for the incurred and
anticipated costs related to the transition of the Corporate office. The reserve
is primarily comprised of severance costs related to involuntary terminations,
relocation costs for management personnel, and lease costs related to the unused
space remaining at the old headquarters location. Through September 30, 1998,
approximately $3.0 million has been paid related to this reserve.
In March 1997, the Company entered into a global capitation agreement
with Allegheny Health, Education and Research Foundation ("AHERF") covering
approximately 250,000 members in the western Pennsylvania market. Under the
Agreement AHERF received 78% to 82% of the premium to cover all of the medical
expenses of the capitated members. In July 1998, AHERF filed for bankruptcy
protection under Chapter 11. As a result, the Company, which is ultimately
responsible for the medical costs of the capitated members, recorded a charge of
$55.0 million to establish a reserve for the medical costs incurred by members
under the AHERF agreement at the time of the bankruptcy filing and other
potential bankruptcy charges. The reserve provides for the contingency that,
under applicable bankruptcy laws, AHERF could reject and refuse to perform under
the agreement. Generally, under Chapter 11 a debtor company such as AHERF may
affirm or reject its contractual obligations prior to confirmation of a plan of
reorganization, and if a contract is rejected, the contractual damages become an
unsecured claim in the Chapter 11 proceeding. The Company anticipates that AHERF
will reject the risk-sharing agreement, but AHERF has not done so as of the date
of this filing. The Company has filed a lawsuit against certain affiliated
hospitals of AHERF that were not included in the bankruptcy filing. The lawsuit
is seeking a court order declaring that the Company is not liable for the
payment of medical services provided by the hospitals to the Company's members
prior to the date of AHERF's bankruptcy filing and compelling the hospitals to
fulfill their contractual obligations to continue to provide health care
services to the membership in western Pennsylvania. The lawsuit also includes a
claim for damages to recover the losses incurred by the Company as a consequence
of AHERF's default of its obligations under the risk-sharing agreement. The
Company believes this reserve is adequate to provide for the claims incurred
related to the AHERF arrangement and other related AHERF bankruptcy
uncertainties.
QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
Managed care premiums increased $267.4 million, or 88.9%, from the
prior year quarter. The PHC operations accounted for approximately $235.4
million or 88.0% of the increase. Exclusive of the PHC operations, total
membership increased slightly by 8,367 or 0.9%. The Medicare risk membership,
exclusive of the PHC acquisition, increased by 26,391 members, or 76.3%. The
increase in Medicare membership was offset by a 20,484 decrease in Medicaid
membership primarily resulting from the Company's decision to exit the Medicaid
market in Pennsylvania in the first quarter of 1998. Medicare risk membership
has a significantly (approximately three times) higher per member per month
premium when compared to commercial products. In addition, revenues per member
per month, exclusive of the PHC acquisition, remained level for HMO members and
increased 10.2% for PPO/POS members. The Company continued to install rate
increases that averaged approximately 7% for renewals in the quarter.
The Company will exit the Medicare program in several counties
representing approximately 18,000 members effective December 31, 1998.
Approximately 10,000 of those members are in the Florida and Illinois health
plans that are being sold. The remaining markets are being exited because the
reimbursement rates are not adequate and the Company was not successful in its
recontracting efforts.
Management services revenue increased $19.2 million or 331.7% from the
prior year quarter. The PHC ASO operations and PPO access fees accounted for
approximately $10.5 million or 54.7% of the increase. The management services
and marketing services agreements that were entered into coincident with the PHC
acquisition accounted for approximately $7.7 million, or 40.1%, of the increase.
Exclusive of the PHC operations and the related agreements with Mutual, the
management services revenue increased approximately $1.0 million or 5.2%.
Health benefits expense increased $251.0 million, or 98.6%, from the
prior year quarter. The PHC operations accounted for approximately $205.5
million or 81.9% of the increase. Exclusive of the PHC operations, health
benefits expense increased by
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<PAGE> 14
approximately $45.5 million, or 18.1%. The remaining increase is primarily
attributable to the significant growth in the Medicare risk business and an
increase in the Company's medical loss ratio of 4.4% to 89.0% from 84.6% in the
prior year quarter. The increase in the medical loss ratio is attributable to
the fact the Company has elected to record medical expenses related to AHERF
affiliated providers as if the global capitation agreement was no longer in
effect subsequent to the AHERF bankruptcy and increased medical costs in certain
of its markets. The Company continues to focus intensely on ways to control its
medical costs, including implementation of best practices to reduce inpatient
days and improve the overall quality and level of care. The Company is also
continuously monitoring and renegotiating with its provider networks to improve
reimbursement rates and improve access to the network for the Company's members.
Selling, general and administrative ("SGA") expense increased $34.8
million, or 80.4%, from the prior year quarter. The PHC operations accounted for
approximately $34.0 million or 97.7% of the increase. SGA expense as a percent
of revenue, decreased to 13.2% for the quarter ended September 30, 1998, from
14.1% in the prior year quarter which is primarily attributable to changes in
estimates of certain accrued amounts in the current quarter. In an effort to
control costs and improve customer service, the Company is in the process of
migrating certain of its operating activities (e.g., customer service, claims
processing, billing and enrollment) to regional service centers. It is
anticipated that the service centers would be fully operational in the fourth
quarter of 1999.
Depreciation and amortization increased $4.6 million, or 160.6%, from
the prior year quarter. Depreciation related to the PHC operations accounted for
approximately $0.7 million or 15.2% of the increase. The incremental
amortization expense related to the intangibles and goodwill recorded as part of
the PHC acquisition was approximately $3.4 million or 73.9% of the increase for
the quarter ended September 30, 1998.
Other income, net increased by $7.4 million, or 476.7%, from the prior
year quarter. The PHC operations accounted for approximately $3.1 million or
41.9% of the increase. Exclusive of the PHC operations, other income, net
increased by approximately $4.3 million or 58.1%. The remaining increase is
primarily attributable to increased investment income resulting from the
increase in invested assets subsequent to the acquisition of PHC.
Earnings from operations were $2.2 million compared to $6.0 million in
the prior year quarter. This $3.8 million decrease in operating income compared
to the prior year quarter is attributable to various factors as described above.
The Company's effective tax rate is 36.6% compared to 40.0% for the
prior year quarter. The 3.4% decrease is attributable to changes in the
estimates of permanent differences between book and taxable income.
The Company's net earnings were $5.1 million. Net earnings per common
and common equivalent share were $0.09 per share for the quarter ending
September 30, 1998 compared to earnings per common share and common equivalent
share of $0.08 in the prior year quarter. The weighted average common and common
equivalent shares outstanding were approximately 58,899,000 and 38,952,000 for
the quarters ended September 30, 1998 and 1997, respectively. The increase in
1998 average shares is primarily attributable to the issuance of stock in April
1998 related to the acquisition of PHC.
12
<PAGE> 15
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Managed care premiums increased $561.7 million or 62.9%, from the
corresponding period in 1997. The PHC operations accounted for approximately
$466.3 million or 83.0% of the increase. Exclusive of the PHC operations,
membership increased slightly by 8,367. The Medicare risk membership, exclusive
of the PHC acquisition, increased by 26,391 members, or 76.3%. The increase in
Medicare membership was offset by a 20,484 decrease in Medicaid membership
primarily resulting from the Company's decision to exit the Medicaid market in
Pennsylvania in the first quarter of 1998. Medicare risk membership has a
significantly (approximately three times) higher per member per month premium
when compared to commercial products. In addition, revenues per member per
month, exclusive of the PHC acquisition, increased 3.8% for HMO members and 8.4%
for PPO/POS members. The Company continues to install rate increases that
averaged approximately 7% for renewals in the quarter ended September 30, 1998.
The Company will exit the Medicare program in several counties
representing approximately 18,000 members effective December 31, 1998.
Approximately 10,000 of those members are in the Florida and Illinois health
plans that are being sold. The remaining markets are being exited because the
reimbursement rates are not adequate and the Company was not successful in its
recontracting efforts.
Management services revenue increased $38.5 million for the nine months
ended September 30, 1998 or 260.8%, from the corresponding period in 1997.
Management services and marketing services agreements that were entered into
coincident with the acquisition of PHC accounted for approximately $15.3
million, or 39.7%, of the increase. Approximately $20.1 million or 52.2% of the
increase is primarily attributable to the PHC ASO operations and PPO access
fees. Exclusive of the PHC acquisition and the related agreements with Mutual,
the management services revenue increased approximately $3.1 million or 8.1% and
can be attributed to transition services related to global capitation agreements
and rate increases to ASO customers.
Health benefits expense increased $489.5 million for the nine months
ended September 30, 1998 or 63.4%, from the corresponding period in 1997,
primarily as a result of the increase in risk enrollment, especially Medicare
enrollment. The PHC operations accounted for approximately $411.6 million or
84.1% of the increase. The Company's medical loss ratio increased slightly from
86.6% to 86.8% for the nine months ended September 30, 1998, from the
corresponding period in 1997.
The Company continues to focus intensely on ways to control its medical
costs, including implementation of best practices to reduce inpatient days and
improve the overall quality and level of care. The Company is also continuously
monitoring and renegotiating with its provider networks to improve reimbursement
rates and improve access to the network for the Company's members.
As previously discussed, in July 1998, AHERF, the global capitation
provider organization in western Pennsylvania, filed for bankruptcy protection
under Chapter 11. As a result, the extent that AHERF will continue to perform
their obligations under that contract is uncertain. In addition to the charge to
provide for the estimated claims that were incurred but not reported on behalf
of the globally capitated members at the date of the bankruptcy filing, the
Company expects that the medical loss ratio for the globally captitated members
could be negatively impacted by 8-10% in the near term compared to the
percentage of premium paid to AHERF under the global capitation agreement. In
addition, the Company expects to increase administrative staff for patient
utilization and medical management in western Pennsylvania.
13
<PAGE> 16
SGA expense increased $81.5 million for the nine months ended September
30, 1998 or 65.3%, from the corresponding period in 1997. The PHC operations
accounted for approximately $61.5 million or 75.5% of the increase. The
remainder of the increase in SGA is primarily attributable to the increase in
Medicare risk membership, additional personnel cost relating to administrative
processes, particularly in claims processing, and the costs associated with the
growth of the Medicare product in certain markets. SGA expense as a percent of
revenue decreased to 13.7% for the nine months ended September 30, 1998, from
13.8% in the corresponding period in 1997. In an effort to control costs and
improve customer service, the Company is in the process of migrating certain of
its operating activities (e.g., customer service, claims processing, billing and
enrollment) to regional service centers. It is anticipated that the service
center would be fully operational in the fourth quarter of 1999.
Depreciation and amortization increased $8.2 million for the nine
months ended September 30, 1998, or 83.0%, from the corresponding period in
1997. Depreciation expense from the PHC operations accounted for approximately
$1.5 million or 18.3% of the increase. The incremental amortization expense
related to the intangibles and goodwill recorded as part of the PHC acquisition
was approximately $6.7 million or 81.7% of the increase for the nine months
ended September 30, 1998.
Other income, net decreased $1.0 million for the nine months ended
September 30, 1998 or 6.8% from the corresponding period in 1997. Other income,
net related to the PHC operations amounts to approximately $6.9 million.
Exclusive of the PHC operations, other income, net decreased by $7.9 million.
That reduction is primarily attributable to a $14.9 million pre-tax gain related
to the sale of medical offices that was recognized in the prior year, offset by
increased investment income resulting from the increase in invested assets
subsequent to the acquisition of PHC.
Loss from operations was $41.9 million for the nine months ended
September 30, 1998. Excluding the $62.8 million of charges associated with the
AHERF bankruptcy and the restructuring of the Corporate headquarters, reported
in the quarter ended June 30, 1998, operating earnings would have been $20.9
million for the nine months ended September 30, 1998 compared to $0.05 million
from the corresponding period in 1997. The increase in the operating earnings,
exclusive of the charges for the nine months ended September 30, 1998 is
attributable to various factors as previously described.
The Company's net loss was $18.0 million. Net loss per common and
common equivalent share was $0.36 for the nine months of 1998 compared to
earnings per common and common equivalent share of $0.25 for the nine months of
1997. Excluding the $62.8 million of charges associated with the AHERF
bankruptcy and the restructuring of the Corporate headquarters, the Company
would have reported earnings per common and common equivalent of $0.40 per share
for the nine months ended September 30, 1998. The weighted average common and
common equivalent shares outstanding were approximately 54,102,000 and
35,833,000 for the nine months ended
14
<PAGE> 17
September 30, 1998 and 1997, respectively. The increase in 1998 average shares
is primarily attributable to the stock issued in April 1998 related to the
acquisition of PHC.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash and investments, excluding deposits of $21.3
million restricted under state regulations, increased $263.8 million to $491.7
million at September 30, 1998 from $227.9 million at December 31, 1997. The
increase is primarily attributable to the PHC operations that increased cash and
investments by $250.3 million at the date of acquisition. The Company's
investment guidelines emphasize investment grade fixed income instruments in
order to provide short-term liquidity and minimize the risk to principal. The
Company believes that since its long-term investments are available for sale,
the amount of such investments should be added to short-term assets when
assessing the Company's working capital and liquidity and the short-term assets
plus long-term investments available for sale less short-term liabilities
increased to $87.1 million at September 30, 1998 from $53.3 million at December
31, 1997.
The Company's HMOs and insurance subsidiaries are required by state
regulatory agencies to maintain minimum surplus balances, thereby limiting the
dividends the Company may receive from its HMOs and insurance subsidiaries.
After giving effect to these statutory reserve requirements, the Company's
regulated subsidiaries had surplus in excess of statutory requirements of
approximately $105.6 million and $52.9 million at September 30, 1998 and
December 31, 1997, respectively. The Company will be required to provide
additional capital to its regulated subsidiaries to provide for additional
medical claim liabilities related to the AHERF bankruptcy. Excluding funds held
with entities subject to regulation, the Company had cash and investments of
approximately $41.2 million and $28.6 million at September 30, 1998 and December
31, 1997, respectively, which are available to pay intercompany balances to
regulated companies and for general corporate purposes. The Company also has
entered into regulatory agreements with certain of its subsidiaries to provide
additional capital if necessary to prevent the subsidiary's insolvency.
On December 29, 1997, the Company entered into a credit agreement with
a group of banks (the "Credit Facility"). The Credit Facility refinanced the
previous agreement and totaled $42.2 million at September 30, 1998. The Credit
Facility bears interest at LIBOR plus 1.75% and the entire outstanding balance
is due on March 31, 1999. The Company currently anticipates that a portion of
the net proceeds from the sale of its Florida health plans will be used to repay
the credit facility. It is anticipated that the transactions will be consummated
on December 31, 1998 or in January 1999. Alternatively, the Company currently
believes it will be able to refinance or extend the maturity of the Credit
Facility prior to March 31, 1999.
The Credit Facility requires the Company to apply 50% of the net cash
proceeds of sales of the Company's equity securities to reduce the Credit
Facility, prohibits the sale of any substantial subsidiary without prior consent
of the lenders and restricts the Company's ability to declare and pay cash
dividends on its common stock.
The Credit Facility contains covenants relating to net worth,
maintenance of statutory capital requirements, fixed charges coverage and the
creation or assumption of debt or liens on the assets of the Company. The Credit
Facility is collateralized by substantially all of the assets of the Company.
On September 30, 1998, the effective interest rate on the indebtedness
under the Credit Facility was 7.0625%.
During the quarter ending June 30, 1997, the Company entered into a
securities purchase agreement ("Warburg Agreement") with Warburg, Pincus
Ventures, L.P. ("Warburg") and Franklin Capital Associates III, L.P.
("Franklin") for the purchase of $40 million of Coventry's 8.3% Convertible
Exchangeable Senior Subordinated Notes ("Coventry Notes"), together with
warrants to purchase 2.35 million shares of the
15
<PAGE> 18
Company's common stock for $42.35 million. The Coventry Notes are convertible
into four million shares of the Company's common stock.
The Coventry Notes are exchangeable at the Company's or Warburg's
option for shares of convertible preferred stock. Interest is payable
semi-annually beginning in May 1997 for two years and accrues at 8.3%. Interest
is payable in additional Coventry Notes and, as a result, the accrued interest
at September 30, 1998 has been added to the outstanding indebtedness.
Projected capital investments in 1998 of approximately $16.0 million
consist primarily of computer hardware, software and related equipment costs
associated with the development and implementation of improved operational and
communications systems. Approximately $8.2 million has been expended for capital
investments for the nine months ended September 30, 1998.
The Company believes that cash flows generated from operations, cash on
hand and investments, excess funds in certain of its regulated subsidiaries,
funds from the sales of its Florida and Illinois health plans and available
financing alternatives will be sufficient to fund continuing operations and debt
service obligations through September 30, 1999.
Impact of Year 2000
The Company's business is significantly dependent on information
systems. The Company has implemented a Year 2000 readiness program designed to
prevent material information system disruption at January 1, 2000. The Program
includes an inventory and review of all core application systems; networks,
desktop systems, infrastructure and critical information supply chains. The
Company's Year 2000 readiness program can be broken down into five categories:
1) IS hardware, software and networks, 2) office equipment which relies on
microchips or telecommunications, 3) buildings and facilities, 4) business
partners and customers, and 5) business risk and contingency planning. It is
anticipated that the program will be substantially completed by the end of the
first quarter of 1999. The total estimated cost of the program is approximately
$13.1 million, of which $8.9 million has been incurred, and is expensed as
incurred. The cost of Year 2000 modifications is based on management's best
estimates. Actual costs; however, may differ from those currently anticipated.
All Year 2000 initiatives are monitored by a steering committee made up of
management personnel representing the Company's legal, compliance, finance,
actuarial, medical and IS departments. The steering committee meets weekly and
reports the status of the Company's Year 2000 readiness program to senior
management who report to the board of directors.
While the Company currently believes that its planning efforts and
anticipated modifications to existing systems and purchases of new systems will
be adequate to address its Year 2000 concerns, there can be no assurance that
the systems of other companies on which the Company's systems and operations
rely will be converted on a timely basis and will not have a material adverse
effect on the Company.
The specific phases of the Year 2000 readiness program are as follows:
IS HARDWARE, SOFTWARE AND NETWORKS
The Company has historically purchased its core applications rather
than build them. The Company is currently operating on two different platforms
for its core managed health care applications. The former Coventry plans use a
third-party product whose current release is Year 2000 compliant and is in the
process of converting its applications to the current release. That conversion
is expected to be completed by December 31, 1998. The former PHC health plans
are using a different third party product that had been customized and is no
longer supported by the vendor. That system utilizes Julian dates for all
internal processes and is easier to bring into Year 2000 compliance as a result.
As part of the Company's readiness program, the entire application has been
reviewed and necessary changes identified. The Company is in the process of
modifying that code to bring it into Year 2000 compliance. Those modifications
are expected to be completed by December 31, 1998.
The Company has requested all vendors of currently installed products
to disclose their products' current Year 2000 readiness and the company's plan
for achieving Year 2000 readiness. All internally developed systems were
inventoried and plans for upgrade, readiness changes, replacement or
discontinuance were made. It is the Company's plan that all software code will
be Year 2000 ready by December 31, 1998, that all network and server hardware
and software will be certified by December 31, 1998 and that all systems will be
tested, repaired and ready by March 31, 1999 with the exception of PC upgrades
which will be completed by September 30, 1999.
Other major purchased applications that are non-compliant are being
replaced by upgraded software from vendors or by new purchased systems. Those
applications include replacements for the Company's general ledger and financial
reporting applications, a data warehouse for financial decision support, and a
proposal system to support the underwriting process. The upgrades and
implementations of new software are expected to be completed by January 31,
1999.
OFFICE EQUIPMENT
The Company has requested all of its office equipment vendors to submit
Year 2000 readiness statements about their products. The Company expects that it
will receive substantially all of such statements by December 31, 1998.
Thereafter it will determine the extent to which nonconforming office equipment
should be upgraded or replaced.
BUILDINGS AND FACILITIES
All landlords and building management companies have been surveyed in
regards to each key operating and security system in Coventry locations. The
Company currently anticipates that this process will be completed by December
31, 1998, and the results will be evaluated and risks assessed as they are
received.
BUSINESS PARTNERS AND CUSTOMERS
Coventry is in the process of communicating with its key business
associates such as financial institutions, third party vendors, provider and
hospital networks, business partners, contractors and service providers to
ensure that those parties have appropriate plans to remediate Year 2000 issues
where their systems interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to remediate properly their computer
systems. These communications will continue through March 1999. The Company has
little or no control over the efforts of those key business associates and other
suppliers to become Year 2000 compliant. Certain of the services provided by
those parties, particularly telecommunications providers, financial institutions
and major hospitals and provider, could have a material adverse effect on the
Company's financial condition and results of operations if these services or
operations are not Year 2000 compliant.
RISK ASSESSMENT AND CONTINGENCY PLANNING
The Company is reviewing its existing contingency plans for necessary
modifications to address specific Year 2000 issues, and expects to continue this
process through September 30, 1999. As part of its contingency planning the
Company is analyzing the most reasonable likely worst case scenario that could
result from Year 2000-related failures. The Company's best estimate of that
scenario, based on current information would involve a combination of major
operational disruptions by its principal depository financial institutions,
utility and telecommunication suppliers and its largest hospital and provider
networks in its Pennsylvania and Missouri markets. The Company's Year 2000
readiness program and contingency planning efforts are designed to prevent
and/or mitigate the effects of such possible failures.
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<PAGE> 19
LEGISLATION AND REGULATION
Numerous proposals have been introduced in the United States Congress
and various state legislatures relating to health care reform. Some proposals,
if enacted, could among other things, limit the Company's ability to control
medical costs, expose the Company to liability to members for coverage denials
or delays, require certain coverages and impose other requirements on managed
care companies. Although the provisions of any legislation adopted at the state
or federal level cannot be accurately predicted at this time, management of the
Company believes that the ultimate outcome of currently proposed legislation
would not have a material adverse effect on the Company and its results of
operations in the short run.
As a result of the introduction of Medicare and Medicaid risk products
in 1995, the Company is subject to regulatory and legislative changes in those
two government programs. On August 5, 1997, the President signed into law the
Balanced Budget Act of 1997. This law made revisions to the Medicare program,
including permitting provider-sponsored organizations to offer services to
Medicare beneficiaries, and requiring managed care plans serving Medicare
beneficiaries to make medically necessary care available 24 hours a day, to
provide coverage a "prudent lay person" would deem necessary and to provide
grievance and appeal procedures, and prohibiting such plans from restricting
providers' advice concerning medical care. The Company does not believe this
legislation will have a material adverse effect on its operations.
RISK FACTORS
The Company's business is subject to numerous risks and uncertainties
which may affect the Company's results of operations in the future and may cause
such future results of operations to differ materially and adversely from
projections included in or underlying any forward-looking statements made by or
on behalf of the Company. See "Business-Risk Factors" contained in the Company's
Proxy Statement on Form S-4/A dated March 10, 1998.
17
<PAGE> 20
PART II OTHER INFORMATION
ITEM 1.: Legal Proceedings
In the normal course of business, the Company has been named as
defendant in various legal actions seeking payments for claims denied by the
Company, medical malpractice and other monetary damages. The Company also has
contingent litigation risks with certain discontinued operations. The claims are
in various stages of proceedings and some may ultimately be brought to trial.
Incidents occurring through September 30, 1998 may result in the assertion of
additional claims. With respect to medical malpractice, the Company carries
professional malpractice and general liability insurance for each of its
operations on a claims made basis with varying deductibles for which the Company
maintains reserves. In the opinion of management, the outcome of any of these
actions will not have a material adverse effect on the financial position or
results of operations of the Company.
ITEMS 2, 3, 4 and 5: Not Applicable
ITEM 6: Exhibits and Report on Form 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit
No. Description of Exhibit
------- ----------------------
4.13 Coventry Health Care, Inc. Amendment No. 1 to Amended
and Restated Securities Purchase Agreement dated
August 1, 1998 between Coventry Health Care, Inc.
(successor by merger to Coventry Corporation) and
Warburg, Pincus Ventures, L.P., a Delaware limited
partnership
10.32.1 Third Amendment to the Coventry Health Care, Inc.
Supplemental Executive Retirement Plan effective as
of April 30, 1998.
10.43 Amendment No. 1 to Credit Agreement and Amended and
Restated Security Documents, Consent and Waiver in
Connection With Proposed Transaction with Principal
Health Care, Inc. dated as of March 10, 1998, between
Coventry Corporation (the Borrower), Coventry Health
Care, Inc. (the Guarantor) and the banks listed on
the signature pages thereof, and Morgan Guaranty
Trust Company of New York, as Agent
10.44 Amendment No. 2 to Credit Agreement and Amended and
Restated Security Documents, Consent and Waiver in
Connection With Proposed Transaction with Principal
Health Care, Inc. dated as of August 13, 1998,
between Coventry Corporation (the Borrower), Coventry
Health Care, Inc. (the Guarantor) and the banks
listed on the signature pages thereof, and Morgan
Guaranty Trust Company of New York, as Agent
10.45 Principal Health Care of Florida, Inc. Stock
Purchase Agreement dated as of October 14, 1998, by
and among Coventry Health Care, Inc., as Seller, Blue
Cross and Blue Shield of Florida, Inc., Principal
Health Care of Florida, Inc. and Health Options,
Inc., as Buyer
10.46 Stock Purchase Agreement dated October 2, 1998,
between Coventry Health Care, Inc., as Seller, and
First American Group of Companies, Inc., as Buyer
21 Subsidiaries of Registrant
27 Financial data schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVENTRY HEALTH CARE, INC.
(Registrant)
Date: November 13, 1998 By: /s/ Allen F. Wise
--------------------- -----------------------------
Allen F. Wise
President and Chief Executive
Officer
Date: November 13, 1998 By: /s/ Dale B. Wolf
--------------------- -----------------------------
Dale B. Wolf
Executive Vice President and
Chief Financial Officer
19
<PAGE> 1
EXECUTION COPY
COVENTRY HEALTH CARE, INC.
AMENDMENT NO. 1
TO
AMENDED AND RESTATED
SECURITIES PURCHASE AGREEMENT
Dated as of August 1, 1998
This Amendment No. 1 (this "Agreement"), dated as of August 1,
1998, by and between Coventry Health Care, Inc., a Delaware corporation and the
successor by merger to Coventry Corporation, a Tennessee corporation (the
"Company"), and Warburg, Pincus Ventures, L.P., a Delaware limited partnership
("Warburg").
R E C I T A L S :
WHEREAS, the Company, Warburg and Franklin Capital Associates
III are parties to an Amended and Restated Securities Purchase Agreement, dated
as of April 2, 1997 (the "Purchase Agreement"); and
WHEREAS, the Company and Warburg wish to amend certain
provisions of the Purchase Agreement relating to Warburg.
NOW, THEREFORE, in consideration of the foregoing premises and
for good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereby agree as follows:
Section 1. Definitions. Capitalized terms used but not defined
herein shall have the meaning assigned to them in the Purchase Agreement.
Section 2. Amendments.
(a) Notwithstanding the provisions of the Purchase Agreement
or the Notes, from and after May 28, 1999, the Notes held by Warburg shall no
longer bear interest. Warburg agrees to exchange any Notes presently held by it
for new Notes reflecting this amendment.
<PAGE> 2
(b) Section 9(a) of the Purchase Agreement is hereby amended
by adding the following to the end thereof:
"Notwithstanding anything contained in this Agreement to the contrary,
the Notes shall not be convertible by Warburg, if, after giving effect
to the shares of Common Stock of the Company issuable to Warburg upon
such conversion (or partial conversion), Warburg would beneficially own
ten percent (10%) or more of the outstanding Voting Securities of the
Company (the "Control Threshold"), unless Warburg shall have obtained
all Required Approvals. For purposes of this Agreement, (i) beneficial
ownership shall be determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, (ii) Voting Securities of
the Company shall mean all shares of Common Stock and all securities
convertible into or exchangeable for shares of Common Stock other than
any Notes owned by Warburg and any Warrants to acquire shares of Common
Stock owned by Warburg ("Warburg Warrants"), and (iii) "Required
Approval" shall mean any approval required by any state insurance
regulatory or similar authority to which the Company or any of its
assets is subject, in connection with an acquisition of control of the
Company or any of its subsidiaries. The foregoing provisions are
specifically intended to prevent the acquisition of control (as defined
or presumed to exist under any such state insurance or similar
regulatory authority) of the Company or any of its subsidiaries by
Warburg unless and until Warburg obtains the Required Approval."
(c) Section 9(e) of the Purchase Agreement is hereby amended
by deleting the fourth sentence thereof and inserting the following in its
place:
"The date of receipt by the Company of the Notes and notice shall be
the conversion date. Warburg shall have the right to deliver a notice
of conversion conditioned upon the receipt of all Required Approvals as
provided in Section 9(a) hereof and, upon the receipt of such Required
Approvals, the Company shall deliver certificates representing the
shares of Common Stock to Warburg. Upon the receipt by the Company of a
notice of conversion, the Company shall no longer have the right to
prepay any of the Notes subject to such notice without the prior
written consent of the holder thereof."
Section 3. Exchange of Notes
(a) In the event that, on or before December 31, 1999,
directors or stockholders of the Company authorize a series of preferred stock
having substantially identical rights to the shares of Series A Preferred Stock
("New Convertible Preferred"), except that such shares will have no voting
rights except as provided by law and will have a limitation on the extent to
which
-2-
<PAGE> 3
they can be converted substantially similar to the restriction set forth in
Section 2(b) hereof, the Company may upon written notice to the holders of the
Notes (the "Notice"), exchange the Notes for shares of New Convertible Preferred
(the "Exchange").
(b) In the event the Company elects to effect the Exchange,
the holders of the Notes shall be entitled to receive a number of shares of New
Convertible Preferred equal to the number of shares of Series A Preferred Stock
into which such Notes are exchangeable pursuant to the terms of the Purchase
Agreement.
(c) As soon as practicable after the date on which the Company
delivers to the holders of the Notes the Notice, and in any event within ten
(10) days thereafter, the Company, at its expense, will cause to be issued in
the name of and delivered to the holders of the Notes a certificate or
certificates for the number of fully paid and non-assessable shares of New
Convertible Preferred to which such holder shall be entitled plus, in lieu of
any fractional share to which such holder would otherwise be entitled, cash in
an amount determined in accordance with Section 9(c) of the Purchase Agreement.
Such shares shall otherwise be issuable upon the same terms as the shares of
Series A Preferred Stock pursuant to Section 9 of the Purchase Agreement.
Section 4. Mandatory Exercise of Warburg Warrants. In the
event the Company exercises its rights pursuant to Section 1.2(b) of the Warburg
Warrants and, after giving effect to the shares of Common Stock issuable upon
such exercise (or partial exercise), Warburg would exceed the Control Threshold
(as defined in the Warburg Warrants), then the following provisions shall apply:
(a) Warburg shall use its reasonable best efforts to obtain
all Required Approvals (as defined in the Warburg Warrants) as soon as
practicable following receipt of the Optional Exercise Notice (as defined in the
Warburg Warrants), unless Warburg notifies the Company that it intends to sell
or otherwise transfer shares of Common Stock so that, after giving effect to the
Mandatory Exercise (as defined in the Warburg Warrants), it will not exceed the
Control Threshold. Without limiting the generality of the foregoing, at the
request of Warburg, the Company shall register the shares to be issued to
Warburg pursuant to the Mandatory Exercise in the names of the partners of
Warburg unless, in the opinion of counsel to the Company, such shares are not at
the time of such registration freely transferable by such partners pursuant to
Rule 144(k) or another similar exemption from the registration requirements of
the Securities Act of 1933, as amended.
(b) In no event shall any shares of Common Stock be issued to
Warburg pursuant to the Mandatory Exercise unless and until Warburg notifies the
Company in writing that all Required Approvals have been obtained or that it has
transferred or sold such number of shares of Common Stock such that, after
giving
-3-
<PAGE> 4
effect to the issuance of the shares of Common Stock pursuant to the Mandatory
Exercise, the Control Threshold would not be exceeded.
(c) In the event Warburg is unable or unwilling to obtain the
Required Approvals in order to permit the Company to exercise the Mandatory
Exercise, Warburg shall use all reasonable efforts to sell or otherwise
transfer, during a period of 120 days from the date on which the Company
delivers the Optional Exercise Notice, such number of shares of Common Stock as
shall be required in order to permit the Mandatory Exercise to be effected
without exceeding the Control Threshold.
Section 5. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within such State.
Section 6. Section Headings. The headings of the sections of
this Agreement are inserted for convenience only and shall not be deemed to
constitute a part hereof.
Section 7. Notices.
(a) All communications under this Agreement shall be in
writing and shall be delivered by hand, by facsimile or mailed by overnight
courier or by registered mail or certified mail, postage prepaid:
(1) if to Warburg, at 466 Lexington Avenue, New York, New York
10017 (facsimile: (212) 878-9361), marked for attention of
Patrick T. Hackett, or at such other address as Warburg may
have furnished the Company in writing (with a copy to Willkie
Farr & Gallagher, 787 Seventh Avenue, New York, NY 10019,
Attention: Steven J. Gartner, Esq. (facsimile: (212)
728-8111), or at such other address it may have furnished the
Company in writing), or
(2) if to the Company, at 6705 Rockledge Drive, Suite 900,
Bethesda, MD 20817-1850 (facsimile: (301) 493-0743) marked for
attention of Chief Financial Officer, or at such other address
as the Company may have furnished the Investors in writing
(with a copy to Bass, Berry & Sims PLC, Attention: Bob F.
Thompson, Esq. (facsimile: (615) 742-6298) or at such other
address as it may have furnished in writing to Warburg).
(b) Any notice so addressed shall be deemed to be given: if
delivered by hand or facsimile, on the date of such delivery; if mailed by
courier, on the first business day following the date of such mailing; and if
mailed by registered
-4-
<PAGE> 5
or certified mail, on the third business day after the date of such mailing.
Section 8. Successors and Assigns. This Agreement shall inure
to the benefit of and be binding upon the successors and assigns of each of the
parties.
Section 9. Entire Agreement; Amendment and Waiver. This
Agreement constitutes the entire understandings of the parties hereto and
supersede all prior agreements or understandings with respect to the subject
matter hereof among such parties. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, with (and only with) the
written consent of the Company and Warburg.
Section 10. Severability. In the event that any part or parts
of this Agreement shall be held illegal or unenforceable by any court or
administrative body of competent jurisdiction, such determination shall not
effect the remaining provisions of this Agreement which shall remain in full
force and effect.
Section 11. Ratification. Except as expressly set forth
herein, the terms of the Purchase Agreement and the Notes are unaffected hereby
and shall remain in full force and effect.
Section 12. Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original and all of
which together shall be considered one and the same agreement.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
COVENTRY HEALTH CARE, INC.
By:_____________________________
Name:
Title:
WARBURG, PINCUS VENTURES, L.P.
By: WARBURG, PINCUS & CO.,
General Partner
By:_________________________
Name:
Title:
-6-
<PAGE> 1
EXHIBIT 10.32.1
THIRD AMENDMENT TO THE
COVENTRY HEALTH CARE, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, Coventry Corporation has adopted the Coventry Corporation
Supplemental Executive Retirement Plan (the "SERP") for the benefit of a select
group of management or highly compensated employees of Coventry Corporation and
its affiliated companies, effective as of July 1, 1994; and
WHEREAS, Coventry Corporation has also adopted the Coventry Corporation
Retirement Savings Plan (the "Old 401(k) Plan"), which was most recently
restated, effective as of October 1, 1996; and
WHEREAS, Coventry Corporation has amended the vesting schedule of the
Old 401(k) Plan to provide that employer matching contributions shall vest 50%
upon completion of one year of continuous employment and 100% upon completion of
two years of continuous employment, effective as of January 1, 1998; and
WHEREAS, pursuant to the Capital Contribution and Merger Agreement
dated November 3, 1997 and the related Agreement and Plan of Merger, Coventry
Health Care, Inc. (the "Company") was formed as the new parent company of an
affiliated group of companies that includes Coventry Corporation, effective as
of March 31, 1998; and
WHEREAS, the Company has adopted the Coventry Health Care, Inc.
Retirement Savings Plan (the "New 401(k) Plan") for the benefit of the employees
of certain affiliated companies who were formerly employees of Principal Health
Care, Inc. and certain of its affiliated companies, effective as of April 1,
1998; and
WHEREAS, the provisions of the New 401(k) Plan, including the vesting
schedule (which is a 2-year graded vesting schedule), are identical in all
material respects to the provisions of the Old 401(k) Plan; and
WHEREAS, the Company, with the approval of Coventry Corporation, has
adopted and has become the sponsor of the Old 401(k) Plan, effective as of April
1, 1998; and
WHEREAS, the Company, with the approval of Coventry Corporation, has
adopted and has become the sponsor of the SERP and its associated trust (the
"Trust") and has changed the name of the SERP to the "Coventry Health Care, Inc.
Supplemental Executive Retirement Plan" and the name of the Trust to the "Trust
under the Coventry Health Care, Inc. Supplemental Executive Retirement Plan,"
effective as of April 1, 1998; and
WHEREAS, the Company desires to amend the SERP to reflect the change in
sponsorship of the SERP and the adoption of the New 401(k) Plan, effective as of
April 1, 1998; and
WHEREAS, the Company desires to amend the vesting schedule of the SERP
so that a Participant's benefits under the SERP vest on the same schedule as his
or her benefits vest under the Old 401(k) Plan and the New 401(k) Plan,
effective as of January 1, 1998.
NOW, THEREFORE, the Company hereby amends the SERP as follows:
1. Article I is amended, effective as of April 1, 1998, to provide as
follows:
PURPOSE
The purpose of this Supplemental Executive Retirement Plan
(hereinafter referred to as the "Plan") is to provide
accumulation of
<PAGE> 2
supplemental funds for retirement or death on a tax-deferred
basis for a select group of management or highly compensated
employees (and their beneficiaries) of Coventry Health Care,
Inc. (the "Corporation"). It is intended that the Plan will be
unfunded for tax purposes and for purposes of Title I of the
Employee Retirement Income Security Act of 1974 ("ERISA").
2. Section 2.2 is amended, effective as of April 1, 1998, to
provide as follows:
2.2 Board. "Board" means the Board of Directors of
Coventry Health Care, Inc.
3. Section 2.15 is amended, effective as of April 1, 1998, to
provide as follows:
2.15 Employer. "Employer" means Coventry Health Care, Inc.
and any member of a controlled group of corporations
or affiliated service group of which the Employer is
a member under Code Sections 1563 or 414(m),
respectively, or any successors to the business
thereof.
4. Section 4.2 is amended, effective as of April 1, 1998, to
provide as follows:
4.2 Employer Matching Contributions. To the extent a
Participant has made the maximum elective deferral to
the Coventry Health Care, Inc. Retirement Savings
Plan or the Coventry Corporation Retirement Savings
Plan as applicable (each such plan hereinafter
referred as the "401(k) Plan"), the Employer will
credit an Employer Matching Contribution on behalf of
the Participant if he is employed on the last day of
the Plan Year. The amount of the Employer Matching
Contribution will be equal to the 401(k) Plan
Employer Matching Contribution, as defined in the
401(k) Plan Adoption Agreement, applied to the sum of
the Participant's elective deferrals to the 401(k)
Plan for the Plan Year, less matching contributions
made by the Employer to the 401(k) Plan for the
Participant. In no event will the aggregate Employer
Matching Contribution to this Plan and the 401(k)
Plan exceed 4.5% of the Participant's Compensation.
The Employer Matching Contribution will be credited
to the Participant's Deferred Compensation Account
within 120 days after the end of the Plan Year.
5. The vesting schedule in Section 4.3 is amended, effective as
of January 1, 1998, to provide as follows:
Years of Service Vested Percentage
---------------- -----------------
1 50%
2 100%
2
<PAGE> 3
IN WITNESS WHEREOF, Coventry Health Care, Inc. and Coventry Corporation
have caused this Third Amendment to the Coventry Health Care, Inc. Supplemental
Executive Retirement Plan to be executed by its duly authorized officers this
____ day of April, 1998.
COVENTRY HEALTH CARE, INC.
By: /s/ Harvey C. Penovick
----------------------------------
ATTEST:
/s/ Tim A. Silvera
- ---------------------------------
COVENTRY CORPORATION
By: /s/ Shirley R. Smith
----------------------------------
ATTEST:
/s/ David A. Hornock
- ---------------------------------
A:SERP3rdAmnd
<PAGE> 1
Exhibit 10.43
CONFORMED COPY
AMENDMENT NO.1 TO CREDIT AGREEMENT AND AMENDED AND RESTATED SECURITY
DOCUMENTS, CONSENT AND WAIVER IN CONNECTION WITH PROPOSED TRANSACTION
WITH PRINCIPAL HEALTH CARE, INC.
AMENDMENT NO.1 TO CREDIT AGREEMENT AND AMENDED AND RESTATED SECURITY
DOCUMENTS AND WAIVER dated as of March 10, 1998 among COVENTRY CORPORATION (the
"BORROWER") COVENTRY HEALTH CARE, INC. (the "GUARANTOR") and the banks listed on
the signature pages hereof (collectively, the "BANKS") and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Agent (the "AGENT").
W I T N E S S E T H :
WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit
Agreement dated as of December 29, 1997 (the "CREDIT AGREEMENT");
WHEREAS, the Pledgors (as defined in the Amended and Restated Security
Documents (as defined below)) and the Agent have heretofore entered into the
Amended and Restated Security Documents dated as of December 29, 1997 (as
amended from time to time, the "AMENDED AND RESTATED SECURITY DOCUMENTS");
WHEREAS, the Borrower has agreed, in Section 5.21 of the Credit
Agreement, that notwithstanding certain provisions thereof the Borrower may
consummate the proposed merger with Principal Health Care, Inc. if it has
obtained the prior written approval of the Required Banks; and
WHEREAS, the Borrower has requested that the Banks approve said
transaction and waive any defaults occasioned thereby; and the parties hereto
desire to amend the Credit Agreement and the Amended and Restated Security
Documents as hereinafter provided;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. DEFINITIONS; REFERENCES. Unless otherwise specifically
defined herein, each term used herein which is defined in the Credit Agreement
shall have the meaning assigned to such term in the Credit Agreement.
SECTION 2. AMENDMENT OF SECTION 1.01 OF THE CREDIT AGREEMENT. Section
1.01 of the Credit Agreement is amended by (a) adding the following new
definitions:
"GUARANTOR" means Coventry Health Care, Inc.
"PRINCIPAL HEALTH CARE TRANSACTION" means the transactions
contemplated by (a) the Capital Contribution and Merger Agreement dated as of
November 3, 1997 by and among the Borrower, Coventry Health Care, Inc.,
Principal Health Care, Inc. and Principal Mutual Life Insurance Company and
<PAGE> 2
(b) the Agreement and Plan of Merger among the Borrower, Coventry Health Care,
Inc. and Coventry Merger Corporation.; and
(b) replacing the definition of Coventry Group with the following new
definition:
"COVENTRY GROUP" means, collectively, the Borrower, its Subsidiaries,
and the Guarantor.
SECTION 3. GUARANTY. With effect from and including the date this
Amendment and Waiver becomes effective in accordance with Section 12 hereof,
Coventry Health Care, Inc. shall become a party to the Credit Agreement as the
Guarantor thereunder.
SECTION 4. GUARANTOR AS NEW PLEDGOR. The Guarantor hereby agrees to
enter into the Amended and Restated Security Documents as a Pledgor (as defined
therein) within 10 days from the date of the effectiveness hereof, agrees to be
bound thereby and confirms to the Agent the grant of security as contemplated
thereby.
SECTION 5. APPROVAL AND WAIVER. The Borrower has advised the Banks and
the Agent that the Borrower intends to consummate the Principal Health Care
Transaction (as defined in Section 2(a) above). The Banks and the Agent approve
such transaction and waive any default that may be occasioned thereby under the
Credit Agreement, including without limitation, Sections 5.07(b), 5.08(b), 5.09,
5.12, 5.14, 5.15 and 6.01(b) of the Credit Agreement to the extent necessary to
enable the Borrower to consummate such transaction provided that the Borrower
and the Guarantor are the surviving corporations.
SECTION 6. AMENDMENT OF SECTION 5.07 OF THE CREDIT AGREEMENT. Sections
5.07(a) and (b) of the Credit Agreement are hereby amended by adding "(a), "
between "5.10" and "(b)" on the third line of each of the above-referenced
sections.
SECTION 7. AMENDMENT OF SECTION 5.16 OF THE CREDIT AGREEMENT.
Section 5.16 of the Credit Agreement is hereby amended by adding ", the
Agreements entered into in connection with the Principal Health Care
Transaction" on the fourth line of such section before the word "or."
SECTION 8. AMENDMENT OF SECTION 6.01(K) OF THE CREDIT AGREEMENT.
Section 6.01(k) is hereby amended by adding the words "Principal Health Care
Transaction and the" on the first line before the words "Warburg Pincus
Transaction" in Section 6.01(k).
SECTION 9. REPRESENTATIONS AND WARRANTIES CORRECT; NO DEFAULT. The
Borrower represents and warrants that on and as of the date hereof, (a) the
representations and warranties of each Loan Party contained in each Financing
Document to which it is a party are true and (b) no Default under the Credit
Agreement exists.
SECTION 10. CONSENT BY PLEDGORS. By giving its Consent below, each
pledgor affirms its obligations under the Amended and Restated Security
Documents and acknowledges that such Consent shall not alter, release, discharge
or otherwise affect any of such obligations, all of which shall remain in full
force and effect and are hereby ratified and confirmed in all respects.
SECTION 11. GOVERNING LAW. This Amendment and Waiver shall be governed
by and construed in accordance with the laws of the State of New York.
<PAGE> 3
SECTION 12. COUNTERPARTS; EFFECTIVENESS. This Amendment and Waiver may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Amendment and Waiver shall become effective as of the date
hereof when each of the following conditions shall have been satisfied:
(i) receipt by the Agent of duly executed counterparts hereof
signed by each of the parties hereto (or, in the case of any party as to which
an executed counterpart shall not have been received, the Agent shall have
received telegraphic, telex or other written confirmation from such party of
execution of a counterpart hereof by such party); and
(ii) receipt by the Agent within 30 days of the date hereof of a
opinion of counsel for the Loan Parties covering such matters relating to the
transactions contemplated hereby as the Agent or the Required Banks may
reasonably request.
The Agent shall promptly notify the Borrower and the Banks of the effectiveness
of this Amendment and such notice shall be conclusive and binding on all parties
hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be
duly executed by their respective authorized officers as of the date first above
written.
COVENTRY CORPORATION
By: /s/ Dale B. Wolf
----------------------------------------------
Title: Senior Vice President, Chief Financial
Officer & Treasurer
COVENTRY HEALTH CARE INC.
By: /s/ Dale B. Wolf
----------------------------------------------
Title: President
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By: /s/ Stephen J. Hannan
-----------------------------------------------
Title: Vice President
NATIONSBANK, N.A.
By: /s/ Kevin Wagley
----------------------------------------------
Title: Vice President
<PAGE> 4
EACH OF THE UNDERSIGNED PLEDGORS CONSENTS
TO THE FOREGOING AMENDMENT AND WAIVER AND CONFIRMS
ITS AGREEMENT WITH SECTION 10 OF THE AMENDMENT AND WAIVER:
COVENTRY HEALTHCARE
MANAGEMENT CORPORATION (to
be renamed COVENTRY HEALTHCARE
BENEFIT SERVICES)(Delaware)
By: /s/ Robert A. Mayer
---------------------------------------
Title: President & Chief Executive
Officer
COVENTRY HEALTHCARE MANAGEMENT CORPORATION
(formerly Southern Health Management
Corporation)
By: /s/ Eileen Walter
---------------------------------------
Title: Vice President, Provider
Relations & Administration, and
Secretary
SOUTHERN HEALTH BENEFIT SERVICES, INC.
By: /s/ Eileen Walter
---------------------------------------
Title: Vice President, Provider
Relations & Administration, and
Secretary
PENNSYLVANIA-HEALTHCARE USA, INC.
By: /s/ Davina C. Lane
-------------------------------------
Title: President & Chief Executive
Officer
<PAGE> 5
HEALTHPASS, INC.
By: /s/ Richard H. Jones
--------------------------------------
Title: Vice President & Treasurer
COVENTRY HEALTHCARE DEVELOPMENT CORPORATION
By: /s/ Dale B. Wolf
--------------------------------------
Title: Vice President
<PAGE> 1
EXHIBIT 10.44
CONFORMED COPY
AMENDMENT NO. 2 TO THE CREDIT AGREEMENT AND AMENDED AND RESTATED
SECURITY DOCUMENTS AND WAIVER
AMENDMENT NO. 2 TO CREDIT AGREEMENT AND AMENDED AND RESTATED
SECURITY DOCUMENTS AND WAIVER dated as of August 13, 1998 among COVENTRY
CORPORATION (the "BORROWER"), COVENTRY HEALTH CARE, INC., (the "GUARANTOR"), the
BANKS listed on the signature pages hereof (the "BANKS"), and MORGAN GUARANTY
TRUST COMPANY OF NEW YORK, as Agent (the "AGENT").
W I T N E S S E T H :
WHEREAS, the Borrower, the Banks and the Agent entered into a
Credit Agreement dated as of December 29, 1997, and amended by Amendment Number
1, dated as of March 10, 1998, (as so amended, the "CREDIT AGREEMENT");
WHEREAS, certain Loan Parties (as defined in the Credit
Agreement) and the Agent entered into the Amended and Restated Security
Documents dated as of December 29, 1997, and amended by Amendment Number 1 dated
as of March 10, 1998, (as so amended, the "AMENDED AND RESTATED SECURITY
DOCUMENTS"); and
WHEREAS, pursuant to a letter dated August 12, 1998, the
Borrower has asked the Banks, and the Banks are willing, on the terms and
conditions set forth herein, to (i) exclude certain nonrecurring charges
incurred by the Borrower and (ii) waive the Subsidiary capital requirement of
Section 5.17 with respect to Riverside Health Plan, Inc., HealthAmerica
Pennsylvania, Inc., Coventry Health and Life Insurance Company and Coventry
Health Plan of West Virginia, Inc. through the Termination Date.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise
specifically defined herein, each term used herein which is defined in the
Credit Agreement shall have the meaning assigned to such term in the Credit
Agreement.
SECTION 2. Waiver and Amendment of Sections 5.17, 5.18 and
5.19 of the Credit Agreement. Commencing June 30, 1998, calculations of (i) the
statutory capital and surplus of any of the Borrower's Subsidiaries that is an
HMO Company or of CHLIC, (ii) the ratio of Adjusted Cash Flow to Fixed Charges
and (iii) Consolidated Adjusted Net Worth pursuant to Sections 5.17, 5.18 and
5.19, respectively, shall exclude the pretax nonrecurring charges not in excess
of $60,000,000 incurred by the Borrower in connection with the commencement of
bankruptcy proceedings by AHERF and reflected in the Borrower's consolidated
statement of income for the fiscal quarter ended June 30, 1998.
SECTION 3. Representation by Borrower. The Borrower represents
and warrants that except as heretofore disclosed in writing to the Banks, (i)
after giving effect to the amendments and waiver
<PAGE> 2
contained herein, no Default has occurred and is continuing, and (ii) since June
30, 1998, there has been no material adverse change in the business, financial
position, results of operations of the Coventry Group, considered as a whole.
SECTION 4. New Pledgors. Each of Principal Health Care
Management Corporation, Principal Health Care of South Carolina, Inc., Principal
Health Care of Tennessee, Inc. and United HealthCare Services of Iowa, Inc.
hereby (i) agrees to enter into the Amended and Restated Security Documents as a
Pledgor (as defined therein) within 20 days from the date of the effectiveness
hereof, (ii) agrees to be bound thereby and (iii) confirms to the Agent the
grant of security as contemplated thereby.
SECTION 5A. Waiver regarding Riverside Health Plan, Inc. The
Borrower has advised the Banks and the Agent that Riverside Health Plan, Inc. is
not currently in compliance with the capital requirement of Section 5.17 of the
Credit Agreement. The Banks waive any Default which may occur as a result of
Riverside Health Plan, Inc.'s failure to satisfy the requirements of Section
5.17 through the Termination Date, provided that Riverside Health Plan, Inc.
remains an inactive Subsidiary and complies with the applicable state
requirement.
SECTION 5B. Waiver regarding certain Subsidiaries. The
Borrower has advised the Banks and the Agent that HealthAmerica Pennsylvania,
Inc., Coventry Health and Life Insurance Company and Coventry Health Plan of
West Virginia, Inc. may not remain in compliance with the capital requirement of
Section 5.17 of the Credit Agreement. The Banks waive any Default which may
occur as a result of such noncompliance through the Termination Date, provided
that a determination by the applicable state regulator that the capitalization
of any of such Subsidiaries is inadequate and the failure of any of such
Subsidiaries to comply within 30 days of receipt of notice of such determination
shall constitute a Default under the Credit Agreement.
SECTION 6. Governing Law. This Amendment and Waiver shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 7. Consent by Other Loan Parties. By signing this
Amendment and Waiver below, each Loan Party (other than the Borrower) that is a
party to any Security Document affirms its obligations under each Security
Document to which it is a party and acknowledges that this Amendment and Waiver
shall not alter, release, discharge or otherwise affect any of such obligation,
all of which shall remain in full force and effect and are hereby notified and
confirmed in all respects.
SECTION 8. Counterparts; Effectiveness. This Amendment and
Waiver may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Amendment and Waiver shall become effective as of the
date hereof upon receipt by the Agent of duly executed counterparts hereof
signed by the Borrower, the other Loan Parties that are parties to any Security
Document and the Required Banks (or, in the case of any party as to which an
executed counterpart shall not have been received, the Agent shall have received
telegraphic, telex or other written confirmation from such party of execution of
a counterpart hereof by such party).
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment and Waiver to be duly executed as of the date first above written.
COVENTRY CORPORATION
By: /s/ Shirley R. Smith
-----------------------------
Title: Vice President
COVENTRY HEALTH CARE, INC.
By: /s/ Shirley R. Smith
-----------------------------
Title: Senior Vice President
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By: /s/ Stephen J. Hannan
-----------------------------
Title: Vice President
NATIONSBANK, N.A.
By: /s/ Kevin Wagley
-----------------------------
Title: Vice President
<PAGE> 4
EACH OF THE UNDERSIGNED PLEDGORS
CONSENTS TO THE FOREGOING AMENDMENT AND WAIVER AND
CONFIRMS ITS AGREEMENT WITH SECTION 7
THEREOF:
COVENTRY HEALTHCARE
MANAGEMENT CORPORATION (Delaware)
By: /s/ Francis S. Soistman, Jr.
-----------------------------------
Title: President
COVENTRY HEALTHCARE MANAGEMENT
CORPORATION (Virginia)
By: /s/ George B. Wheeler
-----------------------------------
Title: Vice President Finance & CFO
SOUTHERN HEALTH BENEFIT SERVICES, INC.
By: /s/ George B. Wheeler
-----------------------------------
Title: Vice President Finance & CFO
PENNSYLVANIA HEALTHCARE USA, INC.
By: /s/ Brian D. Tony
-----------------------------------
Title: Treasurer
<PAGE> 5
HEALTHPASS, INC.
By: /s/ Francis S. Soistman, Jr.
---------------------------------------
Title: President
COVENTRY HEALTHCARE DEVELOPMENT CORPORATION
By: /s/ Francis S. Soistman, Jr.
---------------------------------------
Title: President
PRINCIPAL HEALTH CARE MANAGEMENT CORPORATION
By: /s/ Sharon I. Taylor
---------------------------------------
Title: Senior Vice President
PRINCIPAL HEALTH CARE OF SOUTH
CAROLINA, INC.
By: /s/ Sharon I. Taylor
---------------------------------------
Title: Senior Vice President
PRINCIPAL HEALTH CARE OF TENNESSEE, INC.
By: /s/ Sharon I. Taylor
---------------------------------------
Title: Senior Vice President
UNITED HEALTHCARE SERVICES OF IOWA, INC.
By: /s/ Sharon I. Taylor
---------------------------------------
Title: Senior Vice President
<PAGE> 1
EXHIBIT 10.45
EXECUTION COPY
PRINCIPAL HEALTH CARE OF FLORIDA, INC.
STOCK PURCHASE AGREEMENT
DATED AS OF OCTOBER 14, 1998
BY AND AMONG
COVENTRY HEALTH CARE, INC., AS SELLER,
BLUE CROSS AND BLUE SHIELD OF FLORIDA, INC.
PRINCIPAL HEALTH CARE OF FLORIDA, INC.
AND
HEALTH OPTIONS, INC., AS BUYER
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I.......................................................................................................-1-
DEFINITIONS AND INTERPRETATION..................................................................................-1-
1.1. Definitions......................................................................................-1-
1.2. Interpretation..................................................................................-11-
ARTICLE II.....................................................................................................-11-
PURCHASE AND SALE OF SHARES; PURCHASE PRICE....................................................................-11-
2.1. Purchase and Sale of Shares.....................................................................-11-
2.2. Purchase Price..................................................................................-11-
2.3. Company Net Worth and Balance Sheet at Closing..................................................-11-
2.4. Purchase Price Adjustments......................................................................-12-
2.5. Measured Lives Collar...........................................................................-12-
ARTICLE III....................................................................................................-13-
CLOSING........................................................................................................-13-
3.1. Closing Date....................................................................................-13-
3.2. Payment of Purchase Price; Delivery of Shares; Establishment of Escrow Account..................-13-
3.3. Buyer's Additional Deliveries...................................................................-14-
3.4. Seller's Deliveries.............................................................................-15-
ARTICLE IV.....................................................................................................-17-
REPRESENTATIONS AND WARRANTIES OF COMPANY AND SELLER...........................................................-17-
4.1. Organization and Authority of Seller............................................................-18-
4.2. Organization and Capital Structure of the Company...............................................-19-
4.3. Subsidiaries and Investments....................................................................-20-
4.4. Financial Statements and Reserves...............................................................-20-
4.5. Operations Since Balance Sheet Date.............................................................-20-
4.6. Taxes...........................................................................................-21-
4.7. Affiliated Services.............................................................................-23-
4.8. Governmental Licenses and Permits...............................................................-23-
4.9. Real Property...................................................................................-24-
4.10. Personal Property...............................................................................-24-
4.11. Intellectual Property; Software.................................................................-24-
4.12. Accounts Receivable.............................................................................-25-
</TABLE>
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<TABLE>
<S> <C>
4.13. Employee Benefit Plans..........................................................................-25-
4.14. Employee Relations..............................................................................-27-
4.15. Members, Groups, Providers and Other Contracts..................................................-28-
4.16. No Violation, Litigation or Regulatory Action...................................................-30-
4.17. Environmental Matters...........................................................................-31-
4.18. Insurance.......................................................................................-32-
4.19. Service Contracts...............................................................................-33-
4.20. Bank Accounts; Powers of Attorney...............................................................-33-
4.21. No Finder.......................................................................................-33-
4.22. Disclosure......................................................................................-33-
ARTICLE V......................................................................................................-33-
REPRESENTATIONS AND WARRANTIES OF BUYER AND OF BCBSF...........................................................-33-
5.1. Organization of Buyer...........................................................................-34-
5.2. Authority of Buyer..............................................................................-34-
5.3. No Financing Contingency........................................................................-34-
5.4. Investment Representation.......................................................................-34-
5.5. Organization of BCBSF...........................................................................-34-
5.6. Authority of BCBSF..............................................................................-34-
5.7. No Finder.......................................................................................-34-
ARTICLE VI.....................................................................................................-35-
ACTION PRIOR TO THE CLOSING DATE...............................................................................-35-
6.1. Investigation of the Company by Buyer...........................................................-35-
6.2. Preserve Accuracy of Representations and Warranties.............................................-35-
6.3. Consents of Third Parties; Governmental Approvals...............................................-35-
6.4. Operations Prior to the Closing Date............................................................-36-
6.5. Notification by Seller of Certain Matters.......................................................-38-
6.6. Legal Compliance................................................................................-38-
ARTICLE VII....................................................................................................-39-
ADDITIONAL AGREEMENTS..........................................................................................-39-
7.1. Covenant Not to Compete or Solicit Business.....................................................-39-
7.2. Access to Records after Closing.................................................................-41-
7.3. Employees and Employee Benefit Plans............................................................-42-
7.4. Pre-Closing Payables and Receivables............................................................-42-
7.5. Post-Closing Adjustment to Purchase Price to reflect Number of Measured Lives...................-43-
7.6 Confidential Nature of Information..............................................................-43-
7.7. No Public Announcement..........................................................................-44-
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
7.8. Expenses........................................................................................-44-
7.9. Further Assurances..............................................................................-44-
7.10. Post-Closing Adjustment to Purchase Price to Reflect the Company's Failure to obtain Enrollment
Rate Increase................................................................................-44-
7.11. Timely Payment of Claims Agreement..............................................................-45-
7.12. Agreed Balance Sheet Audit......................................................................-45-
ARTICLE VIII...................................................................................................-45-
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARTIES.................................................................-45-
8.1. Conditions to Buyer's Obligations...............................................................-45-
8.2. Conditions to Seller's Obligations..............................................................-47-
ARTICLE IX.....................................................................................................-48-
TAX MATTERS....................................................................................................-48-
9.1. Liability for Taxes.............................................................................-48-
9.2. Tax Returns.....................................................................................-51-
9.3 Contest Provisions..............................................................................-51-
9.4 Assistance and Cooperation......................................................................-52-
9.5. Election Under Section 338(h)(10)...............................................................-52-
9.6. Survival of Obligations.........................................................................-53-
ARTICLE X......................................................................................................-53-
INDEMNIFICATION................................................................................................-53-
10.1. Indemnification by Seller.......................................................................-53-
10.2. Indemnification by Buyer and BCBSF..............................................................-56-
10.3. Notice of Claims................................................................................-57-
10.4. Third Person Claims.............................................................................-58-
ARTICLE XI.....................................................................................................-59-
TERMINATION....................................................................................................-59-
11.1. Termination.....................................................................................-59-
11.2. Notice of Termination...........................................................................-59-
11.3. Effect of Termination...........................................................................-59-
ARTICLE XII....................................................................................................-60-
GENERAL PROVISIONS.............................................................................................-60-
12.1. Survival of Obligations.........................................................................-60-
12.2. Notices.........................................................................................-60-
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C>
12.3. Successors and Assigns.........................................................................-61-
12.4. Entire Agreement; Amendments...................................................................-61-
12.5. Waivers........................................................................................-62-
12.6. Partial Invalidity.............................................................................-62-
12.7. Execution in Counterparts......................................................................-62-
12.8. Governing Law..................................................................................-62-
12.9. Submission to Jurisdiction.....................................................................-62-
12.10. Acknowledgment regarding Blue Cross and Blue Shield Association................................-63-
</TABLE>
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<PAGE> 6
EXHIBITS
Exhibit 2.3 Agreed Balance Sheet
Exhibit 2.4(B) Rate Filing Adjustment
Exhibit 2.6 Transition Services Agreements
Exhibit 3.4(I) Legal Opinion of Seller
Exhibit 3.4(O) Principal Agreement
Exhibit 3.4(P) Assumption Agreement
Exhibit 6.4(B)(iii) Maintenance of Efforts Provisions
Exhibit 7.4 Adjudication and Payment of Medical Claims
Exhibit 7.11 Opportunity to Cure Provisions
SCHEDULES
Schedule 3.2 Seller's Wire Transfer Instructions
Schedule 4.1 Exceptions to Authority of Seller and Company and Required
Consents
Schedule 4.2(A) Additional Foreign Qualification of Company
Schedule 4.2(B) Capital Stock of Company
Schedule 4.3 Company Subsidiaries
Schedule 4.4 Financial Statements
Schedule 4.5(A) Operation of Company
Schedule 4.5(B) Conduct of Business of Company
Schedule 4.6 Taxes
Schedule 4.7 Affiliated Services
Schedule 4.8 Government Permits
Schedule 4.9(A) Owned Real Property
Schedule 4.9(B) Leased Real Property
Schedule 4.11 Intellectual Property
Schedule 4.13(A) ERISA Benefit Plans
Schedule 4.13(B) Non-ERISA Benefit Plans
Schedule 4.13(D) Status of the Pension Plans
Schedule 4.13(E) Compliance
Schedule 4.14(A) Conflicts of Interest / Compliance with Anti-Bribery Laws
Schedule 4.14(B) Related Party Transactions
Schedule 4.14(C) Labor Law and Union Activities
Schedule 4.15(A) Group Service Agreements
Schedule 4.15(B) Individual Service Agreements
Schedule 4.15(C) Provider Service Agreements
Schedule 4.15(D) Guaranteed Rate Agreements
Schedule 4.15(E) Variable Rate Agreements
Schedule 4.15(F) Member Grievances / Provider and Group Terminations
Schedule 4.15(G) Other Binding Obligations
Schedule 4.15(H) Status of Company Agreements
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<PAGE> 7
Schedule 4.15(I) Broker Agreements
Schedule 4.16 Compliance with Laws and Absence of Regulatory Action
Schedule 4.17 Environmental Matters
Schedule 4.18 Insurance
Schedule 4.19 Service Contracts
Schedule 4.20 Bank Accounts and Powers of Attorney
Schedule 7.1(A) Alabama Counties (Covenant Not to Compete or Solicit
Business)
Schedule 8.1(E) Consents
Schedule 8.1(J) Termination, Amendment or Assignment of Provider Service
Agreements
-vi-
<PAGE> 8
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT, dated as of October 14, 1998
(this "Agreement"), by and among Health Options, Inc. , a Florida corporation
("Buyer"), Coventry Health Care, Inc., a Delaware corporation ("Seller"),
Principal Health Care of Florida, Inc., a Florida corporation ("Company"), and
Blue Cross and Blue Shield of Florida, Inc., a Florida not-for-profit
corporation ("BCBSF").
PRELIMINARY STATEMENT
WHEREAS, Seller is the owner, beneficially and of record, of
all of the issued and outstanding capital stock of the Company;
WHEREAS, BCBSF is the indirect owner, through a wholly-owned
intermediate holding company, of the capital shares of Buyer;
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to
purchase from Seller, subject to certain indemnification agreements by Seller,
all of the capital stock of the Company pursuant to the terms and subject to the
conditions set forth herein.
NOW THEREFORE, in consideration of the mutual agreements
hereinafter set forth, Buyer, Seller, and Company agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1. DEFINITIONS. In this Agreement, the following terms have
the meanings specified or referred to in this Section 1.1 and shall be equally
applicable to both the singular and plural forms.
"ACTIVELY TARGET" means a knowing, intentional practice of
direct solicitation of business, whether using customer lists existing as of the
Closing Date, or otherwise.
"AFFILIATE" means, with respect to any Person, any other
Person which directly or indirectly owns or controls, is owned or controlled by
or is under common ownership or control with such Person. Any Person who is
deemed an Affiliate of a party on the date hereof shall be deemed to remain an
Affiliate of such party for the purposes of this Agreement and all Exhibits
<PAGE> 9
and Schedules hereto. For purposes of this Agreement, the term "control" shall
mean (i) in the case of a corporation, the ownership, directly or indirectly, of
greater than 50% of the capital stock of the corporation, or the right, directly
or indirectly, to independently elect or cause the election of more than 50% of
the voting members or directors of such corporation, and (ii) in the case of a
Person other than a corporation, the possession, directly or indirectly, of the
power to independently direct or cause the direction of the management and
policies of the Person, whether through the ownership of voting equity
interests, by Contract or otherwise.
"AGREED BALANCE SHEET" has the meaning specified in Section
2.3.
"AGREEMENT" means this Stock Purchase Agreement, and shall
include, without limitation, all Schedules and Exhibits referred to herein,
which are hereby incorporated herein by reference.
"ALABAMA HMO STATUTES" means Chapter 21A of the Alabama
Insurance Code, as amended, any other provisions of Alabama law applicable to
health maintenance organizations, and the applicable published rules and
regulations promulgated thereunder.
"ALABAMA LIVES" means Members covered by Group Services
Agreements that are not subject to the jurisdiction of the Florida Department of
Insurance.
"ALLOCATION SCHEDULE" has the meaning specified in Section
9.5(b).
"ASSOCIATION" has the meaning specified in Section 12.10.
"ASSUMED OBLIGATIONS" has the meaning specified in Section
10.1(b).
"ASSUMPTION AGREEMENT" has the meaning specified in Section
3.4(p).
"BALANCE SHEET" has the meaning specified in Section 4.4.
"BALANCE SHEET DATE" means August 31, 1998.
"BCBSF" means Blue Cross and Blue Shield of Florida, Inc., a
Florida not-for-profit corporation.
"BUYER" has the meaning specified in the first paragraph of
this Agreement.
"BUYER ANCILLARY AGREEMENTS" means all agreements, instruments
and documents being or to be executed and delivered by Buyer under this
Agreement or in connection herewith.
-2-
<PAGE> 10
"BUYER GROUP MEMBER" means Buyer, BCBSF, and their respective
Affiliates, including, but not limited to the Company subsequent to Closing, and
each of their respective successors and assigns.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. " 9601 et seq., and the regulations
promulgated thereunder.
"CLAIM NOTICE" has the meaning specified in Section 10.3.
"CLAIMS RESERVE" has the meaning specified in Section 2.3.
"CLOSING" means the closing of the transfer of the Shares from
Seller to Buyer.
"CLOSING DATE" has the meaning specified in Section 3.1.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLAR DATE" has the meaning specified in Section 2.5(a).
"COMPANY" has the meaning specified in the first paragraph of
this Agreement.
"COMPANY AGREEMENTS" has the meaning specified in Section
4.15(h).
"COMPANY COMMON STOCK" has the meaning specified in Section
4.2(b).
"COMPANY PROPERTY" means any real or personal property, plant,
building, facility, structure, underground storage tank, equipment or unit, or
other asset owned, leased or operated by the Company.
"COMPANY TAX GROUP" means any "affiliated group" (as defined
in Section 1504(a) of the Code without regard to the limitations contained in
Section 1504(b) of the Code) that, at any time on or before the Closing Date,
includes or has included the Company or any subsidiary of the Company or any
predecessor of or successor to the Company or any subsidiary (or another such
predecessor or successor), or any other group of corporations that, at any time
on or before the Closing Date, files or has filed Tax Returns on a combined,
consolidated or unitary basis with the Company or any subsidiary or any
predecessor of or successor to the Company or any subsidiary of the Company (or
another such predecessor or successor).
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<PAGE> 11
"CONTAMINANT" means any waste, pollutant, hazardous or toxic
substance or waste, petroleum, petroleum-based substance or waste, special
waste, or any constituent of any such substance or waste.
"CONTRACT" means any contract, agreement, lease, license or
other legally binding commitment, obligation, or arrangement, whether oral or
written, express or implied in fact.
"COPYRIGHTS" means United States and foreign copyrights,
copyrightable works, and mask work, whether registered or unregistered, and
pending applications to register the same.
"COURT ORDER" means any judgment, order, award or decree of
any foreign, federal, state, local or other court or tribunal and any award in
any arbitration proceeding.
"COVENTRY TAX GROUP" means the affiliated group (as defined in
Section 1504(a) of the Code) with Seller as the common parent.
"ENCUMBRANCE" means any lien (statutory or other), claim,
charge, security interest, mortgage, deed of trust, pledge, hypothecation,
assignment, conditional sale or other title retention agreement, preference,
priority or other security agreement or preferential arrangement of any kind or
nature, and any easement, encroachment, covenant, restriction, right of way,
defect in title or other encumbrance of any kind.
"ENVIRONMENTAL ENCUMBRANCE" means an Encumbrance in favor of
any Governmental Body for (i) any liability under any Environmental Law, or (ii)
damages arising from, or costs incurred by such Governmental Body in response
to, a Release or threatened Release of a Contaminant into the environment.
"ENVIRONMENTAL LAW" means all Requirements of Laws derived
from or relating to all federal, state and local laws or regulations relating to
or addressing the environment, health or safety, including but not limited to
CERCLA, OSHA and RCRA and any state equivalent thereof.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations promulgated thereunder.
"ERISA AFFILIATE" has the meaning specified in Section
4.13(a).
"ERISA BENEFIT PLAN" has the meaning specified in Section
4.13(a).
"ESCROW ACCOUNT" has the meaning specified in Section 3.2(c).
-4-
<PAGE> 12
\
"ESCROW AGENT" has the meaning specified in Section 3.2 (c).
"ESCROW AGREEMENT" has the meaning specified in Section
3.2(c).
"ESCROW AMOUNT" has the meaning specified in Section 3.2(a).
"EXPENSES" means any and all reasonable expenses incurred in
connection with investigating, defending or asserting any claim, action, suit or
proceeding incident to any matter indemnified against hereunder (including court
filing fees, court costs, arbitration fees or costs, witness fees, and
reasonable fees and disbursements of legal counsel, investigators, expert
witnesses, consultants, accountants and other professionals).
"FEHBP" means the Federal Employee Health Benefits Program, 5
U.S.C. ' 8901 et seq., as amended, and the published rules and regulations
promulgated thereunder.
"FEDERAL HMO ACT" means the federal Health Maintenance
Organization Act, 42 U.S.C. ' 300e et seq., as amended, and the published rules
and regulations thereunder.
"FLORIDA HMO STATUTES" means Chapter 641 of the Florida
Statutes, ' 641.17 et seq., any other provisions of the Florida Statutes
applicable to health maintenance organizations, and the applicable published
rules and regulations promulgated thereunder.
"GOVERNMENTAL BODY" means any foreign, federal, state, local
or other governmental authority, instrumentality, commission, agency or
regulatory body.
"GOVERNMENTAL PERMITS" has the meaning specified in Section
4.8.
"GROUP" means those Members, collectively, who are covered by
a specific Group Services Agreement.
"GROUP SERVICES AGREEMENT" means an agreement pursuant to
which Company is obligated to provide, arrange for the provision of, or pay or
reimburse the cost of certain health care services with respect to a defined
population.
"GUARANTEED RATE AGREEMENT" means any Individual Services
Agreement, Group Services Agreement or any other similar agreement,
understanding or commitment in connection therewith that either (i) provides for
coverage by the Company for a period of more than twelve (12) months, or (ii)
governs enrollment premiums for any period other than the current term of an
Individual Services Agreement or Group Services Agreement in force as of the
date hereof.
-5-
<PAGE> 13
"HCUSA" has the meaning specified in Section 2.3.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the published rules and regulations promulgated
thereunder.
"IBNR RESERVE" has the meaning specified in Section 4.4(b).
"INDIVIDUAL SERVICES AGREEMENT" means an agreement with an
individual pursuant to which Company is obligated to provide, arrange for the
provision of, or pay or reimburse the cost of certain health care services with
respect to such individual.
"INDEMNIFIED PARTY" has the meaning specified in Section
10.3(a).
"INDEMNITOR" has the meaning specified in Section 10.3(a).
"INTELLECTUAL PROPERTY" means Copyrights, Patent Rights,
Trademarks and Trade Secrets and all agreements, contracts, licenses,
sublicenses, assignments and indemnities which relate or pertain to any of the
foregoing.
"IRS" means the Internal Revenue Service.
"LEASED REAL PROPERTY" has the meaning specified in Section
4.9(b).
"LEASED PERSONAL PROPERTY" has the meaning specified in
Section 8.1(h).
"LOSSES" means any and all losses, costs, obligations,
liabilities, settlement payments, awards, judgments, fines, penalties,
assessments, damages or other charges however characterized, and Expenses
related thereto.
"MATERIAL ADVERSE EFFECT" means any condition, circumstance,
change or effect (or any development that, insofar as can be reasonably
foreseen, would result in any condition, circumstance, change or effect) that is
materially adverse to the assets, business, financial condition, results of
operations or prospects of the Company or the Seller, as the case may be, after
the Closing.
"MEASURED LIVES" means the Members as of the applicable
measuring date other than (i) Medicaid beneficiaries, (ii) Members covered by a
Group Services Agreement with the State of Florida, (iii) Members covered
through the FEHBP, (iv) Members covered by an Individual Services Agreement
resulting from conversion rights conferred by the Group Services Agreement with
the State of Florida or FEHBP, (v) Members covered under an agreement pursuant
to which the Company does not substantially underwrite the risk of medical
claims, but
-6-
<PAGE> 14
only provides administrative services, (vi) Members covered by a Medicare
enrollment agreement, and (vii) Alabama Lives.
"MEASURED LIVES COLLAR" has the meaning specified in Section
2.5(a).
"MEASURED LIVES PRICE INCREASE AMOUNT" has the meaning
specified in Section 2.5(c).
"MEASURED LIVES PRICE REDUCTION AMOUNT" has the meaning
specified in Section 2.5(b).
"MEDICAL EXPENSES" means amounts owed or payable to health
care providers and suppliers by Company for (i) covered services rendered to
Members prior to the Closing, and (ii) for covered inpatient services rendered
to Members admitted prior to the Closing until the date of their discharge, as
well as the administrative cost of adjudicating, processing and paying such
amounts.
"MEMBERS" means (i) employees and their eligible family
dependents, and other members or beneficiaries of Groups with respect to whom
Company is obligated to provide, arrange for the provision of, or pay or
reimburse the cost of certain health care services pursuant to the terms of
Group Services Agreements in force as of the Closing Date, (ii) individuals
entitled to continuation of coverage benefits pursuant to the terms of Group
Services Agreements in force as of the Closing Date, and (iii) individuals who
have entered into Individual Services Agreements in force as of the Closing
Date.
"MUTUAL NON-DISCLOSURE AGREEMENT" means the Mutual
Non-Disclosure Agreement, dated July 11, 1998, between BCBSF and Seller.
"NET WORTH" means the difference between total assets and
total liabilities.
"NON-ERISA COMMITMENT" has the meaning specified in Section
4.13(b).
"OSHA" means the Occupational Safety and Health Act, 29 U.S.C.
" 651 et seq., and the regulations promulgated thereunder.
"OWNED REAL PROPERTY" has the meaning specified in Section
4.9(a).
"PATENT RIGHTS" means United States and foreign patents,
patent applications, continuations, continuations-in-part, divisions, reissues,
patent disclosures, inventions (whether or not patentable or reduced to
practice) and improvements thereto.
-7-
<PAGE> 15
"PERMITTED ENCUMBRANCES" means: (i) liens for taxes and other
governmental charges and assessments arising in the ordinary course of business
which are not yet due and payable, (ii) liens of landlords and liens of
carriers, warehousemen, mechanics and materialmen and other like liens arising
in the ordinary course of business for sums not yet due and payable and (iii)
other liens or imperfections on property which are not material in amount, do
not interfere with, and are not violated by, the consummation of the
transactions contemplated by this Agreement, and do not impair the marketability
of, or materially detract from the value of or materially impair the existing
use of, the property affected by such lien or imperfection.
"PERSON" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company, trust,
unincorporated organization or Governmental Body.
"PENSION PLAN" has the meaning specified in Section 4.13(a).
"PRINCIPAL AGREEMENT" has the meaning specified in Section
3.4(o).
"PRIOR PENSION PLAN" has the meaning specified in Section
4.13(a).
"PROVIDER" means any provider or supplier of health care
services who is bound by the terms of a Provider Services Agreement.
"PROVIDER SERVICES AGREEMENT" means any agreement enforceable
by the Company pursuant to which health care services are rendered to a Member.
"PURCHASE PRICE" has the meaning specified in Section 2.2.
"RCRA" means the Resource Conservation and Recovery Act, 42
U.S.C. " 6901 et seq., and the regulations promulgated thereunder.
"RECEIVABLES" has the meaning specified in Section 7.4.
"RELEASE" means any release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching or
migration of a Contaminant into the indoor or outdoor environment or into or out
of any Company Property, including the movement of Contaminants through or in
the air, soil, surface water, groundwater or Company Property.
"REMEDIAL ACTION" means actions required to (i) clean up,
remove, treat or in any other way address Contaminants in the indoor or outdoor
environment, (ii) prevent the Release or threatened Release or minimize the
further Release of Contaminants or (iii)
-8-
<PAGE> 16
investigate and determine if a remedial response is needed and to design such a
response and post-remedial investigation, monitoring, operation and maintenance
and care.
"REQUIREMENTS OF LAWS" means any and all foreign, federal,
state and local laws, statutes, regulations, rules, codes, policies, regulatory
bulletins or ordinances enacted, adopted, issued or promulgated by any
Governmental Body (including, without limitation, those pertaining to insurance
companies, health maintenance organizations, utilization review organizations,
and third party administrators ) or common law.
"RUN-OUT DATE" has the meaning specified in Section 2.6.
"SECTION 338(H)(10) ELECTIONS" has the meaning specified in
Section 9.5(a).
"SECTION 338 TAXES" means any Taxes that would not have been
imposed but for the Section 338(h)(10) Elections, or any elections under state,
local or other Tax law that are required to be made or deemed to have been made
as a result of any Section 338(h)(10) Election.
"SELLER" has the meaning specified in the first paragraph of
this Agreement.
"SELLER ANCILLARY AGREEMENTS" means all agreements,
instruments and documents being or to be executed and delivered by Seller under
this Agreement or in connection herewith.
"SELLER GROUP MEMBER" means Seller and its Affiliates,
including, but not limited to the Company prior to Closing, and, except for the
Company, each of their respective successors and assigns.
"SHARES" means all of the issued and outstanding shares of
capital stock of the Company.
"SOFTWARE" means computer software programs and software
systems, including all databases, compilations, tool sets, compilers, higher
level or "proprietary" languages, related documentation and materials, whether
in source code, object code or human readable form.
"STRADDLE PERIOD" means any taxable year or period beginning
before and ending after the Closing Date.
"TAX" (and, with correlative meaning, "Taxes" and "Taxable")
means:
(i) any federal, state, local or foreign net income, gross
income, gross receipts, premium, windfall profit, severance, property,
production, sales, use, license, excise,
-9-
<PAGE> 17
franchise, employment, payroll, withholding, alternative or add-on
minimum, ad valorem, value-added, transfer, stamp, or environmental
tax, or any other tax, custom, duty or other like assessment or charge
of any kind similar to taxes, together with any interest or penalty,
addition to tax or additional amount imposed by any governmental
authority; and
(ii) any liability of the Company or any subsidiary of the
Company for the payment of amounts with respect to payments of a type
described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group, or as a result of any
obligation of the Company or any subsidiary of the Company under any
Tax Sharing Arrangement or Tax indemnity arrangement.
"TAX BENEFIT RESTITUTION AGREEMENT" means that certain Tax
Benefit Restitution Agreement, dated April 1, 1998, by and between Principal
Life Insurance Company and Seller.
"TAX RETURN" means any return, report or similar statement
required to be filed with respect to any Tax (including any attached schedules),
including, without limitation, any information return, claim for refund, amended
return or declaration of estimated Tax.
"TAX SHARING ARRANGEMENT" means any written or unwritten
agreement or arrangement for the allocation or payment of Tax liabilities or
payment for Tax benefits with respect to a consolidated, combined or unitary Tax
Return which Tax Return includes the Company or any subsidiary of the Company.
"TRADEMARKS" means United States, state and foreign
trademarks, service marks, logos, trade dress and trade names (including all
assumed or fictitious names under which the Company is conducting business or
has within the previous five years conducted business), whether registered or
unregistered, and pending applications to register the foregoing.
"TRADE SECRETS" means confidential ideas, trade secrets,
know-how, concepts, methods, processes, formulae, reports, data, customer lists,
mailing lists, business plans, or other proprietary information.
"TRANSITION SERVICES AGREEMENTS" means the administrative
services and claims processing agreements in the form of Exhibits 2.6.
"VARIABLE RATE AGREEMENT" means any (i) Group Services
Agreement that provides for retroactive experience adjustments to enrollment
premiums, retroactive risk sharing payments or refunds, or enrollment premium
adjustments or credits in connection with the medical claims experience of, or
utilization of health care services by, Members, and (ii) any
-10-
<PAGE> 18
Provider Services Agreement that provides for risk sharing payments, payment
rate withhold distributions, incentive distributions or bonuses.
"WARN" has the meaning specified in Section 4.14(c).
"WELFARE PLAN" has the meaning specified in Section 4.13(a).
1.2. INTERPRETATION. As used in this Agreement, the word
"including" means without limitation, the word "or" is not exclusive and the
words "herein", "hereof", "hereby", "hereto" and "hereunder" refer to this
Agreement as a whole. Unless the context otherwise requires, references herein:
(i) to Articles, Sections, Exhibits and Schedules mean the Articles and Sections
of and the Exhibits and Schedules attached to this Agreement; (ii) to an
agreement, instrument or other document means such agreement, instrument or
other document as amended, supplemented and modified from time to time to the
extent permitted by the provisions thereof and by this Agreement; and (iii) to a
statute means such statute as amended from time to time and includes any
successor legislation thereto. The Schedules and Exhibits referred to herein
shall be construed with and as an integral part of this Agreement to the same
extent as if they were set forth verbatim herein. Titles to Articles and
headings of Sections are inserted for convenience of reference only and shall
not be deemed a part of or to affect meaning or interpretation of this
Agreement. References herein to the knowledge of a party or matters or
information known to a party mean the actual knowledge or conscious awareness of
such party.
ARTICLE II
PURCHASE AND SALE OF SHARES; PURCHASE PRICE
2.1. PURCHASE AND SALE OF SHARES. Upon the terms and subject
to the conditions of this Agreement, on the Closing Date, Seller shall sell,
transfer, assign, convey and deliver to Buyer, and Buyer shall purchase from
Seller, the Shares, free and clear of any and all Encumbrances (except for
Permitted Encumbrances).
2.2. PURCHASE PRICE. The purchase price for the Shares (the
"Purchase Price") shall be, subject to adjustment pursuant to Section 2.4 and
Section 2.5, equal to ninety-five million dollars ($95,000,000), payable
pursuant to Section 3.2.
2.3. COMPANY NET WORTH AND BALANCE SHEET AT CLOSING. Buyer and
Seller shall jointly prepare a target balance sheet of the Company at the
Closing (the "Agreed Balance Sheet"). The Agreed Balance Sheet shall reflect
only those assets and liabilities set forth in Exhibit 2.3. At the Closing, the
Net Worth of the Company shall be as set forth on the Agreed Balance Sheet, and
shall include cash, unearned premium, reserve for doubtful accounts, statutory
deposits, and a Claims Reserve (as defined hereinafter) for all of the unpaid
Medical
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Expenses not assumed by Health Care USA, Inc., a Florida corporation ("HCUSA")
pursuant to the terms of the Assumption Agreement (as defined in Section
3.4(p)), in an amount equal to the greater of (i) such amount as required
therefore under statutory accounting principles or (ii) such amount as may be
required therefore under Alabama law (the "Claims Reserve"). The Claims Reserve
shall be maintained in a separate segregated bank account of the Company. The
Agreed Balance Sheet shall be subject to a post-closing audit pursuant to
Section 7.12.
2.4. PURCHASE PRICE ADJUSTMENTS. The Purchase Price shall be
adjusted as follows:
(a) The Purchase Price shall be adjusted to the extent
required by Section 2.5.
(b) The Purchase Price shall be further reduced in the event
that the Company fails to gain approval of a December 1, 1998 rate filing with
the Florida Department of Insurance. In the event of such failure to gain such
approval, the Purchase Price shall be reduced to the extent necessary to reflect
the difference between the rates to be filed and the rates in effect for those
Group Service Agreements, new contracts, and renewals first effective between
December 1, 1998 and the earliest date for which Buyer could receive a rate
increase, as more specifically described in Exhibit 2.4(B).
(c) The Purchase Price shall be further reduced by the amount
of two million dollars ($2,000,000), in the event that the Company is subject to
any Medicare enrollment agreement for periods commencing on and after January 1,
1999.
2.5. MEASURED LIVES COLLAR.
(a) A certified public accounting firm selected jointly by
Buyer and Seller shall determine the number of Measured Lives as of the later of
(i) February 1, 1999 or (ii) thirty (30) days after the Closing Date (the
"Collar Date"). To the extent that such number of Measured Lives is less than
132,384 or greater than 142,384 (the "Measured Lives Collar"), a post-closing
adjustment shall be made to the Purchase Price. For a particular Measured Life
to be eligible for inclusion towards the Measured Lives Collar, the Company must
have received payment in full of such Measured Life's monthly insurance premium
for the calendar month in which the Collar Date falls.
(b) To the extent that the number of Measured Lives as of the
Collar Date is less than 132,384, the Purchase Price shall be reduced in an
amount equal to the product of (x) $688 per Measured Life multiplied by (y) the
difference between 132,384 and the number of Measured Lives as of the Collar
Date (the "Measured Lives Price Reduction Amount").
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(c) To the extent that the number of Measured Lives as of the
Collar Date is greater than 142,384, the Purchase Price shall be increased in an
amount equal to the product of (x) $688 per Measured Life multiplied by (y) the
difference between the number of Measured Lives as of the Collar Date and
142,384 (the "Measured Lives Price Increase Amount").
2.6. CLAIMS RESERVE RECONCILIATION. Pursuant to the terms of
one of the Transition Services Agreements which are attached as Exhibit 2.6
hereto, one or more of the Seller Group Members shall administer and pay Medical
Expenses payable from the Claims Reserve from the segregated account of the
Company established therefor. In the event that, at any time subsequent to the
Closing but prior to December 31, 1999 (the "Run-Out Date"), such account is
depleted, any and all additional Medical Expenses payable from the Claims
Reserve shall be the liability of Seller. At the Run-Out Date, any funds then
remaining in such account shall be paid to Seller or its designee; provided,
however, that any Medical Expenses payable from the Claims Reserve that are
presented to the Company subsequent to the Run-Out Date shall be submitted to
Seller, which shall be liable for payment thereof.
ARTICLE III
CLOSING
3.1. CLOSING DATE. The Closing shall take place at 10:00 A.M.,
local time, on the last of (i) December 31, 1998, (ii) the last day of the month
in which the approval of the Florida Commissioner of Insurance of the
transactions contemplated hereby is received, (iii) the last day of the month in
which the approval of the Alabama Commissioner of Insurance of the transactions
contemplated hereby is received, or such other date or time as may be agreed
upon by Buyer and Seller after the regulatory approvals and other conditions set
forth herein have been satisfied; provided, however, that if the last day of the
month scheduled for closing is not a business day, then the Closing shall take
place on the first business day thereafter, effective as of the last day of the
immediately preceding month. The Closing shall take place at the offices of
BCBSF or at such other place as shall be agreed upon by Buyer and Seller. The
time and date on which the Closing is actually held are sometimes referred to
herein as the "Closing Date".
3.2. PAYMENT OF PURCHASE PRICE; DELIVERY OF SHARES;
ESTABLISHMENT OF ESCROW ACCOUNT. (a) Subject to fulfillment or waiver of the
conditions set forth in Section 8.1, at the Closing Buyer shall pay and BCBSF
shall cause Buyer to pay Seller an amount equal to the Purchase Price, less five
million dollars ($5,000,000) (the "Escrow Amount"). The Escrow Amount shall be
deposited with the Escrow Agent for purposes of funding the Escrow Account
pursuant to Section 3.2(c). The balance of the Purchase Price shall be payable
by wire transfer of immediately available funds to the account specified in
Schedule 3.2.
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(b) Subject to fulfillment or waiver of the conditions set
forth in Section 8.2, Seller shall deliver to Buyer a stock certificate
representing the Shares, accompanied by a duly executed and witnessed stock
power transferring the Shares to Buyer.
(c) At or prior to the Closing, Buyer shall establish an
escrow fund as further described herein:
(i) Buyer shall establish an escrow fund ("Escrow Account")
with a financial institution acceptable to Seller and shall select an
escrow agent acceptable to Seller to oversee the Escrow Account (the
"Escrow Agent"). Buyer and Seller shall enter into an agreement with
the Escrow Agent pursuant to which the Escrow Account shall be
administered (the "Escrow Agreement").
(ii) The Escrow Account shall be funded by Buyer at Closing
via the wire transfer of immediately available funds to the Escrow
Account.
(iii) The Escrow Account shall be held for the period ending
one month after the issuance of BCBSF's audited financial statements
for the fiscal year ended December 31, 1999, provided, however, that
such date shall be no later than June 15, 2000.
(iv) Any and all interest accrued with respect to the Escrow
Account shall be deemed part of the Escrow Account and shall be held by
the Escrow Agent pursuant to the Escrow Agreement until the termination
of the Escrow Account.
(v) The Escrow Agent shall provide written notice to each of
BCBSF, Buyer and Seller of the Escrow Account's balance as of the end
of each calendar quarter (March 31, June 30, September 31, and December
31) (each an "Escrow Balance Date"). To the extent that the Escrow
Account's balance is less than five million dollars ($5,000,000) on any
such Escrow Balance Date, Seller agrees to deposit via wire transfer of
immediately available funds to the Escrow Account an amount sufficient
to restore the Escrow Account's balance to five million dollars
($5,000,000) within five (5) business days of its receipt of the Escrow
Account balance from the Escrow Agent, provided, however, that Seller's
obligation to restore the Escrow Account's balance to five million
dollars ($5,000,000) shall be subject to a limit of an aggregate of
five million dollars ($5,000,000) of additional deposits (i.e., in no
event shall, exclusive of interest earned on the Escrow Account, the
sum of the initial $5,000,000 Escrow Account deposit plus any
additional deposits Seller makes to the Escrow Account pursuant to this
subsection, exceed ten million dollars ($10,000,000)).
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<PAGE> 22
3.3. BUYER'S ADDITIONAL DELIVERIES. Subject to fulfillment or
waiver of the conditions set forth in Section 8.1, at the Closing Buyer or
BCBSF, as the case may be, shall deliver to Seller all the following:
(a) Copies of Buyer's Articles of Incorporation certified as
of a recent date by the Secretary of State of the State of Florida;
(b) Certificate of good standing of Buyer issued as of a
recent date by the Secretary of State of the State of Florida;
(c) Certificate of the secretary or an assistant secretary of
Buyer, dated the Closing Date, in form and substance reasonably
satisfactory to Seller, as to (i) no amendments to the Articles of
Incorporation of Buyer since a specified date; (ii) the by-laws of
Buyer; (iii) the resolutions of the Board of Directors or a duly
authorized committee thereof of Buyer authorizing the execution and
performance of this Agreement and the transactions contemplated hereby;
and (iv) incumbency and signatures of the officers of Buyer executing
this Agreement and any Buyer Ancillary Agreement;
(d) The certificate contemplated by Section 8.2(a), duly
executed by the President or any Vice President or the Treasurer of
Buyer;
(e) All necessary consents, waivers or approvals of the
Florida Commissioner of Insurance with respect to the Buyer's
compliance with the Florida HMO Statutes;
(f) All necessary consents, waivers or approvals of the
Alabama Commissioner of Insurance with respect to the Buyer's
compliance with the Alabama HMO Statutes;
(g) The Transition Services Agreements executed by Buyer;
(h) The Escrow Agreement duly executed by Buyer;
(i) Copies of BCBSF's Articles of Incorporation certified as
of a recent date by the Secretary of State of the State of Florida;
(j) Certificate of good standing of BCBSF issued as of a
recent date by the Secretary of State of the State of Florida;
(k) Certificate of the secretary or an assistant secretary of
BCBSF, dated the Closing Date, in form and substance reasonably
satisfactory to Seller, as to (i) no amendments to the Articles of
Incorporation of BCBSF since a specified date; (ii) the by-laws of
BCBSF; (iii) the resolutions of the Board of Directors or a duly
authorized
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committee thereof of BCBSF authorizing the execution and performance of
this Agreement and the transactions contemplated hereby; and (iv)
incumbency and signatures of the officers of BCBSF executing this
Agreement; and
(l) The certificate contemplated by Section 8.2(a), duly
executed by the President or any Vice President or the Treasurer of
BCBSF.
3.4. SELLER'S DELIVERIES. Subject to fulfillment or waiver of
the conditions set forth in Section 8.2, at Closing Seller shall deliver to
Buyer all the following:
(a) Copies of the Articles of Incorporation of Seller, as
amended, certified as of a recent date by the Secretary of State of the
State of Delaware;
(b) Copies of the Articles of Incorporation of the Company, as
amended, certified as of a recent date by the Secretary of State of the
State of Florida;
(c) Long-form certificate of good standing of Seller issued as
of a recent date by the Secretary of State of the State of Delaware;
(d) Long-form certificate of good standing of the Company
issued as of a recent date by the Secretary of State of the State of
Florida;
(e) Evidence of the Company's good standing from the Alabama
Department of Insurance;
(f) Evidence of the Company's good standing from the Florida
Department of Insurance.
(g) Certificate of the secretary or an assistant secretary of
Seller, dated the Closing Date, in form and substance reasonably
satisfactory to Buyer, as to (i) no amendments to the Articles of
Incorporation of Seller since a specified date; (ii) the by-laws of
Seller; (iii) the resolutions of the Board of Directors of Seller
authorizing the execution and performance of this Agreement and the
transactions contemplated hereby; and (iv) incumbency and signatures of
the officers of Seller executing this Agreement and any Seller
Ancillary Agreement;
(h) Certificate of the secretary or an assistant secretary of
the Company, dated the Closing Date, in form and substance reasonably
satisfactory to Buyer, as to (i) no amendments to the Articles of
Incorporation of the Company since a specified date; (ii) the by-laws
of the Company; and (iii) incumbency and signatures of any officers of
the Company executing any Seller Ancillary Agreement;
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<PAGE> 24
(i) Opinion of counsel to Seller and Company substantially in
the form contained in Exhibit 3.4(I);
(j) All consents, waivers or approvals obtained by Seller or
the Company with respect to the consummation of the transactions
contemplated by this Agreement, including but not limited to the
consents of (i) Morgan Guaranty Trust Company and (ii) Nationsbank,
N.A.;
(k) The Escrow Agreement duly executed by Seller;
(l) The Transition Services Agreements duly executed by the
Company and appropriate Seller Group Members;
(m) The certificates contemplated by Sections 8.1(a) and (b),
duly executed by the authorized officers of Seller;
(n) A signed resignation by each of the directors and officers
of the Company;
(o) The agreement, a copy of which is attached hereto as
Exhibit 3.4(O), of Principal Life Insurance Company (i) to be bound by
the applicable provisions of Section 7.1 of this Agreement, and (ii)
granting the Company the right to continue to use its printed materials
containing the name "Principal Health Care" (the "Principal
Agreement");
(p) An Assignment and Assumption Agreement duly executed by
the Company and HCUSA, in the form set forth in Exhibit 3.4(P) ,
approved by the Florida Department of Insurance, providing for the
assignment to HCUSA by the Company of certain assets of the Company and
for the assumption by HCUSA of certain expenses of the Company,
including with limitation, the Medical Expenses other than those
payable from the Claims Reserve (the "Assumption Agreement");
(q) A certificate, dated the Closing Date, signed on behalf of
the Seller by the President or any Vice President of Seller, stating
whether, as of the Closing Date, the Company is subject to any Medicare
enrollment agreement for periods commencing on and after January 1,
1999;
(r) Copies of all of the monthly premium bills for the
calendar month immediately following the Closing Date or a summary
chart thereof; and
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(s) An aged receivables trial balance as of ten (10) calendar
days prior to the Closing Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY AND SELLER
As an inducement to Buyer to enter into this Agreement and to
consummate the transactions contemplated hereby, each of the Seller and the
Company jointly and severally represents and warrants to each of Buyer and BCBSF
and agrees as follows:
4.1. ORGANIZATION AND AUTHORITY OF SELLER.
(a) Seller is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Seller has full
power and authority to own or lease and to operate and use its properties and to
carry on its business as now conducted.
(b) Seller has full power and authority to execute, deliver
and perform this Agreement and all of the Seller Ancillary Agreements. The
execution, delivery and performance of this Agreement and the Seller Ancillary
Agreements by Seller have been duly authorized and approved by its board of
directors and do not require any further authorization or consent of Seller or
its stockholders. This Agreement has been duly authorized, executed and
delivered by Seller and is the legal, valid and binding obligation of Seller
enforceable in accordance with its terms, and each of the Seller Ancillary
Agreements has been duly authorized by Seller and upon execution and delivery by
Seller will be a legal, valid and binding obligation of Seller enforceable in
accordance with its terms.
(c) Except as set forth in Schedule 4.1, neither the execution
and delivery of this Agreement or any of the Seller Ancillary Agreements or the
consummation of any of the transactions contemplated hereby or thereby nor
compliance with or fulfillment of the terms, conditions and provisions hereof or
thereof will:
(i) conflict with, result in a breach of the terms, conditions
or provisions of, or constitute a default, an event of default or an
event creating rights of acceleration, termination or cancellation or a
loss of rights under, or result in the creation or imposition of any
Encumbrance upon any of the assets or properties of Seller or the
Company, under (1) the charter or By-laws of Seller or the Company, (2)
any note, instrument, agreement, mortgage, lease, license, franchise,
permit or other authorization, right, restriction or obligation to
which either of Seller or the
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Company is a party or any of the respective assets or properties of
Seller or the Company is subject or by which Seller or the Company is
bound except where such conflict, breach, or result would not have a
Material Adverse Effect as to Seller, (3) any Court Order to which
Seller or the Company is a party or any of the respective assets or
properties of Seller or the Company is subject or by which Seller or
the Company is bound, or (4) any Requirements of Laws affecting Seller,
the Company or their respective assets or properties; or
(ii) require the approval, consent, authorization or act of,
or the making by Seller or the Company of any declaration, filing or
registration with, any Person, except as provided under the HSR Act,
the Alabama HMO Statutes and the Florida HMO Statutes, except where the
failure to obtain such approval, consent, authorization or act, or make
such declaration, filing or registration would not have a Material
Adverse Effect as to the Company.
(d) From August 25, 1998 to the date of this Agreement, except
as set forth in Schedule 4.1, Seller, and, as applicable, its Affiliates, have
negotiated exclusively with Buyer and one or more of Buyer's Affiliates, with
respect to either the sale of the Shares or the sale of substantially all of the
assets of the Company and neither Seller nor any of their Affiliates has
directly or indirectly, negotiated with, extended an offer to, solicited,
initiated or encouraged (including by way of furnishing information) an offer
from, or entered into an agreement with any other person or entity with respect
to either the Shares or any of the assets of the Company, or with respect to any
transaction that would adversely affect the value of the Shares to Buyer.
(e) Except as set forth in Schedule 4.1 or as otherwise
expressly contemplated hereby, neither Seller (directly or indirectly) nor any
of its Affiliates, including, but not limited to the Company, (directly or
indirectly) has entered into or is bound by the terms of any understanding,
agreement, judgment, order or settlement which would preclude it from entering
into and performing in accordance with the terms of this Agreement.
4.2. ORGANIZATION AND CAPITAL STRUCTURE OF THE COMPANY. (a)
The Company is a corporation duly organized, validly existing and in good
standing as a health maintenance organization under the laws of the State of
Florida. All acts and actions necessary for the Company to maintain its license
as a health maintenance organization under the laws of the State of Florida have
been taken. Other than the State of Alabama, the Company is not qualified to
transact business as a foreign corporation in any other jurisdiction and, except
as set forth in Schedule 4.2(A), neither the Company's ownership or leasing of
its assets or the conduct of its business requires such qualification. With
respect to the State of Alabama, the Company is qualified as a foreign
corporation to do business in such state and is licensed in good standing as a
health maintenance organization under the laws of the State of Alabama. No other
jurisdiction has demanded, requested or otherwise indicated that the Company is
required so to qualify. The Company has full corporate power and authority to
own or lease and to operate and use its properties and assets and to carry on
its business as now conducted in all material respects.
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(b) The authorized capital stock of the Company consists of
1,000 shares of common stock with no par value ("Company Common Stock"), of
which 1,000 shares are issued and outstanding and no shares are unissued or
reserved for any purpose. Except for this Agreement, there are no agreements,
arrangements, options, warrants, calls, rights or commitments of any character
relating to the issuance, sale, purchase or redemption of any shares of capital
stock of the Company. No holder of Company Common Stock has any preemptive,
stock purchase or other rights to acquire Company Common Stock. All of the
outstanding shares of the Company Common Stock are validly issued, fully paid
and nonassessable and were not issued in violation of any preemptive or similar
rights. Seller is the record and beneficial owner of all of the Shares. Except
as set forth in Schedule 4.2(B), all of the Shares are so owned free from any
and all Encumbrances of any kind. At the Closing, all of the Shares will be
owned free from any and all Encumbrances of any kind. The Shares constitute, and
as of the Closing Date shall constitute, all of the issued and outstanding
shares of Company Common Stock. Upon Seller's delivery of, and Buyer's payment
for, the Shares at the Closing pursuant to this Agreement, Buyer shall receive
good, valid and indefeasible title thereto, free and clear of any and all
Encumbrances.
(c) True and complete copies of the articles of incorporation
and all amendments thereto, of the By-laws, as amended to date, the minute book
and of the stock ledger of the Company have been delivered to Buyer. Such minute
books contain true and complete records of all meetings and other corporate
action taken by the Board of Directors and stockholders of the Company.
4.3. SUBSIDIARIES AND INVESTMENTS. Except as set forth in
Schedule 4.3, the Company does not, directly or indirectly, own, of record or
beneficially, any outstanding voting securities or other equity interests in or
control any corporation, limited liability company, partnership, trust, joint
venture or other entity.
4.4. FINANCIAL STATEMENTS AND RESERVES. (a) Schedule 4.4
contains (i) the unaudited statutory balance sheet of the Company as of August
31, 1998 (such balance sheet being herein called the "Balance Sheet") and the
related statements of income and cash flows for the eight months then ended.
Except as set forth therein or in the notes thereto, such balance sheets and
statements of income and cash flow, have been prepared in conformity with
statutory accounting principles consistently applied, and present fairly under
such principles the financial position and results of operations and cash flow
of the Company as of their respective dates and for the respective periods
covered thereby.
(b) Adequate provision has been made for medical claims
liabilities incurred but not reported, and incurred but pending or otherwise
unpaid ("IBNR Reserve") on the Balance Sheet. The IBNR Reserve on the Balance
Sheet reflects the Company's best estimate for such
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liabilities based upon the Company's claims experience and accounting practices,
consistently applied.
4.5. OPERATIONS SINCE BALANCE SHEET DATE. (a) Except as set
forth in Schedule 4.5(A), since the Balance Sheet Date, there has been:
(i) no material adverse change in the assets, business,
operations, liabilities, profits, prospects or condition (financial or
otherwise) of the Company, and no fact or condition exists or is
contemplated or threatened (other than proposed legislative and
regulatory changes and business conditions affecting the health
maintenance industry in Florida generally) which might reasonably be
expected to cause such a change in the future;
(ii) no material adverse change in number of Members or Groups
of the Company, and no fact or condition exists or is contemplated or
threatened which might reasonably be expected to cause such a change in
the future;
(iii) no change in the Company's underwriting and rating
policies and practices; or
(iv) no damage, destruction, loss or claim, whether or not
covered by insurance, or condemnation or other taking materially
adversely affecting any of the assets, business, operations, condition
or prospects of the Company.
(b) Except as set forth in Schedule 4.5(B), since the Balance
Sheet Date, the Company has conducted its business only in the ordinary course
and in conformity with past practice and, without limiting the generality of the
foregoing, has not:
(i) paid any claims against the Company (including the
settlement of any claims and litigation against the Company or the
payment or settlement of any obligations or liabilities of the Company)
other than in the ordinary course of business consistent with past
practice;
(ii) entered into or become committed to enter into any
agreement relating to employment severance, profit-sharing, bonus
payment, incentive, deferred compensation, insurance, pension,
retirement, medical, hospital, disability, welfare or other benefits
with any officers or employees of the Company;
(iii) made any change in the accounting principles and
practices used by the Company from those applied in the preparation of
the Balance Sheet and the related statements of income and cash flow
for the period ended on the Balance Sheet Date; or
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(iv) entered into or become committed to enter into any other
material transaction except in the ordinary course of business, or as
otherwise contemplated hereunder.
4.6. TAXES. (a) Except as set forth on Schedule 4.6, and
except as would not result in a Material Adverse Effect as to the Company (i)
each of the Company and each Company Tax Group has filed all Tax Returns
required to be filed; (ii) all such Tax Returns are complete and accurate and
disclose all Taxes required to be paid by the Company and each Company Tax Group
for the periods covered thereby and all Taxes shown to be due on such Tax
Returns have been timely paid; (iii) all Taxes (whether or not shown on any Tax
Return) owed by the Company while a member of the Coventry Tax Group or by the
Coventry Tax Group have been timely paid; (iv) during the period while the
Company has been a member of the Coventry Tax Group, none of the Company or any
member of the Coventry Tax Group has waived or been requested to waive any
statute of limitations in respect of Taxes which waiver is currently in effect;
(v) there is no action, suit, investigation, audit, claim or assessment pending
or proposed or threatened with respect to Taxes of the Company or the Coventry
Tax Group; (vi) all deficiencies asserted or assessments made as a result of any
examination of the Tax Returns referred to in clause (i) have been paid in full;
(vii) all Tax Sharing Arrangements and Tax indemnity arrangements relating to
the Company or any subsidiary of the Company (other than this Agreement) will
terminate prior to the Closing Date and neither the Company nor any subsidiary
of the Company will have any liability thereunder on or after the Closing Date;
(viii) there are no liens for Taxes upon the assets of the Company except liens
relating to current Taxes not yet due; (ix) all Taxes which the Company or the
Coventry Tax Group are required by law to withhold or to collect for payment
have been duly withheld and collected, and have been paid or accrued, reserved
against and entered on the books of the Company; (x) the Company has not been a
member of any Company Tax Group other than the Coventry Tax Group; (xi) there
are no Tax rulings, requests for rulings, or closing agreements (as described in
Section 7121 of the Code or any corresponding provision of state or local Tax
law) relating to the Company or the Coventry Tax Group which could affect the
Company's liability for Taxes for any period after the Closing Date; (xii)
during the period while the Company has been a member of the Coventry Tax Group,
no claim has ever been made by a Taxing authority in a jurisdiction where the
Company has never paid Taxes or filed Tax Returns asserting that the Company is
or may be subject to Taxes assessed by such jurisdiction; (xiii) except as
contained in or contemplated by this Agreement, no intercompany obligation (as
described in Treas. Reg. ss. 1.1502-13(g)) between or among the Seller, the
Company, or any member of the Coventry Tax Group will remain outstanding
following the Closing, (xiv) none of the directors, officers or any employee
with responsibility for Taxes of the Seller, the Company or any member of the
Coventry Tax Group anticipates that, based on facts known to such person, any
taxing authority is likely to issue a notice of proposed deficiency or similar
notice of intention to assess Taxes against the Company or any member of a
Company Tax Group; (xv) since the Balance Sheet Date, none of Seller, the
Company or any Coventry Tax Group member has taken any action not in accordance
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with past practice that would have the effect of deferring any Tax liability
for the Company or any subsidiary of the Company from any taxable period ending
on or before the Closing Date to any taxable period ending after the Closing
Date; (xvi) none of the income recognized, for federal, state, local or foreign
income Tax purposes, by the Company during the period beginning on Balance Sheet
Date and ending on the Closing Date has been or will be derived from
transactions (y) other than in the ordinary course of business, or (z) of a type
not reflected on the relevant Tax Returns for the taxable period ending on
December 31, 1997; (xvii) no income or gain of the Company has been deferred
pursuant to Treasury Regulation ss. 1.1502-13 or -14, or Temporary Treasury
Regulation ss. 1.1502-13T or -14T, or Proposed Treasury Regulation ss. 1.1502-13
or -14; (xviii) no excess loss account (as described in Treasury Regulation ss.
1.1502-14, 1.1502-19, and 1.1502-32), exists with respect to the Company, (xix)
during the period while the Company has been a member of the Coventry Tax Group,
no power of attorney which is currently in force has been granted with respect
to any matter relating to Taxes of the Company; (xx) the Company has not
participated in or cooperated with an international boycott, within the meaning
of Section 999 of the Code, nor has any such corporation had operations which
are or may hereafter become reportable under Section 999 of the Code; (xxi)
during the period while the Company has been a member of the Coventry Tax Group,
the Company has not disposed of property in a transaction being accounted for
under the installment method pursuant to Section 453 or 453A of the Code; (xxii)
the Company has no corporate acquisition indebtedness, as described in Section
279(b) of the Code; and (xxiii) neither the Company nor any subsidiary of the
Company has filed a consent under Section 341(f) of the Code or any comparable
provision of state statutes.
(b) No transaction contemplated by this Agreement is subject
to withholding under Section 1445 of the Code (relating to "FIRPTA") and no
stock transfer Taxes, sales Taxes, use Taxes, real estate transfer or gains
Taxes, or other similar Taxes will be imposed on the transactions contemplated
by this Agreement.
(c) No payment or other benefit, and no acceleration of the
vesting of any options, payments or other benefits, will be, as a direct or
indirect result of the transactions contemplated by this Agreement, an "excess
parachute payment" to a "disqualified individual" as those terms are defined in
Section 280G of the Code and the Treasury Regulations thereunder. Except as set
forth on Schedule 4.6, no payment or other benefit, and no acceleration of the
vesting of any options, payments or other benefits, will, as a direct or
indirect result of the transactions contemplated by this Agreement, be (or under
Section 280G of the Code and the Treasury Regulations thereunder be presumed to
be) a "parachute payment" to a "disqualified individual" as those terms are
defined in Section 280G of the Code and the Treasury Regulations thereunder,
without regard to whether such payment or acceleration is reasonable
compensation for personal services performed or to be performed in the future.
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(d) Seller is the common parent of an affiliated group (as
defined in Section 1504(a) of the Code) in which the Company is a member
immediately prior to the Closing Date.
4.7. AFFILIATED SERVICES. Schedule 4.7 sets forth a
description of all material services provided to the Company by any Seller Group
Member, Principal Life Insurance Company, or any Affiliate of Principal Life
Insurance Company.
4.8. GOVERNMENTAL LICENSES AND PERMITS. The Company owns,
holds or possesses all licenses, certificates of authority, certifications,
registrations, franchises, permits, privileges, immunities, approvals, and other
authorizations from a Governmental Body (including, without limitation, the
Florida Department of Insurance, the Alabama Department of Insurance, the Health
Care Financing Administration of the United States Department of Health and
Human Services, the Florida Agency for Health Care Administration, and the
United States Office of Personnel Management) which are necessary to entitle it
to own or lease, operate and use its assets and to carry on and conduct its
business substantially as currently conducted (herein collectively called
"Governmental Permits"). Schedule 4.8 sets forth a list and brief description of
each Governmental Permit. Complete and correct copies of all of the Governmental
Permits have heretofore been delivered to Buyer by Seller.
Except as set forth in Schedule 4.8, (i) the Company has
fulfilled and performed its obligations under each of the Governmental Permits,
and no event has occurred or condition or state of facts exists which
constitutes or, after notice or lapse of time or both, would constitute a
material breach or default under any such Governmental Permit or which permits
or, after notice or lapse of time or both, would permit revocation or
termination of any such Governmental Permit, or which might materially adversely
affect the rights of the Company under any such Governmental Permit; (ii) no
notice of cancellation, of default or of any dispute concerning any Governmental
Permit, or of any event, condition or state of facts described in the preceding
clause, has been received by, or is known to, Seller or the Company; and (iii)
each of the Governmental Permits is valid, subsisting and in full force and
effect and will continue to be in full force and effect immediately after the
Closing, in each case without (x) the occurrence of any breach, default or
forfeiture of rights thereunder, or (y) the consent, approval, or act of, or the
making of any filing with, any Governmental Body.
4.9. REAL PROPERTY.
(a) Other than as set forth in Schedule 4.9(A), the Company
owns no parcels of real property (the "Owned Real Property") and is subject to
no agreement, commitment or obligation with respect to the acquisition or sale
of any interest therein.
(b) Schedule 4.9(B) sets forth a list and brief description of
each lease or similar agreement (showing the parties thereto, annual rental,
expiration date, renewal and
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purchase options, the location of the real property covered by, and the space
occupied under, such lease or other agreement) under which the Company is lessee
of, or holds, uses or operates, any real property owned by any third Person (the
"Leased Real Property").
(c) Simultaneously with Closing, any and all leases or similar
agreements relating to Leased Real Property shall either be (i) assigned to and
assumed by HCUSA or (ii) terminated by the Company. In no case shall Buyer
acquire any Leased Real Property or, on and after the Closing, be bound by any
lease or agreement in connection therewith.
4.10. PERSONAL PROPERTY. At the Closing, the Company shall
neither own nor lease any personal property and furthermore shall not be subject
to any obligations in connection therewith other than as specifically set forth
on the Agreed Balance Sheet.
4.11. INTELLECTUAL PROPERTY; SOFTWARE. (a) Schedule 4.11
contains a list and description (showing in each case any product, device,
process, service, business or publication covered thereby, the registered or
other owner, expiration date and number, if any) of all Copyrights, Patent
Rights, and Trademarks owned by, licensed to or used by the Company.
(b) Except as set forth in Schedule 4.11, (i) except as such
infringement that would not have a Material Adverse Effect as to the Company, no
infringement of any Intellectual Property of any other Person has occurred or
results in any way from the operations, activities, products, Software,
equipment, machinery or processes used in the Company's business; (ii) no claim
of any infringement of any Intellectual Property of any other Person has been
made or asserted in respect of the operations of the Company's business; (iii)
no claim of invalidity of any Copyright, Trademark or Patent Right, Software or
Trade Secret has been made; (iv) no proceedings are pending or, to the knowledge
of the Company, threatened which challenge the validity, ownership or use of any
Intellectual Property; and (v) neither Seller nor the Company has had notice of,
or knowledge of any basis for, a claim against Seller that the operations,
activities, products, software, equipment, machinery or processes of the Company
infringe any Intellectual Property of any other Person.
4.12. ACCOUNTS RECEIVABLE. All accounts receivable of the
Company have arisen from bona fide transactions by the Company in the ordinary
course of business. All Receivables shall be assigned to HCUSA prior to the
Closing.
4.13. EMPLOYEE BENEFIT PLANS. (a) Set forth in Schedule
4.13(A) is a true and complete list of each "employee pension benefit plan" (as
such term is defined in Section 3(2) of ERISA) maintained by the Company or (in
the case of a plan subject to Title IV of ERISA) an ERISA Affiliate, or with
respect to which the Company or (in the case of a plan subject to Title IV of
ERISA) an ERISA Affiliate is or will be required to make any payment, or which
provides or will provide benefits to present or prior employees of the Company
or (in the case of a plan
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subject to Title IV of ERISA) an ERISA Affiliate due to such employment (the
"Pension Plans"). Set forth in Schedule 4.13(A) is a true and complete list of
each "employee welfare benefit plan" (as such term is defined in Section 3(1) of
ERISA) maintained by the Company, or with respect to which the Company is or
will be required to make any payment, or which provides or will provide benefits
to present or prior employees of the Company due to such employment (the
"Welfare Plans") (the Pension Plans and Welfare Plans being the "ERISA Benefit
Plans"). Except for the Principal Health Care, Inc. Pension Plan (the "Prior
Pension Plan"), Seller has no knowledge of any "employee pension benefit plan"
(as such term is defined in Section 3(2) of ERISA) ever subject to Section 302
of ERISA and (i) maintained by the Company or an ERISA Affiliate at any time
during the six-year period prior to the Closing Date, or (ii) with respect to
which the Company or an ERISA Affiliate was required to make any payment at any
time during such period. For purposes of this Agreement, "ERISA Affiliate" means
(i) any corporation which at any time on or before the Closing Date and after
April 1, 1998 is or was a member of the same controlled group of corporations
(within the meaning of Section 414(b) of the Code) as the Company; (ii) any
partnership, trade or business (whether or not incorporated) which at any time
on or before the Closing Date and after April 1, 1998 is or was under common
control (within meaning of section 414(c) of the Code) with the Company; and
(iii) any entity which at any time on or before the Closing Date and after April
1, 1998 is or was a member of the same affiliated service group (within the
meaning of Section 414(m) of the Code) as either the Company, any corporation
described in clause (i) or any partnership, trade or business described in
clause (ii) of this paragraph. None of the Pension Plans is or was a
"multiemployer plan" (as such term is defined in Section 3 (3) of ERISA).
(b) Other than those listed in Schedule 4.13(A), set forth in
Schedule 4.13(B) is a true and complete list of each of the following to which
the Company is a party or with respect to which it is or will be required to
make any payment (the "Non-ERISA Commitments"):
(i) each retirement, savings, profit sharing, deferred
compensation, severance, stock ownership, stock purchase, stock option,
performance, bonus, incentive, vacation or holiday pay, hospitalization
or other medical, disability, life or other insurance, or other
welfare, benefit or fringe benefit plan, policy, trust, understanding
or arrangement of any kind, whether written or oral; and
(ii) each employee collective bargaining agreement and each
agreement, understanding or arrangement of any kind, whether written or
oral, with or for the benefit of any present or prior officer,
director, employee, agent or consultant (including, without limitation,
each employment, compensation, deferred compensation, severance or
consulting agreement or arrangement, confidentiality agreement,
covenant not to compete, and any agreement or arrangement associated
with a change in ownership or control of the Company, but excluding
employment agreements terminable by the Company without premium or
penalty
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or notice of 30 days or less under which the only monetary obligation
of the Company is to make current wage or salary payments and provide
current fringe benefits).
The Company has delivered to Buyer correct and complete copies of (i) all
written Non-ERISA Commitments and (ii) all insurance and annuity policies and
contracts and other documents relevant to any Non-ERISA Commitment. Schedule
4.13(B) contains a complete and accurate description of all oral Non-ERISA
Commitments. Except as disclosed on Schedule 4.13(A) or Schedule 4.13(B), none
of the ERISA Benefit Plans or the Non-ERISA Commitments is subject to the law of
any jurisdiction outside of the United States of America.
(c) The Company (x) has delivered to Buyer with respect to
each ERISA Benefit Plan maintained by the Company, or with respect to which the
Company is or will be required to make any payment, or which provides or will
provide benefits to present or prior employees of the Company due to such
employment, and (y) shall deliver to Buyer no later than five business days
after the date hereof with respect to the Prior Pension Plan, correct and
complete copies, where applicable, of (i) all plan documents and amendments
thereto, trust agreements and amendments thereto and insurance and annuity
contracts and policies, (ii) the current summary plan description, (iii) the
Annual Reports (Form 5500 series) and accompanying schedules, as filed, for the
most recently completed plan year for which such reports have been filed, (iv)
the financial statements for the most recently completed plan year for which
such statements have been prepared, (v) the actuarial reports for the most
recently begun plan year for which such reports exist, (vi) the most recent
determination letter issued by the IRS and (vii) all correspondence with the
IRS, Department of Labor and Pension Benefit Guaranty Corporation concerning any
controversy that might reasonably be expected to have a Material Adverse Effect
on the Company. Each report described in clause (v) of the preceding sentence
accurately describes the funded status of the plan to which it relates and
subsequent to the date of such report there has been no adverse change in the
funding status or financial condition of such plan.
(d) Each Pension Plan that is intended to qualify under
Section 401(a) of the Code has been determined to be so qualified by the IRS (or
an application for such determination has been, or as soon as practicable
hereafter will be, filed with the IRS), and no circumstance has occurred or
exists which might cause such plan to cease being so qualified.
(e) There is no pending or, to the best knowledge of Seller or
the Company, threatened claim in respect of any of the ERISA Benefit Plans other
than claims for benefits in the ordinary course of business. Except as set forth
in Schedule 4.13(E), each of the ERISA Benefit Plans (i) has been administered,
in all material respects, in accordance with its terms and (ii) complies in
form, and has been administered, in all material respects, in accordance, with
the requirements of ERISA and, where applicable, the Code. The Company and each
ERISA Affiliate has complied with the health care continuation requirements of
Part 6 of Title I of
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ERISA. The Company has no obligation under any ERISA Benefit Plans or otherwise
to provide health or other welfare benefits to any prior employees or any other
person, except as required by Part 6 of Title I of ERISA. The consummation of
the transactions contemplated by this Agreement will not result in an increase
in the amount of compensation or benefits or accelerate the vesting or timing of
payment of any compensation or benefits payable by the Company to or in respect
of any participant.
(f) Neither the Company nor, to the best knowledge of Seller
and the Company, any other "disqualified person" (within the meaning of Section
4975 of the Code) or "party in interest" (within the meaning of Section 3(14) of
ERISA) has taken any action with respect to any ERISA Benefit Plan which could
subject any such plan (or its related trust) or the Company or any officer,
director or employee of any of the foregoing to the penalty or tax under Section
502(i) or Section 502(l) of ERISA or Section 4975 of the Code, which would have
a Material Adverse Effect.
(g) The Company has no knowledge of any liability or potential
liability that might reasonably be expected to have a Material Adverse Effect on
the Company, whether direct or indirect, contingent or otherwise, under Sections
412 or 401(a)(29) of the Code or Title IV of ERISA.
4.14. EMPLOYEE RELATIONS.
(a) Except as set forth in Schedule 4.14(A), (i) to the best
knowledge of Seller and the Company, the Company is not involved in any
transaction or other situation with any employee, officer, director or Affiliate
of the Company which may be generally characterized as a "conflict of interest",
including, but not limited to, direct or indirect interests in the business of
competitors, suppliers or customers of the Company, and (ii) there are no
situations with respect to the Company which, without limitation hereto,
involved or involves (A) the use of any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses related to
political activity, (B) the making of any direct or indirect unlawful payments
to government officials or others from corporate funds or the establishment or
maintenance of any unlawful or unrecorded funds, (C) the violation of any of the
provisions of The Foreign Corrupt Practices Act of 1977, or any rules or
regulations promulgated thereunder, (D) the receipt of any illegal discounts or
rebates or any other violation of the antitrust laws or (E) any investigation by
the Securities and Exchange Commission or any other federal, foreign, state or
local government agency or authority.
(b) Except as set forth in Schedule 4.14(B), since April 1,
1998, the Company has not, directly or indirectly, purchased, leased from others
or otherwise acquired any material property or obtained any material services
from, or sold, leased to others or otherwise disposed or any material property
or furnished any material services to (except with respect to
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remuneration for services rendered as a director, officer or employee of the
Company), in the ordinary course of business or otherwise, (i) Seller, (ii) any
other Affiliate of the Company, (iii) any Person who is an officer or director
of the Company or (iv) any Associate of any person referred to in clause (i),
(ii) or (iii) above.
(c) Except as set forth in Schedule 4.14(C), the Company has
complied with all applicable laws, rules and regulations which relate to prices,
wages, hours, discrimination in employment and collective bargaining and is not
liable for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing. The Company is in compliance with the requirements of
the Workers Adjustment and Retraining Notification Act ("WARN") and has no
liabilities pursuant to WARN. Seller and the Company believe that the Company's
relations with the employees of the Company are satisfactory. The Company is not
a party to, and the Company is not affected by or threatened with, any dispute
or controversy with a union or with respect to unionization or collective
bargaining involving the employees of the Company. The Company is not materially
affected by any dispute or controversy with (i) any employee of the Company nor
(ii) any union or with respect to unionization or collective bargaining
involving any supplier or customer of the Company. Schedule 4.14(C) also sets
forth a description of any union organizing or election activities involving any
non-union employees of the Company which have occurred since September 1, 1997
or, to the knowledge of Seller or the Company, are threatened.
4.15. MEMBERS, GROUPS, PROVIDERS AND OTHER CONTRACTS.
(a) Schedule 4.15(A) sets forth a complete and accurate list
of all Group Services Agreements in force and effect as of the date hereof.
There are no Persons covered under any Group Service Agreements other than
Members.
(b) Schedule 4.15(B) sets forth a complete and accurate list
of all Individual Services Agreements in force and effect as of the date hereof.
There are no Persons covered under any Individual Service Agreements other than
Members.
(c) Schedule 4.15(C) sets forth a complete and accurate list
of all Provider Services Agreements in effect as of the date hereof, or which,
as the result of any offer made or accepted by the Company, may otherwise be in
effect on or after the Closing Date.
(d) Other than as set forth in Schedule 4.15(D), there are no
Guaranteed Rate Agreements in effect as of the date hereof, or which, as the
result of any offer made or accepted by the Company, may otherwise be in effect
on or after the Closing Date.
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(e) Schedule 4.15(E) sets forth a complete and accurate list
of all Variable Rate Agreements in effect as of the date hereof, or which, as
the result of any offer made or accepted by the Company, may otherwise be in
effect on or after the Closing Date.
(f) Except as set forth on Schedule 4.15(F), since January 1,
1998, (i) no Member has asserted a grievance in writing pursuant to the terms
and conditions of the applicable Individual or Group Service Agreement which
remains unresolved in accordance with both the Company's internal grievance
policies and with the applicable provision of Florida or Alabama law, as the
case may be, and (ii) no Provider or Group has given written notice to Seller or
the Company of termination of its relationship with the Company.
(g) Except as set forth in Schedule 4.15(G) or any other
Schedule hereto, the Company is not a party to or bound by any contract, loan,
note, guaranty, lease, mortgage, commitment, instrument, understanding or
agreement of any nature whatsoever other than for the purchase or lease of
office supplies and equipment or for maintenance services that will not bind the
Company on or after the Closing.
(h) Except as set forth in Schedule 4.15(H) or in any other
Schedule hereto, each of the leases, contracts and other agreements listed in
Schedules 4.15(A), 4.15(B), 4.15(C), 4.15(G) and 4.15(I) (collectively, the
"Company Agreements") constitutes a valid and binding obligation of the parties
thereto and is in full force and effect and (except as set forth in Schedule 4.1
and except for those Company Agreements which by their terms will expire prior
to the Closing Date or are otherwise terminated prior to the Closing Date in
accordance with the provisions hereof) will continue in full force and effect
after the Closing, in each case without breaching the terms thereof or resulting
in the forfeiture or impairment of any rights thereunder and without the
consent, approval or act of, or the making of any filing with, any other party.
Except as set forth in Schedule 4.15(H), the Company has fulfilled and performed
its obligations under each of the Company Agreements, and the Company is not in,
or alleged to be in, breach or default under, nor is there or is there alleged
to be any basis for termination of, any of the Company Agreements and, to the
knowledge of each of Seller and the Company, no other party to any of the
Company Agreements has breached or defaulted thereunder, and no event has
occurred and no condition or state of facts exists which, with the passage of
time or the giving of notice or both, would constitute such a default or breach
by the Company or, to the knowledge of each of Seller and the Company, by any
such other party. Except as set forth in Schedule 4.15(H), the Company is not
currently renegotiating any of the Company Agreements or paying liquidated
damages in lieu of performance thereunder. Complete and correct copies of each
of the Company Agreements have heretofore either (i) been delivered to Buyer by
Seller or (ii) within five (5) business days following the date hereof shall be
made available to Buyer by Seller.
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(i) Except as set forth in Schedule 4.15(I), as of the Closing
Date, the Company will not be a party to or bound by any contracts or agreements
with or commitments to brokers, agents, administrators, or intermediaries for
any Groups.
4.16. NO VIOLATION, LITIGATION OR REGULATORY ACTION. (a)
Except as set forth in Schedule 4.16:
(i) the assets of the Company and their uses comply in all
material respects with all applicable Requirements of Laws and Court
Orders;
(ii) the Company has complied in all material respects with
all Requirements of Laws and Court Orders which are applicable to its
assets or business;
(iii) Other than proposed legislative and regulatory changes
and business conditions affecting the health maintenance industry in
Florida generally, there are no lawsuits, claims, suits, proceedings,
regulatory actions, or investigations pending or, to the knowledge of
Seller or the Company, threatened against or affecting the Company nor,
to the knowledge of Seller or the Company, is there any basis for any
of the same, and there are no lawsuits, suits or proceedings pending in
which Seller is the plaintiff or claimant;
(iv) there is no action, suit or proceeding pending or, to the
knowledge of Seller or the Company, threatened which questions the
legality or propriety of the transactions contemplated by this
Agreement; and
(v) to the knowledge of Seller or the Company, no legislative
or regulatory proposal or other proposal for the change in any
Requirements of Law or the interpretation thereof has been adopted or
is pending which could materially adversely affect the Company other
than as may be applicable to health maintenance organizations
generally.
(b) To the knowledge of each of Seller and the Company,
neither the Seller nor the Company, nor any officer, employee or agent of the
Seller or the Company or any other Person acting on their behalf, has, directly
or indirectly, since January 1, 1997, given or agreed to give any gift or
similar benefit to any customer, supplier, governmental employee or other Person
who is or may be in a position to help or hinder the business of the Company (or
assist either the Seller or the Company in connection with any actual or
proposed transaction) which: (i) subjects the Company to any damage or penalty
in any civil, criminal or governmental litigation or proceeding; (ii) if not
given in the past, might have had an adverse effect on the assets, business or
operations of the Company; (iii) if not continued in the future, can be
reasonably
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expected to adversely affect the assets, business or operations of the Company
or which can be reasonably expected to subject the Company to suit or penalty in
any private or governmental litigation or proceeding; (iv) for any of the
purposes described in Section 162(c) of the Code, or (v) for establishment or
maintenance of any concealed fund or concealed bank account.
(c) To the knowledge of each of Seller and the Company, (i)
neither the Seller nor the Company, nor any officer, employee or agent of the
Seller or the Company or any other Person acting on their behalf, has, directly
or indirectly, engaged in conduct which subjects the Company to any Loss,
sanction or penalty in any civil, criminal or governmental litigation or
proceeding, or any qui tam proceeding pursuant to the False Claims Act, 31
U.S.C. ' 3729 et seq.; and, (ii) the Company has at no time been subject to the
terms of a consent decree, order, agreement, stipulation, or judgment in
connection with allegations of or investigations with respect to actual or
potential violation of such statutes.
4.17. ENVIRONMENTAL MATTERS. Except as set forth in Schedule
4.17:
(i) the operations of the Company comply in all material
respects with all applicable Environmental Laws;
(ii) the Company has obtained all environmental, health and
safety Governmental Permits necessary for the operation of its business in all
material respects as operated prior to Closing, and all such Governmental
Permits are in full force and effect and the Company is in compliance with all
terms and conditions of such permits;
(iii) to the Company's knowledge, none of the Company, nor any
of the present Company Property or operations, or the past Company Property or
operations, is subject to any on-going investigation by, order from or agreement
with any Person (including without limitation any prior owner or operator of
Company Property) respecting (i) any Environmental Law, (ii) any Remedial Action
or (iii) any claim of Losses arising from the Release or threatened Release of a
Contaminant into the environment;
(iv) the Company is not subject to any judicial or
administrative proceeding, order, judgment, decree or settlement alleging or
addressing a violation of or liability under any Environmental Law;
(v) the Company has not:
(a) reported a Release of a hazardous substance
pursuant to Section 103(a) of CERCLA, or any state equivalent;
(b) filed a notice pursuant to Section 103(c) of
CERCLA;
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(c) filed notice pursuant to Section 3010 of RCRA,
indicating the generation of any hazardous waste, as that term
is defined under 40 CFR Part 261 or any state equivalent; or
(d) filed any notice under any applicable
Environmental Law reporting a substantial violation of any
applicable Environmental Law;
(vi) there is not now, nor to the knowledge of Seller or the
Company has there ever been, on or in any Company Property:
(a) any treatment, recycling, storage or disposal of
any hazardous waste, as that term is defined under 40 CFR Part
261 or any state equivalent, that requires or required a
Governmental Permit pursuant to Section 3005 of RCRA; or
(b) any underground storage tank or surface
impoundment or landfill or waste pile.
(vii) there is not now on or in any Company Property any
polychlorinated biphenyls (PCB) used in pigments, hydraulic oils, electrical
transformers or other equipment;
(viii) the Company has not received any notice or claim to the
effect that it is or may be liable to any Person as a result of the Release or
threatened Release of a Contaminant;
(ix) no Environmental Encumbrance has attached to any Company
Property; and
(x) any asbestos-containing material which is on or part of
any Company Property is in good repair according to the current standards and
practices governing such material, and its presence or condition does not
violate any currently applicable Environmental Law.
4.18. INSURANCE. Schedule 4.18 sets forth a list and brief
description (including nature of coverage, limits, deductibles, premiums and the
loss experience for the most recent five years with respect to each type of
coverage) of all policies of insurance maintained, owned or held by or for the
benefit of the Company on the date hereof. Seller shall (and shall cause the
Company to) keep or cause such insurance or comparable insurance to be kept in
full force and effect through the Closing Date. Seller has complied (or has
caused the Company to comply) with each of such insurance policies and has not
failed to give any notice or present any claim thereunder in a due and timely
manner.
4.19. SERVICE CONTRACTS. Except as set forth in Schedule 4.19,
there exists no actual or threatened termination, cancellation or limitation of,
or any modification or change in,
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the business relationship of the Company with any Group whose Members
individually or in the aggregate are material to the Company or the operation of
its business, and there exists no present or future condition or state of facts
or circumstances involving a Group or Members which Seller or the Company can
now reasonably foresee would materially adversely affect the Company or prevent
the conduct of its business after the consummation of the transactions
contemplated by this Agreement in essentially the same manner in which such
business has heretofore been conducted, except to the extent contemplated
hereby.
4.20. BANK ACCOUNTS; POWERS OF ATTORNEY. Schedule 4.20 sets
forth a complete and correct list of all bank accounts and safe deposit boxes of
the Company and persons authorized to sign or otherwise act with respect thereto
as of the date hereof and a complete and correct list of all persons holding a
general or special power of attorney granted by the Company and a complete and
correct copy thereof.
4.21. NO FINDER. Neither Seller, the Company nor any Person
acting on its behalf has paid or become obligated to pay any fee or commission
to any broker, finder or intermediary for or on account of the transactions
contemplated by this Agreement.
4.22. DISCLOSURE. None of the representations or warranties of
Seller or the Company contained herein, none of the information contained in the
Schedules referred to in this Article IV, and none of the other information or
documents furnished to Buyer or any of its representatives by Seller or the
Company or their representatives pursuant to the terms of this Agreement, is
false or misleading in any material respect or omits to state a fact herein or
therein necessary to make the statements herein or therein not misleading in any
material respect. There is no fact which adversely affects or in the future is
likely to adversely affect the Company or its business in any material respect
other than those which similarly adversely affect or are likely to similarly
adversely affect other HMOs in the health maintenance markets served by the
Company in a material respect which has not been set forth or referred to in
this Agreement or the Schedules hereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND OF BCBSF
As an inducement to Seller to enter into this Agreement and to
consummate the transactions contemplated hereby, Buyer, with respect to Sections
5.1 through 5.4 and Section 5.7, and BCBSF, with respect to Sections 5.5 through
5.7, hereby individually represents and warrants to Seller and the Company and
agrees as follows:
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5.1. ORGANIZATION OF BUYER. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida and has full corporate power and authority to own or lease and to
operate and use its properties and assets and to carry on its business as now
conducted.
5.2. AUTHORITY OF BUYER. Buyer has full power and authority to
execute, deliver and perform this Agreement and all of the Buyer Ancillary
Agreements. The execution, delivery and performance of this Agreement and the
Buyer Ancillary Agreements by Buyer have been duly authorized and approved by
Buyer's board of directors and do not require any further authorization or
consent of Buyer or its stockholders. This Agreement has been duly authorized,
executed and delivered by Buyer and is the legal, valid and binding agreement of
Buyer enforceable in accordance with its terms, and each of the Buyer Ancillary
Agreements has been duly authorized by Buyer and upon execution and delivery by
Buyer will be a legal, valid and binding obligation of Buyer enforceable in
accordance with its terms.
5.3. NO FINANCING CONTINGENCY. At Closing, Buyer will have
cash or other liquid assets sufficient to pay the Purchase Price hereunder.
5.4. INVESTMENT REPRESENTATION. The Shares are being acquired
by Buyer for its own account for investment, and not with a view to the sale or
distribution of any part thereof without registration under the Securities Act
of 1933 or pursuant to an applicable exemption therefrom.
5.5. ORGANIZATION OF BCBSF. BCBSF is a non-profit corporation
duly organized, validly existing and in good standing under the laws of the
State of Florida and has full corporate power and authority to own or lease and
to operate and use its properties and assets and to carry on its business as now
conducted.
5.6. AUTHORITY OF BCBSF. BCBSF has full power and authority to
execute, deliver and perform this Agreement. The execution, delivery and
performance of this Agreement by BCBSF have been duly authorized and approved by
BCBSF's Executive Committee of the board of directors and do not require any
further authorization or consent of BCBSF. This Agreement has been duly
authorized, executed and delivered by BCBSF and is the legal, valid and binding
agreement of BCBSF enforceable in accordance with its terms.
5.7. NO FINDER. Neither Buyer, nor BCBSF nor any Person acting
on its behalf has paid or become obligated to pay any fee or commission to any
broker, finder or intermediary for or on account of the transactions
contemplated by this Agreement other than to Goldman Sachs whose fees and
expenses, to the extent payable, shall be paid by Buyer.
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ARTICLE VI
ACTION PRIOR TO THE CLOSING DATE
The respective parties hereto covenant and agree to take the
following actions between the date hereof and the Closing Date:
6.1. INVESTIGATION OF THE COMPANY BY BUYER. Seller shall
afford and cause the Company to afford to the officers, employees and authorized
representatives of Buyer (including its independent public accountants and
attorneys) complete access during normal business hours to the offices,
properties, employees and business and financial records (including computer
files, retrieval programs and similar documentation and such access and
information that may be necessary in connection with an environmental audit) of
the Company to the extent Buyer shall deem necessary or desirable and shall
furnish, and shall cause the Company to furnish, to Buyer or its authorized
representatives such additional information concerning the assets, business and
the operations of the Company as shall be reasonably requested, including all
such information as shall be necessary to enable Buyer or its representatives to
verify the accuracy of the representations and warranties contained in this
Agreement, to verify that the covenants of Seller contained in this Agreement
have been complied with and to determine whether the conditions set forth herein
have been satisfied. Buyer agrees that such investigation shall be conducted in
such a manner as not to interfere unreasonably with the operations of the
Company. No investigation made by Buyer or its representatives hereunder shall
affect the representations and warranties of Seller hereunder.
6.2. PRESERVE ACCURACY OF REPRESENTATIONS AND WARRANTIES.
Except as specifically required or permitted hereunder to the contrary, each of
the parties hereto shall refrain from taking any action which would render any
representation or warranty contained in Article IV or V of this Agreement
inaccurate as of the Closing Date. Each party shall promptly notify the other of
any action, suit or proceeding that shall be instituted or threatened against
such party to restrain, prohibit or otherwise challenge the legality of any
transaction contemplated by this Agreement. Seller shall promptly notify Buyer
of (i) any lawsuit, claim, proceeding or investigation that may be threatened,
brought, asserted or commenced against the Company which would have been listed
in Schedule 4.16 if such lawsuit, claim, proceeding or investigation had arisen
prior to the date hereof and (ii) any other event or matter which becomes known
to Seller and would cause any other representation or warranty contained in
Article IV to be untrue in any material respect.
6.3. CONSENTS OF THIRD PARTIES; GOVERNMENTAL APPROVALS. (a)
Seller will (and will cause the Company to) act diligently and reasonably to
secure, before the Closing Date, the consent, approval or waiver, in form and
substance reasonably satisfactory to Buyer, from any party to any Company
Agreement required to be obtained to permit the consummation of the
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transactions contemplated by this Agreement or to otherwise satisfy the
conditions set forth in Article VIII; provided that (i) neither Seller, the
Company nor Buyer shall have any obligation to offer or pay any consideration in
order to obtain any such consents or approvals; and (ii) neither Seller nor the
Company shall make any agreement or understanding affecting the assets or
business of the Company after the Closing Date as a condition for obtaining any
such consents or waivers except with the prior written consent of Buyer. During
the period prior to the Closing Date, each of BCBSF and Buyer shall act
diligently and reasonably to cooperate with Seller and the Company to obtain the
consents, approvals and waivers contemplated by this Section 6.3(a).
(b) During the period prior to the Closing Date, Seller, BCBSF
and Buyer shall (and Seller shall cause the Company to) (and BCBSF shall cause
Buyer to) act diligently and reasonably, and shall cooperate with each other, in
making any required filing or notification and in securing any consents and
approvals of any Governmental Body required to be obtained by them in order to
permit the consummation of the transactions contemplated by this Agreement,
including, without limitation, any filings or responses required to insure
compliance with (i) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the published rules and regulations promulgated thereunder (the
"HSR Act"), (ii) Chapter 641 of the Florida Statutes, ss. 641.17 et seq., any
other provisions of the Florida Statutes applicable to health maintenance
organizations, and the applicable published rules and regulations promulgated
thereunder (the "Florida HMO Statutes"), (iii) Chapter 21A of the Alabama
Insurance Code, as amended, any other provisions of Alabama law applicable to
health maintenance organizations, and the applicable published rules and
regulations thereunder (the "Alabama HMO Statutes"), (iv) to the extent
applicable, the federal Health Maintenance Organization Act, 42 U.S.C. ss. 300e
et seq., as amended, and the published rules and regulations thereunder ("the
"Federal HMO Act"), (v) Section 1876 of the Social Security Act, as amended, and
the published rules and regulations promulgated thereunder, and (vi) the FEHBP.
Furthermore, Seller, BCBSF and Buyer shall (and Seller shall cause the Company
to) (and BCBSF shall cause Buyer to) act diligently and reasonably, and shall
cooperate with each other in securing any consents and approvals otherwise
satisfy the conditions set forth in Section 8.4; provided that neither Seller
nor the Company shall make any agreement or understanding affecting the assets
or business of the Company after the Closing as a condition for obtaining any
such consents or approvals except with the prior written consent of Buyer.
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6.4. OPERATIONS PRIOR TO THE CLOSING DATE.
(a) Except as otherwise expressly contemplated by this
Agreement, Seller shall cause the Company prior to the Closing Date to operate
and carry on its business only in the ordinary course and substantially as
presently operated. Consistent with the foregoing, Seller shall cause the
Company to (i) keep and maintain the assets and properties to be retained by
Company after the Closing in good operating condition and repair and (ii) prior
to the Closing, shall use its best efforts consistent with good business
practice to maintain the business organization of the Company intact and to
preserve the goodwill of the suppliers, contractors, licensors, employees,
customers, distributors and others having business relations with the Company.
(b) Except as expressly contemplated by this Agreement or
except with the express written approval of Buyer, Seller shall not permit the
Company to:
(i) amend its articles of incorporation or by-laws;
(ii) issue, grant, sell or encumber any shares of its capital
stock or other securities; issue, grant, sell or encumber any security,
option, warrant, put, call, subscription or other right of any kind,
fixed or contingent, that directly or indirectly calls for the
acquisition, issuance, sale, pledge or other disposition of any shares
of its capital stock or other securities or make any other changes in
the equity capital structure of the Company;
(iii) enter into any contract, agreement, undertaking or
commitment which, if in effect on the date hereof, would have been
required to be set forth in (a) Schedule 4.15(A), Schedule 4.15(B), or
Schedule 4.15(C), except as consistent with maintenance of efforts
provisions of Exhibit 6.4(B)(iii) or (b) Schedule 4.15(D) or Schedule
4.15(E), except with the prior written consent of Buyer or enter into
any contract which requires the consent or approval of any third party
to consummate the transactions contemplated by this Agreement; or make
any material modification to any existing Company Agreement or any
contract or agreement set forth in Schedule 4.15(D) or Schedule 4.15(E)
or to any Governmental Permits, other than changes made in good faith
to cure document deficiencies;
(iv) make any material change in the accounting policies
applied in the preparation of the financial statements contained in
Schedule 4.4;
(v) prepare or file any Tax Return inconsistent with past
practice or, on any such Tax Return, take any position, make any
election, or adopt any method that is inconsistent with positions
taken, elections made or methods used in preparing or filing similar
Tax Returns in prior periods (including, without
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limitation, positions, elections or methods which would have the effect
of deferring income to periods for which Buyer is liable pursuant to
Section 9.1(b) or accelerating deductions to periods for which Seller
is liable pursuant to Section 9.1(a);
(vi) file with either the Alabama Department of Insurance or
the Florida Department of Insurance or submit for filing any increase
or decrease, or amendment, modification or termination of any of
Company's rates now filed with the Alabama Department of Insurance or
the Florida Department of Insurance, as applicable;
(vii) notwithstanding the provisions of Section 6.4(b)(iii),
enter into, renew, extend, amend, modify, terminate or waive any rights
with respect to any Group Service Agreements or Individual Service
Agreements which provided for rate quotes which do not comply with the
Company's rates now filed with the Alabama Department of Insurance or
the Florida Department of Insurance, as applicable;
(viii) enter into any agreement or commitment to take any
action prohibited by this Section 6.4.
6.5. NOTIFICATION BY SELLER OF CERTAIN MATTERS. During the
period prior to the Closing Date, Seller will promptly advise Buyer in writing
of (i) any material adverse change in the Company or the condition of its assets
(including Members), properties or business, (ii) any notice or other
communication from any third Person alleging that the consent of such third
Person is or may be required in connection with the transactions contemplated by
this Agreement, and (iii) any material default under any Company Agreement or
event which, with notice or lapse of time or both, would become such a default
on or prior to the Closing Date and of which Seller or the Company has
knowledge.
6.6. LEGAL COMPLIANCE. (a) As promptly as practicable after
the date hereof, Buyer (and/or, to the extent required by applicable law, BCBSF)
and Seller shall file with the Federal Trade Commission and the Antitrust
Division of the Department of Justice the notifications and other information
required to be filed under the HSR Act, with respect to the transactions
contemplated hereby. Each party warrants that all such filings by it will be, as
of the date filed, true and accurate in all material respects and in accordance
with the requirements of the HSR Act. Each of Buyer (and/or, to the extent
required by applicable law, BCBSF) and Seller agrees to make available to the
other such information as each of them may reasonably request relative to its
business, assets and property as may be required of each of them to make such
filings and to provide any additional information requested by such agencies
under the HSR Act.
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(b) As promptly as practicable after the date hereof, Buyer
(and/or, to the extent required by applicable law, BCBSF) shall file with (i)
the Florida Department of Insurance the notifications and other information
required to be filed under the Florida HMO Statutes and (ii) the Alabama
Department of Insurance the notifications and other information required to be
filed under the Alabama HMO Statutes, with respect to the transactions
contemplated hereby. Seller agrees to make available (and to cause the Company
to make available) to Buyer and BCBSF such information as Buyer or BCBSF may
reasonably request relative to the Seller's and the Company's business, assets
and property as may be required to make such filings and to provide Buyer and
BCBSF with any additional information requested by either the Florida Department
of Insurance under the Florida HMO Statutes or the Alabama Department of
Insurance under the Alabama HMO Statutes.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. COVENANT NOT TO COMPETE OR SOLICIT BUSINESS. (a) In
furtherance of the sale of the Shares to Buyer hereunder and more effectively to
protect the value and goodwill of the assets and business of the Company, Seller
covenants and agrees that, for a period ending on the third anniversary of the
Closing Date, no Seller Group Member will directly or indirectly (whether as
principal, agent, independent contractor, partner or otherwise) (i) own, manage,
operate, control, participate in, perform services for, or otherwise carry on,
engage in the business of operating, underwriting, administering or managing
health maintenance organizations, health insurance, provider sponsored
organizations, or other health benefit plans in the State of Florida or in any
of the Alabama counties listed in Schedule 7.1(A), provided, however, that the
foregoing shall not prohibit any Seller Group Member from (1) managing or
reinsuring the Principal Life Insurance Company indemnity insurance business
subject to that certain Coinsurance Agreement and Management Services Agreement
as existing on the date hereof by and between Seller and Principal Life
Insurance Company or (2) continuing to operate a preferred provider network or
(ii) use the name "Principal" in connection with the business of operating,
underwriting, administering or managing health maintenance organizations, health
insurance, provider sponsored organizations, or other health benefit plans in
the State of Florida, or in any of the Alabama counties listed in Schedule
7.1(A), provided, however, that nothing set forth in this Section 7.1(a) shall
prohibit Seller or its Affiliates from owning 1,352,591 shares of common stock
of American Psych Systems, Inc., a Delaware corporation, 235,000 shares of
Series B preferred stock of Accordant Health Services, Inc., a Delaware
corporation, and not in excess of 5% in the aggregate of any class of capital
stock of any other corporation if such stock is publicly traded and listed on
any national or regional stock exchange or on the NASDAQ national market system.
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Seller further covenants and agrees that, for a period of
three years from the Closing Date, in the event that any Seller Group Member
acquires an interest, whether direct or indirect, in any entity that engages in
the business of operating, underwriting, administering or managing health
maintenance organizations, health insurance, provider sponsored organizations,
or other health benefit plans in the State of Florida, such entity's Florida
operations shall be terminated or the Seller Group Member's interest in such
entity shall be divested within a reasonable time (such termination shall occur
or a definitive agreement to divest shall be entered into, as the case may be,
within one hundred eighty (180) calendar days from the date of any Seller Group
Member's acquisition of an interest in the entity to be divested, and Seller
agrees to use its best efforts to close any such divestiture in no more than two
hundred seventy (270) days from the date of any Seller Group Member's
acquisition of an interest in the entity to be divested, subject to any
necessary regulatory approvals) following such acquisition.
(b) Additionally, also in furtherance of the sale of the
Shares to Buyer hereunder and more effectively to protect the value and goodwill
of the assets and business of the Company, Seller covenants and agrees that
neither Principal Life Insurance Company nor any Affiliate of Principal Life
Insurance Company shall fail to perform in accordance with the terms of the
Principal Agreement, a copy of which is attached hereto as Exhibit 3.4(0).
(c) Additionally, also in furtherance of the sale of the
Shares to Buyer hereunder and more effectively to protect the value and goodwill
of the assets and business of the Company, Seller covenants and agrees that,
from the Closing Date until the third anniversary of the Closing Date, no Seller
Group Member nor any of their respective Affiliates will solicit, induce or
attempt to persuade any Member or Group of the Company to terminate or fail to
renew coverage pursuant to any Group Services Agreement or Individual Services
Agreement, or to enroll or contract with another entity for health benefit
coverage; provided, however, that the foregoing restriction shall also apply to
any Member or Group of the Company as of the Closing Date for whom coverage is
renewed by or transferred to any Buyer Group Member.
(d) Additionally, also in furtherance of the sale of the
Shares to Buyer hereunder and more effectively to protect the value and goodwill
of the assets and business of the Company, for a period of three years from the
Closing Date, Seller covenants and agrees that neither Principal Life Insurance
Company nor any of its Affiliates will Actively Target any Member or Group
enrolled as of the Closing Date to (i) terminate or fail to renew coverage
pursuant to any Group Services Agreement or Individual Services Agreement, or,
(ii) enroll or contract with another entity for health benefit coverage;
provided, however, that the foregoing restriction shall also apply to any Member
or Group as of the Closing Date for whom coverage is renewed by or transferred
to any Buyer Group Member, and further provided, that nothing contained herein
shall be deemed to restrict general non-targeted advertising or the activities
of independent agents or brokers that are not Affiliates of Principal Life
Insurance Company. Principal Life Insurance Company will not provide brokers
with any Company customer list but
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Buyer acknowledges that brokers that are not Affiliates of Principal Life
Insurance Company may contact Company customers they have knowledge of and such
is not in the control of Principal Life Insurance Company, nor a violation of
this Agreement. Should Principal Life Insurance Company's compliance with laws
result in a violation of this Section 7.1(d), Principal Life Insurance Company
shall have no liability therefor.
(e) In addition, Seller covenants and agrees that neither it
nor any Seller Group Member will (i) divulge or make use of any Trade Secrets or
other confidential information of the Company after Closing and separate and
distinct from any Trade Secrets owned by Seller or another Seller Group Member
other than to disclose such secrets and information to Buyer or its Affiliates
or (ii) publicly disparage any Buyer Group Member in any manner.
(f) In the event Seller or any Seller Group Member violates
any of its obligations under this Section 7.1, Buyer or the Company may proceed
against it in law or in equity for such damages or other relief as a court may
deem appropriate. Seller acknowledges that a violation of this Section 7.1 may
cause Buyer or the Company irreparable harm which may not be adequately
compensated for by money damages. Seller therefore agrees that in the event of
any actual or threatened violation of this Section 7.1, Buyer or the Company
shall be entitled, in addition to other remedies that it may have, to a
temporary restraining order and to preliminary and final injunctive relief
against Seller or such Affiliate of Seller to prevent any violations of this
Section 7.1, without the necessity of posting a bond. The prevailing party in
any action commenced under this Section 7.1 shall also be entitled to receive
reasonable attorneys' fees and court costs. Prior to the institution of any
legal or equitable action alleging a violation or threatened violation of the
provisions of this Section 7.1, an aggrieved party shall provide written notice
to the other parties hereto of the violation or threatened violation, and the
parties shall negotiate in good faith to seek a remedy or to resolve such
violation or threatened violation during the five (5) business day period (or
such longer period as the parties may otherwise agree) following the delivery of
such notice prior to the institution of such action or making a claim for
indemnification under Section 10(b)(1)(ix).
(g) It is the intent and understanding of each party hereto
that if, in any action before any court or agency legally empowered to enforce
this Section 7.1, any term, restriction, covenant or promise in this Section 7.1
is found to be unreasonable and for that reason unenforceable, then such term,
restriction, covenant or promise shall be deemed modified to the extent
necessary to make it enforceable by such court or agency.
7.2. ACCESS TO RECORDS AFTER CLOSING. (a) For a period of six
years after the Closing Date, Seller and its representatives shall have
reasonable access to all of the books and records of the Company to the extent
that such access may reasonably be required by Seller in connection with matters
relating to or affected by the operations of the Company prior to the Closing
Date. Such access shall be afforded by Buyer upon receipt of reasonable advance
notice and during normal business hours. Seller shall be solely responsible for
any costs or expenses
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incurred by it pursuant to this Section 7.2. If Buyer shall desire to dispose of
any of such books and records prior to the expiration of such six-year period,
Buyer shall, prior to such disposition, give Seller a reasonable opportunity, at
Seller's expense, to segregate and remove such books and records as Seller may
select. Seller agrees that, except as required by Requirements of Law, it will
treat in confidence any such books and records of the Company to which it is
provided access pursuant to this Section 7.2 and further that any such
documents, materials and information shall not be communicated to any third
Person (other than to Seller's counsel, accountants or financial advisors),
except as required by Requirements of Law. Seller agrees not to use any
confidential information regarding the Company which is provided to the Seller
pursuant to this Section 7.2 in any manner whatsoever except solely for the
purposes disclosed to and approved in advance by the Company.
(b) For a period of six years after the Closing Date, Buyer
and its representatives shall have reasonable access to all of the books and
records relating to the Company which Seller or any of its Affiliates may retain
after the Closing Date. Such access shall be afforded by Seller and its
Affiliates upon receipt of reasonable advance notice and during normal business
hours. Buyer shall be solely responsible for any costs and expenses incurred by
it pursuant to this Section 7.2. If Seller or any of its Affiliates shall desire
to dispose of any of such books and records prior to the expiration of such
six-year period, Seller shall, prior to such disposition, give Buyer a
reasonable opportunity, at Buyer's expense, to segregate and remove such books
and records as Buyer may select. Buyer agrees not to use any confidential
information regarding the Company which is provided to the Buyer pursuant to
this Section 7.2 except in the ordinary course of its or the Company's business.
7.3. EMPLOYEES AND EMPLOYEE BENEFIT PLANS.
(a) The Company shall have no employees at the Closing Date.
No Buyer Group Member is obligated to offer employment to any individual
pursuant to this Agreement. However, the Buyer Group Members shall have the
right to interview and solicit for employment by any of them any employee of
Company.
(b) Effective on or prior to the Closing, the Company shall
cause all ERISA Benefit Plans and Non-ERISA Commitments maintained by the
Company to be terminated and shall terminate the Company's participation in all
other ERISA Benefit Plans and Non-ERISA Commitments. Notwithstanding anything
contained herein, in no event shall any Buyer Group Member assume or the Company
retain any liability whatsoever for or with respect to any ERISA Benefit Plan.
7.4. PRE-CLOSING PAYABLES AND RECEIVABLES. (a) From and after
the Closing Date, HCUSA shall receive all amounts due and payable to Company
accruing prior to the Closing
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other than any premium revenues accrued for services to be rendered after the
Closing (the "Receivables"), and shall pay all claims, expenses, liabilities and
other costs of and payable by Company accruing or incurred prior to the Closing,
other than the Medical Expenses payable from the Claims Reserve. Seller agrees
to cause HCUSA to process all such claims, expenses, liabilities and other costs
of the Company in a prompt and courteous manner. All Medical Expenses shall be
adjudicated and paid consistent with the practices and time frames utilized by
the Company prior to the Closing, and shall be subject to such additional
requirements as may be set forth in the Transition Services Agreements and in
Exhibit 7.4.
(b) In the event the Company shall receive any remittance from
or on behalf of any account debtor with respect to any Receivable, Buyer shall
cause the Company to endorse such remittance to the order of HCUSA and to
forward it to HCUSA immediately upon receipt thereof.
7.5. POST-CLOSING ADJUSTMENT TO PURCHASE PRICE TO REFLECT
NUMBER OF MEASURED LIVES.
(a) Pursuant to Section 2.5, a certified public accounting
firm selected jointly by Buyer and Seller shall determine the number of Measured
Lives as of the Collar Date. Such determination shall be made on or before the
later of (i) May 3, 1999 or (ii) 90 days after the Collar Date. In the event
that Buyer and Seller can not agree on a certified public accounting firm, a
certified public accounting firm shall be chosen by lot from among the following
firms: (i) Arthur Andersen, L.L.C. (ii) Deloitte & Touche; (iii) Ernst & Young;
(iv) Price Waterhouse Coopers and (v) KPMG Peat Marwick.
(b) In the event of a reduction to the Purchase Price pursuant
to Section 2.5(b), Seller shall transmit by wire transfer of immediately
available funds the Measured Lives Price Reduction Amount to such account as
specified by Buyer within five (5) business days of such determination.
(c) In the event of an increase to the Purchase Price pursuant
to Section 2.5(c), Buyer shall transmit (and BCBSF shall cause Buyer to
transmit) by wire transfer of immediately available funds the Measured Lives
Price Increase Amount to the account specified in Schedule 3.2 within five (5)
business days of such determination.
7.6. CONFIDENTIAL NATURE OF INFORMATION. Each of BCBSF, Buyer,
Seller and Company agrees that it will treat in confidence all documents,
materials and other information which it shall have obtained regarding the other
party during the course of the negotiations leading to the consummation of the
transactions contemplated hereby (whether obtained before or after the date of
this Agreement), the investigation provided for herein and the preparation of
this Agreement and other related documents, and, in the event the transactions
contemplated hereby shall not be consummated, each party will return to the
other party all copies of nonpublic
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documents and materials which have been furnished in connection therewith. Such
documents, materials and information shall not be communicated to any third
Person (other than, in the case of Buyer, to its counsel, accountants, financial
advisors or lenders, and in the case of Seller, to its counsel, accountants or
financial advisors). No Person shall use any confidential information in any
manner whatsoever except solely for the purpose of evaluating the proposed
purchase and sale of the Shares or the negotiation or enforcement of this
Agreement or any agreement contemplated hereby; provided that after the Closing
Buyer and the Company may use or disclose any confidential information related
to the Company or its assets or business provided, however, that any such use or
disclosure of such confidential information by Buyer or the Company shall be
within the scope of the ordinary course of their respective businesses. The
obligation of each party to treat such documents, materials and other
information in confidence shall not apply to any information which (i) is or
becomes lawfully available to such party from a source other than the furnishing
party, (ii) is or becomes available to the public other than as a result of
disclosure by such party or its agents, (iii) is required to be disclosed under
applicable law or judicial process, but only to the extent it must be disclosed,
or (iv) such party reasonably deems necessary to disclose to obtain any of the
consents or approvals contemplated hereby.
7.7. NO PUBLIC ANNOUNCEMENT. Neither Buyer, BCBSF nor Seller
shall (nor shall Seller permit the Company to), without the prior approval of
the other, make any press release or other public announcement concerning the
transactions contemplated by this Agreement, except as and to the extent that
any such party shall be so obligated by law or the rules of any stock exchange
or quotation system, in which case the other party shall be advised and the
parties shall use their best efforts to cause a mutually agreeable release or
announcement to be issued; provided that the foregoing shall not preclude
communications or disclosures necessary to implement the provisions of this
Agreement or to comply with the accounting and Securities and Exchange
Commission disclosure obligations.
7.8. EXPENSES. Each party hereto will pay all costs and
expenses incident to its negotiation and preparation of this Agreement and to
its performance and compliance with all agreements and conditions contained
herein on its part to be performed or complied with, including the fees,
expenses and disbursements of its counsel and accountants. Subject to the
indemnification provisions and other terms and conditions of this Agreement, (a)
all costs and expenses, if any, incurred by the Company in connection with this
Agreement and the transactions contemplated hereby to take place prior to and at
the Closing, including the fees, expenses and disbursements of the Company's
counsel and accountants shall be paid by Seller, and (b) all costs and expenses,
if any, incurred by the Company in connection with this Agreement after the
Closing and the transactions contemplated hereby to take place after the Closing
shall be paid by Buyer.
7.9. FURTHER ASSURANCES. From time to time following the
Closing, Seller shall execute and deliver, or cause to be executed and
delivered, to the Company such other bills of
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sale, deeds, endorsements, assignments and other instruments of conveyance and
transfer as Buyer or the Company may reasonably request or as may be otherwise
necessary to more effectively convey and transfer to, and vest in, the Company
and put the Company in possession of, any part of the assets or properties of
the Company not in its possession on the Closing Date; provided that nothing
herein shall relieve Seller of its obligations under Section 7.3.
7.10. POST-CLOSING ADJUSTMENT TO PURCHASE PRICE TO REFLECT THE
COMPANY'S FAILURE TO OBTAIN ENROLLMENT RATE INCREASE.
(a) In the event of the Company's failure to obtain the rate
increase provided for in Section 2.4(d), a certified public accounting firm
selected jointly by Buyer and Seller shall establish the adjustment to the
Purchase Price required therein ninety (90) calendar days following the first
anniversary date of the Closing. In the event that Buyer and Seller can not
agree on a certified public accounting firm, a certified public accounting firm
shall be chosen by lot from among the following firms: (i) Arthur Andersen,
L.L.C. (ii) Deloitte & Touche; (iii) Ernst & Young; (iv) Price Waterhouse
Coopers.
(b) In the event of a reduction to the Purchase Price, Seller
shall transmit by wire transfer of immediately available funds the amount of
such deficiency to such account as specified by Buyer within five (5) business
days of such determination.
7.11. TIMELY PAYMENT OF CLAIMS AGREEMENT. In the event that
Medical Expenses are not timely paid consistent with the claims payment
practices of the Company prior to the Closing, regardless of whether the Medical
Expenses are payable from the Claims Reserve or by HCUSA, subject to the notice
and opportunity to cure provisions set forth in Exhibit 7.11, each of Buyer and
the Company shall have the right to pay such claims. In the event that Buyer or
the Company pays any such Medical Expenses pursuant to this Section 7.11, Seller
shall indemnify Buyer or the Company, as the case may be, for such Medical
Expenses.
7.12. AGREED BALANCE SHEET AUDIT. On or before the later of
(i) March 1, 1999 or (ii) 60 days after the Closing Date, a certified public
accounting firm selected jointly by Buyer and Seller shall audit the Agreed
Balance Sheet. Any amount by which the audited Net Worth of the Company is less
than the Net Worth set forth in the Agreed Balance Sheet shall be paid by Seller
to Buyer by wire transfer of immediately available funds within five (5)
business days of the delivery of the audited Agreed Balance Sheet. Any amount by
which the audited Net Worth of the Company is greater than the Net Worth set
forth in the Agreed Balance Sheet shall be paid by Buyer to Seller by wire
transfer of immediately available funds within five (5) business days of the
delivery of the audited Agreed Balance Sheet. In the event that Buyer and Seller
can not agree on a certified public accounting firm, a certified public
accounting firm shall be chosen by lot from among the following firms: (i)
Arthur Andersen, L.L.C. (ii) Deloitte & Touche; (iii) Ernst & Young; (iv) Price
Waterhouse Coopers and (v) KPMG Peat Marwick.
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ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARTIES
8.1. CONDITIONS TO BUYER'S OBLIGATIONS. The obligations of
Buyer to purchase the Shares pursuant to this Agreement shall, at the option of
Buyer, be subject to the satisfaction, on or prior to the Closing Date, of the
following conditions:
(a) There shall have been no material breach by Seller in the
performance of any of its covenants and agreements herein; each of the
representations and warranties of Seller contained or referred to herein shall
be true and correct on the Closing Date as though made on the Closing Date,
except for changes therein specifically required or permitted by this Agreement
or resulting from any transaction expressly consented to in writing by Buyer or
any transaction permitted by Section 6.4 ,and except, with respect to any
representation or warranty which is not subject to the qualification of
materiality, where, in light of the availability and adequacy, as determined by
Buyer in good faith following discussion with Seller, of indemnification
pursuant to the provisions of Article X, such failure would have no adverse
effect on the business, relationships, prospects, financial condition,
reputation, or results of operations of the Company on and after the Closing, or
on the value of the agreements set forth in Schedule 4.15(A), Schedule 4.15(B),
and Schedule 4.15(C); and there shall have been delivered to Buyer a certificate
to such effect, dated the Closing Date, signed on behalf of Seller by the
President or any Vice President of Seller, in addition to the other deliveries
specified in Section 3.4.
(b) Between the date hereof and the Closing Date, except as
specifically required or permitted hereunder, there shall have been (i) no
material adverse change in the assets, business, operations, liabilities,
profits, prospects or condition (financial or otherwise) of the Company; (ii) no
material adverse federal or state legislative or regulatory change affecting the
Company or its business, products or services to be offered by it after the
Closing; and (iii) no material damage to the assets or properties of the Company
to be owned by it after the Closing by fire, flood, casualty, act of God or the
public enemy or other cause, regardless of insurance coverage for such damage;
and there shall have been delivered to Buyer a certificate to such effect, dated
the Closing Date and signed on behalf of Seller by the President or any Vice
President of Seller.
(c) The waiting periods, if any, under each of the HSR Act,
the Alabama HMO Statutes and the Florida HMO Statutes shall have expired or been
terminated, and no action, suit, investigation or proceeding shall have been
instituted or threatened to restrain or prohibit or otherwise challenge the
legality or validity of the transactions contemplated hereby.
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(d) The parties shall have received all approvals and actions
of or by all Governmental Bodies, including, without limitation, those approvals
and actions contemplated by Section 6.3 herein, which are necessary to
consummate the transactions contemplated hereby, which are either specified in
Schedule 4.1 or otherwise required to be obtained prior to the Closing by
applicable Requirements of Laws or which are necessary to prevent a material
adverse change in the assets, business, operations, liabilities, profits,
prospects or condition (financial or otherwise) of the Company.
(e) The Seller or Company, as the case may be, shall have
received consents, in form and substance reasonably satisfactory to Buyer, to
the transactions contemplated hereby from the other parties to all contracts,
leases, agreements and permits to which the Company is a party or by which the
Company or any of its assets or properties is affected and which are specified
in Schedule 8.1(E) or are otherwise necessary to prevent a material adverse
change in the assets, business, operations, liabilities, profits, prospects or
condition (financial or otherwise) of the Company, including but not limited to
the consents of (i) Morgan Guaranty Trust Company and (ii) Nationsbank, N.A.
(f) Buyer shall have received evidence of the termination or
transfer of all contractual liabilities or obligations of the Company as of the
Closing except, subject to Section 8.1(j), with respect to liabilities or
obligations arising subsequent to the Closing pursuant to the Assumed
Obligations.
(g) Buyer shall have received, with respect to each parcel of
Leased Real Property (if any) either (i) an Assignment and Assumption Agreement,
pursuant to which the lease or other arrangement relating to such parcel of
Leased Real Property is assigned to HCUSA or (ii) a termination of such lease or
other arrangement relating to such parcel of Leased Real Property.
(h) Buyer shall have received, with respect to each item of
personal property leased to the Company ("Leased Personal Property") (if any)
either (i) an Assignment and Assumption Agreement, pursuant to which the lease
or other arrangement relating to such item of Leased Personal Property is
assigned to HCUSA or (ii) a termination of such lease or other arrangement
relating to such item of Leased Personal Property.
(i) The Company shall have entered into the Transition
Services Agreements.
(j) Seller shall have terminated each of the Provider Service
Agreements (or amended or assigned such contracts such that the Company is no
longer a party thereto) which are specified in Schedule 8.1(J)
(k) The Company shall have (i) no employees and (ii) no
liability whatsoever for or with respect to any ERISA Benefit Plans or Non-ERISA
Commitments.
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(l) The number of Measured Lives at the time of Closing shall
be equal to or greater than 125,000 Members, based upon evidence of such
membership reasonably satisfactory to each of BCBSF and Buyer.
(m) Seller shall have obtained the Principal Agreement.
(n) The Company shall have entered into the Assignment and
Assumption Agreement.
8.2. CONDITIONS TO SELLER'S OBLIGATIONS. The obligations of
Seller to sell the Shares pursuant to this Agreement shall, at the option of
Seller, be subject to the satisfaction, on or prior to the Closing Date, of the
following conditions:
(a) There shall have been no material breach by either Buyer
or BCBSF in the performance of any of their respective covenants and agreements
herein; each of the representations and warranties of each of Buyer and BCBSF
contained or referred to in this Agreement shall be true and correct on the
Closing Date as though made on the Closing Date, except for changes therein
specifically permitted by this Agreement or resulting from any transaction
expressly consented to in writing by Seller or any transaction contemplated by
this Agreement and except, with respect to any representation or warranty which
is not subject to the qualification of materiality, where, in light of the
availability and adequacy of indemnification pursuant to the provisions of
Article X, such failure would have, as determined by Seller in good faith
following discussion with Buyer, no adverse effect on the Seller; and there
shall have been delivered to Seller a certificate to such effect with respect to
Buyer, dated the Closing Date and signed on behalf of Buyer by the President or
any Vice President or the Treasurer of Buyer and a certificate to such effect
with respect to BCBSF, dated the Closing Date and signed on behalf of BCBSF by
the President or any Vice President or the Treasurer of BCBSF in addition to the
other deliveries specified in Section 3.3.
(b) The waiting period under each of the HSR Act, the Alabama
HMO Statutes and the Florida HMO Statutes shall have expired or been terminated,
and no action, suit or proceeding by any Governmental Body shall have been
instituted or threatened to restrain, prohibit or otherwise challenge the
legality or validity of the transactions contemplated hereby.
(c) The parties shall have received all approvals and actions
of or by all Governmental Bodies, including, without limitation, those approvals
and actions contemplated by Section 6.3 herein, which are necessary to
consummate the transactions contemplated hereby, or otherwise required to be
obtained prior to the Closing by applicable Requirements of Laws.
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ARTICLE IX
TAX MATTERS
9.1. LIABILITY FOR TAXES. (a) Seller shall be liable for and
pay, and pursuant to Article X shall indemnify each Buyer Group Member (and the
Company) against, (i) all Taxes imposed on the Company, or for which the Company
may otherwise be liable, including without limitation Taxes imposed pursuant to
Treas. Reg. ss. 1.1502-6 or similar provisions of state, local or foreign law,
for any taxable year or period that ends on or before the Closing Date and, with
respect to any Straddle Period, the portion of such Straddle Period ending on
and including the Closing Date (including, without limitation, any obligations
to contribute to the payment of a Tax determined on a consolidated, combined or
unitary basis with respect to any Company Tax Group and any Taxes resulting from
the Company ceasing to be a member of any Company Tax Group), (ii) all Section
338 Taxes and (iii) any Loss resulting from the inaccuracy of any statement made
by Seller in Section 9.1(f). Notwithstanding the foregoing, Seller shall not be
liable for or pay, and shall not indemnify Buyer against, any Taxes for which
Buyer is liable under this Agreement.
(b) Buyer shall be liable for and pay, and pursuant to Article
X shall indemnify Seller against, all Taxes imposed on the Company for any
taxable year or period that begins after the Closing Date and, with respect to
any Straddle Period, the portion of such Straddle Period beginning after the
Closing Date provided, however, that Buyer shall not be liable for or pay, and
shall not indemnify Seller against, any Taxes for which Seller is liable under
this Agreement (including, without limitation, Section 4.6 and Section 9.1(a).
(c) For purposes of paragraphs (a) and (b), whenever it is
necessary to determine the liability for Taxes of the Company for a Straddle
Period, the determination of the Taxes of the Company for the portion of the
Straddle Period ending on and including, and the portion of the Straddle Period
beginning after, the Closing Date shall be determined by assuming that the
Straddle Period consisted of two taxable years or periods, one which ended at
the close of the Closing Date and the other which began at the beginning of the
day following the Closing Date and, subject to paragraph (d) of this Section
9.1, items of income, gain, deduction, loss or credit of the Company for the
Straddle Period shall be allocated between such two taxable years or periods on
a "closing of the books basis" by assuming that the books of the Company were
closed at the close of the Closing Date, provided, however, that exemptions,
allowances or deductions that are calculated on an annual basis, such as the
deduction for depreciation, shall be apportioned between such two taxable years
or periods on a daily basis. Notwithstanding anything in this Agreement to the
contrary, Seller shall be liable for all Section 338 Taxes.
(d) Notwithstanding anything herein to the contrary, Seller
shall be jointly and severally liable for and shall pay, and pursuant to Article
X shall indemnify each Buyer Group
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Member (and the Company) against, any real property transfer or gains Tax, sales
Tax, use Tax, stamp Tax, stock transfer Tax, or other similar Tax imposed on the
transactions contemplated by this Agreement.
(e) Seller shall have the right to pursue and shall be
entitled to retain, or receive from the Company or Buyer, prompt payment of any
overpayment, refund or credit of Taxes for any taxable year or period that ends
on or before the Closing Date and, with respect to any Straddle Period, the
portion of such Straddle Period ending on and including the Closing Date. If
Buyer or the Company receives a Tax refund to which Seller is entitled pursuant
to this Section 9.1(e), Buyer or the Company, as the case may be, shall pay or
cause the recipient to pay the amount of such refund (including any interest
received thereon) to Seller within ten (10) days after receipt thereof.
(f) Pursuant to Section 9.1(a), Seller shall be liable for and
pay, and pursuant to Article X shall indemnify each Buyer Group Member (and the
Company) against any Losses resulting from the inaccuracy of any of the
following statements: (i) each of the Company and each Company Tax Group has
filed all Tax Returns required to be filed; (ii) all such Tax Returns are
complete and accurate and disclose all Taxes required to be paid by the Company
and each Company Tax Group for the periods covered thereby and all Taxes shown
to be due on such Tax Returns have been timely paid; (iii) all Taxes (whether or
not shown on any Tax Return) owed by the Company or any Company Tax Group have
been timely paid; (iv) there is no action, suit, investigation, audit, claim or
assessment pending or proposed or threatened with respect to Taxes of the
Company or any Company Tax Group; (v) all deficiencies asserted or assessments
made as a result of any examination of the Tax Returns referred to in clause (i)
have been paid in full; (vi) all Tax Sharing Arrangements and Tax indemnity
arrangements relating to the Company or any subsidiary of the Company (other
than this Agreement) will terminate prior to the Closing Date and neither the
Company nor any subsidiary of the Company will have any liability thereunder on
or after the Closing Date; (vii) there are no liens for Taxes upon the assets of
the Company except liens relating to current Taxes not yet due; (viii) all Taxes
which the Company or any Company Tax Group are required by law to withhold or to
collect for payment have been duly withheld and collected, and have been paid or
accrued, reserved against and entered on the books of the Company; (ix) there
are no Tax rulings, requests for rulings, or closing agreements (as described in
Section 7121 of the Code or any corresponding provision of state or local Tax
law) relating to the Company or any Company Tax Group which could affect the
Company's liability for Taxes for any period after the Closing Date; (x) no
claim has ever been made by a Taxing authority in a jurisdiction where the
Company has never paid Taxes or filed Tax Returns asserting that the Company is
or may be subject to Taxes assessed by such jurisdiction; (xi) except as
contemplated in or contemplated by this Agreement, no intercompany obligation
(as described in Treas. Reg. ss. 1.1502-13(g)) between or among the Seller, the
Company, or any member of any Company Tax Group will remain outstanding
following the Closing, (xii) since
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the Balance Sheet Date, none of Seller, the Company or any Company Tax Group
member has taken any action not in accordance with past practice that would have
the effect of deferring any Tax liability for the Company or any subsidiary of
the Company from any taxable period ending on or before the Closing Date to any
taxable period ending after the Closing Date; (xiii) none of the income
recognized, for federal, state, local or foreign income Tax purposes, by the
Company during the period beginning on Balance Sheet Date and ending on the
Closing Date has been or will be derived from transactions (y) other than in the
ordinary course of business, or (z) of a type not reflected on the relevant Tax
Returns for the taxable period ending on December 31, 1997; (xiv) no income or
gain of the Company has been deferred pursuant to Treasury Regulation ss.
1.1502-13 or -14, or Temporary Treasury Regulation ss. 1.1502-13T or -14T, or
Proposed Treasury Regulation ss. 1.1502-13 or -14; (xv) no excess loss account
(as described in Treasury Regulation ss. 1.1502-14, 1.1502-19, and 1.1502-32),
exists with respect to the Company; (xvi) no Taxes with respect to periods
ending on or before the Balance Sheet Date were paid by the Company (or paid by
any Company Tax Group member or Affiliate thereof and charged to the Company
through any intercompany account or payment) on or after such date which were
not included in the provision for Taxes on the Balance Sheet; (xvii) no
transaction contemplated by this Agreement is subject to withholding under
Section 1445 of the Code (relating to "FIRPTA") and no stock transfer Taxes,
sales Taxes, use Taxes, real estate transfer or gains Taxes, or other similar
Taxes will be imposed on the transactions contemplated by this Agreement;
(xviii) no payment or other benefit, and no acceleration of the vesting of any
options, payments or other benefits, will be, as a direct or indirect result of
the transactions contemplated by this Agreement, an "excess parachute payment"
to a "disqualified individual" as those terms are defined in Section 280G of the
Code and the Treasury Regulations thereunder; (xix) Seller is the common parent
of an affiliated group (as defined in Section 1504(a) of the Code) in which the
Company is a member immediately prior to the Closing Date; (xx) the transactions
contemplated by this Agreement will not constitute a breach of the Tax Benefit
Restitution Agreement; and (xxi) the Company does not, directly or indirectly,
own, of record or beneficially, any outstanding voting securities or other
equity interests in or control of any corporation, limited liability company,
partnership, trust, joint venture or other entity.
9.2. TAX RETURNS. Seller shall file or cause to be filed when
due (taking into account all extensions properly obtained) all Tax Returns,
including, but not limited to, Form 1099, that are required to be filed by or
with respect to the Company for taxable years or periods ending on or before the
Closing Date and Seller shall remit (or cause to be remitted) any Taxes due in
respect of such Tax Returns, and Buyer shall file or cause to be filed when due
all Tax Returns that are required to be filed by or with respect to the Company
for taxable years or periods ending after the Closing Date and Buyer shall remit
(or cause to be remitted) any Taxes due in respect of such Tax Returns. Seller
or Buyer shall reimburse the other party the Taxes for which Seller or Buyer is
liable pursuant to Section 9.1 but which are payable with any Tax Return to be
filed by the other party pursuant to this Section 9.2 upon the written request
of the party entitled to reimbursement setting forth in detail the computation
of the amount owed by
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Seller or Buyer, as the case may be, but in no event earlier than ten (10) days
prior to the due date for paying such Taxes. All Tax Returns which Seller is
required to file or cause to be filed in accordance with this Section 9.2 shall
be prepared and filed in a manner consistent with past practice in so far as
such is known to Seller and, on such Tax Returns, no position shall be taken,
elections made or method adopted that is inconsistent with positions taken,
elections made or methods used in preparing and filing similar Tax Returns in
prior periods in so far as such is known to Seller (including, but not limited
to, positions, elections or methods which would have the effect of deferring
income to periods for which Buyer is liable under Section 9.1(b) or accelerating
deductions to periods for which Seller is liable under Section 9.1(a).
9.3 CONTEST PROVISIONS. Buyer shall promptly notify Seller in
writing within ten (10) days from the receipt by Buyer, any of its Affiliates
or, after the Closing Date, the Company, of notice of any pending or threatened
federal, state, local or foreign Tax audits or assessments which may materially
affect the Tax liabilities of the Company for which Seller is liable pursuant to
Section 9.1, provided that failure to comply with this provision shall not
affect Buyer's right to indemnification hereunder except to the extent such
failure materially impairs Seller's ability to contest any such Tax liabilities.
Seller shall have the sole right to represent the Company's
interests in any Tax audit or administrative or court proceeding relating to
taxable periods ending on or before the Closing Date (including settlement of
all such issues), and to employ counsel of Seller's choice at Seller's expense.
9.4 ASSISTANCE AND COOPERATION. After the Closing Date, each
of Seller and Buyer shall (and shall cause their respective Affiliates to):
(a) timely sign and deliver such certificates or forms as may
be necessary or appropriate to establish an exemption from (or
otherwise reduce), or file Tax Returns or other reports with respect
to, Taxes described in Section 9.1(d) (relating to sales, transfer and
similar Taxes);
(b) assist the other party in preparing any Tax Returns which
such other party is responsible for preparing and filing in accordance
with Section 9.2;
(c) cooperate fully in preparing for any audits of, or
disputes with taxing authorities regarding, any Tax Returns of the
Company;
(d) make available to the other and to any taxing authority as
reasonably requested all information, records, and documents relating
to Taxes of the Company; and
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(e) furnish the other with copies of all correspondence
received from any taxing authority in connection with any Tax audit or
information request with respect to any taxable period for which the
other may have a liability under this Article IX.
9.5. ELECTION UNDER SECTION 338(H)(10). (a) Seller and Buyer
shall make a joint election for the Company under Section 338(h)(10) of the Code
and under any applicable similar provisions of state or local law with respect
to the purchase of the Shares (collectively, the "Section 338(h)(10)
Elections"). Seller represents that, to the best of Seller's knowledge, Seller
has taken no action that would cause any Section 338(h)(10) Election to be
unavailable to Buyer. Seller and Buyer shall, no later than five days prior to
the due date for filing Internal Revenue Service Form 8023, exchange completed
and executed copies of Internal Revenue Service Form 8023, required schedules
thereto, and any similar state and foreign forms. If any changes are required in
these forms as a result of information which is first available after these
forms are prepared, the parties will promptly agree on such changes.
(b) Within sixty (60) days following the Closing Date, Buyer
shall deliver to Seller a schedule (the "Allocation Schedule") allocating the
Modified Adjusted Deemed Sales Price, as defined in Treas. Reg. ss.
1.338(h)(10)-1(f), for the Company, among the assets of the Company and, if
Buyer elects, any covenants not to compete and similar covenants made by Seller.
The Allocation Schedule shall be reasonable and shall be prepared in accordance
with Section 338(h)(10) of the Code and the regulations thereunder. Seller
agrees that promptly upon receiving said Allocation Schedule it shall sign the
Allocation Schedule and return an executed copy thereof to Buyer, provided that
Seller agrees with the allocation of value thereon. If Seller does not agree
with the Allocation Schedule as presented, Seller shall notify Buyer in writing
stating those assets where there is disagreement and the value that Seller
proposes for each such asset. For those assets, the allocation shall be
determined by appraisal of such assets by an independent appraiser acceptable to
both Buyer and Seller, the cost of such appraisal to be borne by Seller. Buyer
and Seller each agrees to file all federal, state, local and foreign Tax Returns
in accordance with the Allocation Schedule (as originally proposed or as
revised, as the case may be) and not to take, or cause to be taken, any action
that would be inconsistent with or prejudice any Section 338(h)(10) Elections.
9.6. SURVIVAL OF OBLIGATIONS. Notwithstanding anything to the
contrary in this Agreement, and notwithstanding Article X of this Agreement, the
obligations of the parties set forth in this Article IX shall be unconditional
and absolute and shall remain in effect without limitation as to time.
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ARTICLE X
INDEMNIFICATION
10.1. INDEMNIFICATION BY SELLER.
(a) Seller agrees to indemnify and hold harmless each Buyer
Group Member from and against any and all Losses incurred by such Buyer Group
Member in connection with or arising from:
(i) any breach by Seller of any of its covenants in this
Agreement or in any Seller Ancillary Agreement;
(ii) any failure of Seller to perform any of its obligations
in this Agreement or in any Seller Ancillary Agreement;
(iii) any breach of any warranty or the inaccuracy of any
representation of Seller or Company contained or referred to in this
Agreement (other than those representations contained in Section 4.6 of
this Agreement) or any certificate delivered by or on behalf of Seller
pursuant hereto; and
(iv) any failure of Seller or the Company to obtain prior to
the Closing any consent set forth in Schedule 4.1.
(b) Notwithstanding any other term or provision of this
Agreement to the contrary, including, but not limited to, the indemnification
provisions of Section 10.1(a), or any qualification to or disclosure made
pursuant to any covenant, representation or warranty contained herein, Seller
agrees to indemnify and hold harmless at all times each Buyer Group Member from
and against any and all Losses, other than those liabilities arising or accruing
subsequent to the Closing pursuant to those agreements set forth in Schedule
4.15(A), Schedule 4.15(B), Schedule 4.15(C) and Schedule 4.15(I), other than as
excluded by Schedule 8.1(J), (collectively, the "Assumed Obligations"), arising
in any manner whatsoever with respect to or in connection with the ownership or
operation of the Company, its assets or its business, prior to the Closing, or
otherwise incurred or accrued by the Company prior to the Closing. Without
limiting the generality of the foregoing, Losses subject to indemnification
pursuant to this Section 10.1(b) shall specifically and additionally, as the
case may be, include:
(i) The extent to which Medical Expenses payable from the
Claims Reserve exceed the amount of the Claims Reserve;
(ii) Medical Expenses which (1) are not timely paid consistent
with the claims payment practices of the Company prior to the Closing,
regardless of whether the Medical Expenses are payable from the Claims
Reserve or by HCUSA and (2) are
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subsequently paid by the Buyer or the Company, as the case may be,
pursuant to Section 7.11;
(iii) returns of, or adjustments to, premiums received with
respect to Members for periods prior to the Closing;
(iv) Losses resulting from the wrongful acts or omissions of
Seller, the Company, their affiliates, or the employees, agents or
contractors of any Seller Group Member prior to the Closing;
(v) Losses, resulting from any agreement, obligation, promise
or commitment that exists as of the Closing, oral or written, express
or implied, binding the Company or its assets prior to or following the
Closing, except for the Assumed Obligations, including, but not limited
to, liabilities, obligations and regulatory sanctions resulting from
agreements with or commitments to brokers, agents, administrators, or
intermediaries for Groups arising from any failure to comply with
Requirements of Law;
(vi) Losses arising from any and all Taxes, including, without
limitation, the effect of any and all Tax Sharing Arrangements or any
other agreement with respect to Taxes that are the responsibility of
Seller as more particularly provided in Section 9.1(a);
(vii) any and all amounts due Providers or Groups for periods
prior to the Closing pursuant to the terms of Variable Rate Agreements
regardless of whether such amount is payable prior to or subsequent to
the Closing; provided, however, that the amount due for periods prior
to the Closing shall be determined at the conclusion of the term of the
Variable Rate Agreement, or at such other time for such determination
where specified therein, pro-rata in proportion to the percentage of
total months subject to the Variable Rate Agreement that is constituted
by the number of months preceding the Closing, (including the month
during which the Closing occurs);
(viii) any and all claims by a Buyer Group Member for
indemnification pursuant to the Transition Service Agreements or the
Assumption Agreement, as the case may be;
(ix) Losses resulting from any breach or default by Principal
Life Insurance Company of the Principal Agreement or of Section 7.1(d)
of this Agreement (subject to Section 7.1(f)); and further provided,
that as to any violation of Section 7.1(d), Losses shall be calculated
on the basis of the product of (x) $688 per Member multiplied by (y)
the number of Members lost as a result of Active Targeting by Principal
Life Insurance Company or any of its Affiliates; and
(x) Losses incurred or accrued by the Company following the
Closing with respect to any Provider Service Agreements that were not
included in Schedule 4.15(c)
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until the first date subsequent to the Closing that each such Provider
Service Agreement may be terminated pursuant to its terms.
(c) The indemnification provided for in Section 10.1(a) shall
expire one month after the issuance of BCBSF's audited financial statements for
the fiscal year ended December 31, 1999, provided, however, that such date shall
be no later than June 15, 2000 (and no claim shall be made by any Buyer Group
Member thereafter under Section 10.1(a)). The indemnification provided for in
Section 10.1(b) shall terminate upon the expiration of the relevant statute of
limitations applicable to the Losses and any extension thereof (and no claims
shall be made by any Buyer Group Member under Section 10.1(b) thereafter).
Notwithstanding the two sentences immediately precedent, the indemnification
provided for in Section 10.1(a) by Seller shall continue as to:
(i) the representations and warranties set forth in Sections
4.1, 4.2, 4.3 and 4.17 and the covenants and agreements of Seller set
forth in Sections 7.2, 7.6, 7.9, 12.2, 12.8 and 12.9 and Article IX, as
to all of which no time limitation shall apply;
(ii) the representations and warranties set forth in Section
4.6, as to which the indemnification provided for shall terminate upon
the expiration of the relevant statute of limitations applicable to the
Losses and any extension thereof (and no claims shall be made by any
Buyer Group Member under Article IX thereafter); and
(iii) the covenant set forth in Section 7.1, as to which the
indemnification provided for in this Section 10.1 shall terminate one
year after the expiration of the noncompetition period provided for
therein;
furthermore, the indemnification provided for in Sections 10.1(a) and 10.1(b) by
Seller shall continue as to any Loss of which any Buyer Group Member has
notified Seller in accordance with the requirements of Section 10.3 on or prior
to the date such indemnification would otherwise terminate in accordance with
this Section 10.1, as to which the obligation of Seller shall continue until the
liability of Seller shall have been determined pursuant to this Article X, and
Seller shall have reimbursed all Buyer Group Members for the full amount of such
Loss in accordance with this Article X.
10.2. INDEMNIFICATION BY BUYER AND BCBSF. (a) Buyer agrees to
indemnify and hold harmless Seller from and against any and all Losses incurred
by Seller in connection with or arising from:
(i) any breach by Buyer of any of its covenants or agreements
in this Agreement or in any Buyer Ancillary Agreement;
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(ii) any failure by Buyer to perform any of its obligations in
this Agreement or in any Buyer Ancillary Agreement;
(iii) any breach of any warranty or the inaccuracy of any
representation of Buyer contained or referred to in this Agreement or
in any certificate delivered by or on behalf of Buyer pursuant hereto;
or
(iv) any Loss incurred by Seller from Taxes that are the
responsibility of Buyer pursuant to Section 9.1(b).
(b) BCBSF agrees to indemnify and hold harmless Seller from
and against any and all Loss incurred by Seller in connection with or arising
from:
(i) any breach by BCBSF of any of its covenants or agreements
in this Agreement;
(ii) any failure by BCBSF to perform any of its obligations in
this Agreement;
(iii) any breach of any warranty or the inaccuracy of any
representation of BCBSF contained or referred to in this Agreement or
in any certificate delivered by or on behalf of BCBSF pursuant hereto;
or
(iv) any failure by Buyer to perform any of its obligations to
indemnify Seller under Section 10.2(a).
(c) The indemnification provided for in this Section 10.2
shall expire one month after the issuance of Seller's audited financial
statements for the fiscal year ended December 31, 1999, provided, however, that
such date shall be no later than June 15, 2000 (and no claims shall be made by
Seller under this Section 10.2 thereafter), except that the indemnification by
Buyer and BCBSF, as the case may be, shall continue as to:
(i) the representations and warranties set forth in Sections
5.1, 5.2, 5.5, and 5.6 and the covenants and agreements of Buyer set
forth in Sections 7.2, 7.6, 7.9, 12.2, 12.8 and 12.9 and Article IX as
to all of which no time limitation shall apply; and
(ii) the covenants and agreements of BCBSF set forth in
Sections 7.6, 12.2, 12.8 and 12.9 as to all of which no time limitation
shall apply; and
(iii) any Loss of which Seller has notified Buyer in
accordance with the requirements of Section 10.3 on or prior to the
date such indemnification would otherwise terminate in accordance with
this Section 10.2, as to which the obligation of
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Buyer shall continue until the liability of Buyer shall have been
determined pursuant to this Article X, and Buyer shall have reimbursed
Seller for the full amount of such Loss in accordance with this Article
X.
(iv) any Loss of which Seller has notified BCBSF in accordance
with the requirements of Section 10.3 on or prior to the date such
indemnification would otherwise terminate in accordance with this
Section 10.2, as to which the obligation of BCBSF shall continue until
the liability of BCBSF shall have been determined pursuant to this
Article X, and BCBSF shall have reimbursed Seller for the full amount
of such Loss in accordance with this Article X.
10.3. NOTICE OF CLAIMS. (a) A party seeking indemnification
hereunder (the "Indemnified Party") shall give to the party obligated to provide
indemnification to such Indemnified Party (the "Indemnitor") a notice (a "Claim
Notice") describing in reasonable detail the facts giving rise to any claim for
indemnification hereunder and shall include in such Claim Notice (if then known)
the amount or the method of computation of the amount of such claim, and a
reference to the provision of this Agreement or any other agreement, document or
instrument executed hereunder or in connection herewith upon which such claim is
based; provided, that (i) a Claim Notice in respect of any action at law or suit
in equity by or against a third Person as to which indemnification will be
sought shall be given promptly after the action or suit is commenced; and (ii)
failure to give such notice shall not relieve the Indemnitor of its obligations
hereunder except to the extent it shall have been prejudiced by such failure.
(b) Any indemnification payment hereunder with respect to any
Loss shall be an amount which is sufficient to compensate the Indemnified Party
for the amount of such Loss, after (i) taking into account all increases in
federal, state, local, foreign or other Taxes payable by the Indemnified Party
as a result of the receipt of such payment (by reason of such payment being
included in income, resulting in a reduction of tax basis, or otherwise
increasing such Taxes payable by the Indemnified Party at any time) and (ii)
netting out against any such increases in Taxes payable by the Indemnified Party
any tax benefit of the Loss, including, but not limited to, any resulting
business expense deduction the Indemnified Party is entitled to claim on its Tax
Return.
10.4. THIRD PERSON CLAIMS. (a) Subject to Section 10.4(b), the
Indemnified Party shall have the right to conduct and control, through counsel
of its choosing, the defense, compromise or settlement of any third Person
claim, action or suit against such Indemnified Party as to which indemnification
will be sought by any Indemnified Party from any Indemnitor hereunder, and in
any such case the Indemnitor shall cooperate in connection therewith and shall
furnish such records, information and testimony and attend such conferences,
discovery proceedings, hearings, trials and appeals as may be reasonably
requested by the Indemnified Party in connection therewith; provided, that (i)
the Indemnitor may participate, through counsel chosen by it and at its own
expense, in the defense of any such claim, action or suit as to which
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the Indemnified Party has so elected to conduct and control the defense thereof;
and (ii) the Indemnified Party shall not, without the written consent of the
Indemnitor (which written consent shall not be unreasonably withheld), pay,
compromise or settle any such claim, action or suit, except that no such consent
shall be required if, following a written request from the Indemnified Party,
the Indemnitor shall fail, within 14 days after the making of such request, to
acknowledge and agree in writing that, if such claim, action or suit shall be
adversely determined, such Indemnitor has an obligation to provide
indemnification hereunder to such Indemnified Party. Notwithstanding the
foregoing, the Indemnified Party shall have the right to pay, settle or
compromise any such claim, action or suit without such consent, provided that in
such event the Indemnified Party shall waive any right to indemnity therefor
hereunder unless such consent is unreasonably withheld.
(b) If any third Person claim, action or suit against any
Indemnified Party is solely for money damages or, where Seller is the
Indemnitor, will have no continuing effect in any material respect on the
Company or its business, assets or operations, then the Indemnitor shall have
the right to conduct and control, through counsel of its choosing, the defense,
compromise or settlement of any such third Person claim, action or suit against
such Indemnified Party as to which indemnification will be sought by any
Indemnified Party from any Indemnitor hereunder if the Indemnitor has
acknowledged and agreed in writing that, if the same is adversely determined,
the Indemnitor has an obligation to provide indemnification to the Indemnified
Party in respect thereof, and in any such case the Indemnified Party shall
cooperate in connection therewith and shall furnish such records, information
and testimony and attend such conferences, discovery proceedings, hearings,
trials and appeals as may be reasonably requested by the Indemnitor in
connection therewith; provided that the Indemnified Party may participate,
through counsel chosen by it and at its own expense, in the defense of any such
claim, action or suit as to which the Indemnitor has so elected to conduct and
control the defense thereof. Notwithstanding the foregoing, the Indemnified
Party shall have the right to pay, settle or compromise any such claim, action
or suit, provided that in such event the Indemnified Party shall waive any right
to indemnity therefor hereunder unless the Indemnified Party shall have sought
the consent of the Indemnitor to such payment, settlement or compromise and such
consent was unreasonably withheld, in which event no claim for indemnity
therefor hereunder shall be waived.
(c) If there shall be any conflict between the provisions of
this Section 10.4 and 9.1(c) (relating to Tax contests), the provisions of
Section 9.1(c) shall control with respect to Tax contests.
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ARTICLE XI
TERMINATION
11.1. TERMINATION. Anything contained in this Agreement to the
contrary notwithstanding, this Agreement may be terminated at any time prior to
the Closing Date:
(a) by the mutual consent of Buyer and Seller;
(b) by BCBSF, Buyer or Seller if the Closing shall not have
occurred on or before January 31, 1998 (or such later date as may be
mutually agreed to by Buyer and Seller);
(c) by Buyer in the event of any breach by Seller of any of
Seller's agreements, representations or warranties contained herein
which breach would have a Material Adverse Effect as to the Company and
the failure of Seller to cure such breach within seven days after
receipt of notice from Buyer requesting such breach to be cured; or
(d) by Seller in the event of any material breach by Buyer of
any of Buyer's agreements, representations or warranties contained
herein and the failure of Buyer to cure such breach within seven days
after receipt of notice from Seller requesting such breach to be cured.
11.2. NOTICE OF TERMINATION. Any party desiring to terminate
this Agreement pursuant to Section 11.1 shall give notice of such termination to
each of the other parties to this Agreement.
11.3. EFFECT OF TERMINATION. In the event that this Agreement
shall be terminated pursuant to this Article XI, all further obligations of the
parties under this Agreement (other than Sections 7.6, 7.7 and 7.8) shall be
terminated without further liability of any party to the other, provided that
nothing herein shall relieve any party from liability for its willful breach of
this Agreement.
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ARTICLE XII
GENERAL PROVISIONS
12.1. SURVIVAL OF OBLIGATIONS. All representations,
warranties, covenants, agreements and obligations contained in this Agreement
shall survive the consummation of the transactions contemplated by this
Agreement; provided, however, except as otherwise provided in Article X, the
representations and warranties contained in Articles IV and V (other than the
representations and warranties contained in Sections 4.1, 4.2, 4.3, and 4.17 and
the covenants and agreements contained in Sections 7.2, 7.6, 7.9, 12.2, 12.8,
12.9 and 12.10 and Article IX, each of which shall survive indefinitely) shall
terminate upon the expiration of the relevant indemnification provisions
contained in Article X. Except as otherwise provided herein, no claim shall be
made for the breach of any representation or warranty contained in Article IV or
V or under any certificate delivered with respect thereto under this Agreement
after the date on which such representations and warranties terminate as set
forth in this Section.
12.2. NOTICES. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given or delivered
(i) when delivered personally, (ii) if transmitted by Fax when confirmation of
transmission is received, or (iii) if sent by registered or certified mail,
return receipt requested, or by private courier when received; and shall be
addressed as follows:
If to Buyer or BCBSF, to:
Health Options, Inc.
4800 Deerwood Campus Parkway
Building 100 - Floor 7
Jacksonville, FL 32246
Attn: Executive Vice President
with a copy to:
Blue-Cross and Blue Shield of Florida, Inc.
4800 Deerwood Campus Parkway
Building 100 - Floor 7
Jacksonville, FL 32246
Attention: Office of the General Counsel
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If to Seller, to:
Coventry Health Care, Inc.
6705 Rockledge Drive
Bethesda, MD 20817
Attention: Dale Wolf
with a copy to
Bass, Berry & Sims PLC
2700 First American Center
Nashville, TN 37238-2700
Attention: Bob F. Thompson, Esq.
or to such other address as such party may indicate by a notice delivered to the
other party hereto.
12.3. SUCCESSORS AND ASSIGNS. (a) The rights of any party
under this Agreement shall not be assignable by such party hereto prior to the
Closing without the written consent of the other parties, except that the rights
of Buyer hereunder may be assigned prior to the Closing, without the consent of
Seller, to an Affiliate of Buyer; provided that (i) such assignment shall not
result in Buyer (and/or BCBSF, to the extent required by applicable law) or
Seller having to amend its respective Notification and Report Form filed under
the HSR Act in connection with the transactions contemplated hereunder, (ii) the
assignee shall assume in writing all of Buyer's obligations to Seller hereunder,
(iii) neither Buyer nor BCBSF shall be released from any of their respective
obligations hereunder by reason of such assignment, (iv) Seller's obligations
under this Agreement shall be subject to the delivery by such assignee, on or
prior to the Closing Date, of a certificate signed on its behalf containing
representations and warranties similar to those made by Buyer in Article V, and
(v) BCBSF's obligations under this Agreement with respect to Buyer shall apply
with respect to such assignee. Following the Closing, any party to this
Agreement may assign any of its rights hereunder, but no such assignment shall
relieve it of its obligations hereunder.
(b) This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors and permitted assigns. The
successors and permitted assigns hereunder shall include without limitation, in
the case of each of the Buyer and the Company after the Closing, any Buyer Group
Member. Nothing in this Agreement, expressed or implied, is intended or shall be
construed to confer upon any Person other than the parties and successors and
assigns permitted by this Section 12.3 any right, remedy or claim under or by
reason of this Agreement.
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12.4. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the
Exhibits and Schedules referred to herein and the documents delivered pursuant
hereto contain the entire understanding of the parties hereto with regard to the
subject matter contained herein or therein, and supersede all prior agreements,
understandings or letters of intent between or among any of the parties hereto,
including without limitation the Mutual Non-Disclosure Agreement. This Agreement
shall not be amended, modified or supplemented except by a written instrument
signed by an authorized representative of each of the parties hereto.
12.5. WAIVERS. Any term or provision of this Agreement may be
waived, or the time for its performance may be extended, by the party or parties
entitled to the benefit thereof. Any such waiver shall be validly and
sufficiently given for the purposes of this Agreement if, as to any party, it is
in writing signed by an authorized representative of such party. The failure of
any party hereto to enforce at any time any provision of this Agreement shall
not be construed to be a waiver of such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of any party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent
breach.
12.6. PARTIAL INVALIDITY. Wherever possible, each provision
hereof shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such provision shall be ineffective to the extent, but only to the
extent, of such invalidity, illegality or unenforceability without invalidating
the remainder of such provision or provisions or any other provisions hereof,
unless such a construction would be unreasonable.
12.7. EXECUTION IN COUNTERPARTS. This Agreement may be
executed in two or more counterparts, each of which shall be considered an
original instrument, but all of which shall be considered one and the same
agreement, and shall become binding when one or more counterparts have been
signed by each of the parties hereto and delivered to each of Seller and Buyer.
12.8. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (as opposed to the conflicts of
law provisions) of the State of Florida.
12.9. SUBMISSION TO JURISDICTION. Seller and Buyer hereby
irrevocably submit in any suit, action or proceeding arising out of or related
to this Agreement or any of the transactions contemplated hereby or thereby to
the non-exclusive jurisdiction of the United States District Court for the
Northern District of Florida and the jurisdiction of any court of the State of
Florida located in the city of Jacksonville, Florida and waive any and all
objections to
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jurisdiction that they may have under the laws of the State of Florida or the
United States and any claim or objection that any such court is an inconvenient
forum.
12.10. ACKNOWLEDGMENT REGARDING BLUE CROSS AND BLUE SHIELD
ASSOCIATION. Each of Seller and Company expressly acknowledge their
understanding that this Agreement constitutes a contract between the parties
hereto, that Buyer is the wholly-owned subsidiary of BCBSF, that BCBSF is an
independent corporation operating under a license or sublicense with the Blue
Cross and Blue Shield Association (the "Association"), an association of
independent Blue Cross and Blue Shield Plans, permitting BCBSF to use the Blue
Cross and/or Blue Shield service mark in the States of Florida and Alabama, and
that neither BCBSF nor Buyer is contracting as the agent of the Association.
Seller and Company further acknowledge and agree that they have not entered into
this Agreement based upon representations made by any person other than Buyer or
BCBSF and that, except as set forth in Section 10.2 (b) of this Agreement, no
person, entity, or organization other than Buyer shall be held accountable or
liable to Seller or Company for any of Buyer's obligations to Seller and/or
Company created under this Agreement. This Section 12.10 shall not create any
additional obligations whatsoever on the part of Buyer or BCBSF other than those
obligations created under other provisions of this Agreement.
* * * * * *
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed the day and year first above written.
HEALTH OPTIONS, INC., AS BUYER
By /s/ ROBERT I. LUFRANO
-------------------------------------------
Name: ROBERT I. LUFRANO
Its: PRESIDENT
BLUE CROSS AND BLUE SHIELD OF FLORIDA, INC.
By /S/ ROBERT I. LUFRANO
-------------------------------------------
Name: ROBERT I. LUFRANO
Its: EXECUTIVE VICE PRESIDENT
PRINCIPAL HEALTH CARE OF FLORIDA, INC.
By /S/ RONALD M. CHAFFIN
-------------------------------------------
Name: RONALD M. CHAFFIN
Its: CEO
COVENTRY HEALTH CARE, INC., AS SELLER
By /S/ DALE B. WOLF
-------------------------------------------
Name: DALE B. WOLF
Its: EXECUTIVE VICE PRESIDENT & CFO
[Signature Page to the Stock Purchase Agreement]
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<PAGE> 74
SET FORTH BELOW IS A LIST OF EXHIBITS AND SCHEDULES TO THE STOCK PURCHASE
AGREEMENT THAT ARE NOT BEING FILED HEREWITH. THEY WILL BE PROVIDED TO
THE SECURITIES AND EXCHANGE COMMISSION IMMEDIATELY UPON REQUEST.
EXHIBITS
Exhibit 2.3 Agreed Balance Sheet
Exhibit 2.4(B) Rate Filing Adjustment
Exhibit 2.6 Transition Services Agreements
Exhibit 3.4(I) Legal Opinion of Seller
Exhibit 3.4(O) Principal Agreement
Exhibit 3.4(P) Assumption Agreement
Exhibit 6.4(B)(iii) Maintenance of Efforts Provisions
Exhibit 7.4 Adjudication and Payment of Medical Claims
Exhibit 7.11 Opportunity to Cure Provisions
SCHEDULES
Schedule 3.2 Seller's Wire Transfer Instructions
Schedule 4.1 Exceptions to Authority of Seller and Company and Required
Consents
Schedule 4.2(A) Additional Foreign Qualification of Company
Schedule 4.2(B) Capital Stock of Company
Schedule 4.3 Company Subsidiaries
Schedule 4.4 Financial Statements
Schedule 4.5(A) Operation of Company
Schedule 4.5(B) Conduct of Business of Company
Schedule 4.6 Taxes
Schedule 4.7 Affiliated Services
Schedule 4.8 Government Permits
Schedule 4.9(A) Owned Real Property
Schedule 4.9(B) Leased Real Property
Schedule 4.11 Intellectual Property
Schedule 4.13(A) ERISA Benefit Plans
Schedule 4.13(B) Non-ERISA Benefit Plans
Schedule 4.13(D) Status of the Pension Plans
Schedule 4.13(E) Compliance
Schedule 4.14(A) Conflicts of Interest/Compliance with Anti-Bribery Laws
Schedule 4.14(B) Related Party Transactions
Schedule 4.14(C) Labor Law and Union Activities
Schedule 4.15(A) Group Service Agreements
Schedule 4.15(B) Individual Service Agreements
Schedule 4.15(C) Provider Service Agreements
Schedule 4.15(D) Guaranteed Rate Agreements
Schedule 4.15(E) Variable Rate Agreements
Schedule 4.15(F) Member Grievances/Provider and Group Terminations
Schedule 4.15(G) Other Binding Obligations
Schedule 4.15(H) Status of Company Agreements
Schedule 4.15(I) Broker Agreements
Schedule 4.16 Compliance with Laws and Absence of Regulatory Action
Schedule 4.17 Environmental Matters
Schedule 4.18 Insurance
Schedule 4.19 Service Contracts
Schedule 4.20 Bank Accounts and Powers of Attorney
Schedule 7.1(A) Alabama Counties (Covenant Not to Compete or Solicit
Business)
Schedule 8.1(E) Consents
Schedule 8.1(J) Termination, Amendment or Assignment of Provider Service
Agreements
<PAGE> 1
EXHIBIT 10.46
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made and entered into in Chicago,
Illinois, as of this 2nd day of October, 1998 by and between Coventry Health
Care, Inc., a Delaware corporation (hereinafter "Seller"), and First American
Group of Companies, Inc., an Illinois corporation (hereinafter "Buyer").
W I T N E S S E T H:
WHEREAS, Seller will, at Closing Date (as such term is defined below),
own 100% of the issued and outstanding shares of common stock of Principal
Health Care of Illinois, Inc., an Illinois corporation (the "Company"); and
WHEREAS, Seller desires to sell, and Buyer desires to purchase, all of
the shares of the Company's common stock on the terms set forth herein.
NOW THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I. PURCHASE AND SALE OF THE STOCK; RELATED TRANSACTION
A. Purchase and Sale. Upon the terms and conditions contained herein, and
subject to the representations, warranties and covenants contained
herein, at Closing Seller will sell to Buyer, and Buyer will purchase
from Seller, all of the outstanding shares of common stock of the
Company all of which shall be owned by Seller (the "Stock") without a
resulting step-up in asset value, and all of Seller's right, title and
interest therein and thereto, free and clear of all liens,
encumbrances and claims of every kind.
B. Related Transaction.
1. At or before Closing, Company shall transfer to Seller or a
subsidiary of Seller all of the assets held by Company
immediately prior to the Closing, except for the Retained Assets
described in Section I.B.2, below, (the "Transferred Assets"),
and such Transferred Assets shall be available to fund the
Account to the extent required by and as described in Section
V.G.
2. Anything in this Agreement to the contrary notwithstanding, all
right, title, and interest in the following Retained Assets shall
remain with Company:
a. All contracts of the Company relating to its individual,
group and government health care benefits business,
including but not limited
<PAGE> 2
to enrollment, group, and provider agreements; its licenses
and Certificates of Authority; and
b. The statutory deposits maintained pursuant to requirements
of regulatory authorities.
3. Pursuant to Section VI.B, Seller shall, as of the Closing,
indemnify Buyer for any liabilities, costs, obligations, or
expenses of the Company occurring or arising from actions or
omissions taken by the Company prior to the Closing, other than
those required by this Agreement ("Transferred Liabilities"),
including but not limited to the following:
a. Employees and employment contracts;
b. Trade accounts payable, including lease obligations and any
incentive or bonus obligations payable to any employer or
group as a result of or incident to any claims or medical
expense experience occurring before the Closing;
c. Medical Claims payable, including any incentive or bonus
obligations payable as a result of or incident to any claims
or medical expense experience occurring before the Closing;
d. Payroll benefits and payroll taxes accrued, accruable or
payable before the Closing;
e. Litigation pending, threatened, or arising as a result of an
act or omission occurring before the Closing; and
f. Taxes accrued, accruable, paid or payable for any period
prior to the Closing.
C. Purchase Price; Payment. The total purchase price for the Stock shall
be Four Million Dollars ($4,000,000.00) plus the amount of the
statutory deposits and interest accrued thereon as of the Closing
Date, which purchase price may be increased or reduced as set forth in
Section I.D.3 and I.D.4 (the "Purchase Price"), and which shall be
paid by wire transfer to an account or accounts of Seller identified
in writing to Buyer not less than five days prior to the Closing Date.
D. Closing
1. Closing of this Agreement ("Closing") shall occur at 10:00 a.m.
on the Closing Date and will be held at the offices of Lord
Bissell & Brook, 115
2
<PAGE> 3
South LaSalle Street, Chicago, Illinois, or at such other time
and place as may be agreed by the parties.
2. (i) "Satisfaction of Conditions Date" shall mean the date on
which all regulatory and governmental approvals necessary
for the consummation of the transactions contemplated by
this Agreement are received, any applicable waiting period
expires or is terminated, and all other conditions required
by this Agreement are either satisfied or waived.
(ii) "Closing Date" shall mean the date on which the Escrow
Agent, as defined below, releases, among other things, the
Purchase Price to the Seller and the certificate or
certificates representing the Stock to Buyer and shall be
set as described below.
3. In the event the Dry Closing, as defined below, occurs on or
prior to November 15, 1998, the Purchase Price shall be decreased
by the amount of $25,000.00 multiplied by the number of days by
which the Dry Closing precedes November 16, 1998. Notwithstanding
the foregoing, if the Dry Closing is November 16, 1998, then the
Purchase Price shall be decreased by $25,000.
4. In the event the Satisfaction of Conditions Date occurs on or
after November 20, 1998, the Purchase Price shall be increased by
the amount of $16,666.67 multiplied by the number of days by
which the Satisfaction of Conditions Date follows November 19,
1998; provided, however, that there shall be no increase in the
Purchase Price attributable to those days by which the
Satisfaction of Conditions Date exceeds November 19, 1998 to the
extent such days of delay in the Closing are solely and directly
caused by the negligence of Seller or the Company. Any increase
in the Purchase Price pursuant to this Section I.D.4 shall be
nonrefundable regardless of whether Closing occurs and shall be
paid as follows:
(i) on December 4, 1998, for increases in the Purchase Price
attributable for the periods from November 20, 1998 through
December 3, 1998;
(ii) on December 17, 1998, for increases in the Purchase
Price attributable for the periods from December 4, 1998
through December 16, 1998;
3
<PAGE> 4
(iii) on December 31, 1998, for increases in the Purchase
Price attributable for the periods from December 17, 1998
through December 31, 1998; and
(iv) at Closing, for increases in the Purchase Price
attributable for the periods from January 1, 1999 through
the Closing Date.
5. (i) No later than two business days after the Satisfaction of
Conditions Date, the parties shall close the transaction for
purposes of fixing the Purchase Price and obligating the
parties to effect the Closing (the "Dry Closing"), if the
Satisfaction of Conditions Date is prior to December 1,
1998. At the Dry Closing, the parties shall execute all
documents effective as of the Closing Date and shall deliver
them to a mutually acceptable national bank (the "Escrow
Agent"). In addition, Seller shall execute stock powers
transferring the Stock to Buyer and deliver such stock
powers and the certificate or certificates representing the
Stock to the Escrow Agent at the Dry Closing. Buyer shall
remit the Purchase Price to the Escrow Agent at the Dry
Closing.
(ii) The Closing Date shall occur on November 2, 1998 if the Dry
Closing occurs prior to October 31, 1998. The Closing Date
shall occur on December 1, 1998 if the Dry Closing occurs
after October 31, 1998 and prior to December 1, 1998. If the
Satisfaction of Conditions Date occurs after November 30,
1998, then the Closing Date shall be two business days after
the Satisfaction of Conditions Date.
(iii) Notwithstanding the Dry Closing of this transaction, Seller
shall continue to operate the Company and have financial
responsibility for the Company through the Closing Date.
Notwithstanding the foregoing, if the transaction closes on
any day during the first 15 days of December, 1998, Seller's
obligation for Transferred Liabilities and Seller's rights
in the Transferred Assets shall continue only to and through
November 30, 1998 and if the transaction closes on or after
December 16, 1998, Seller's obligation for Transferred
Liabilities and Seller's rights in the Transferred Assets
shall continue to and through December 31, 1998.
6. If the Dry Closing or the Closing Date does not take place solely
due to the failure of the Buyer to obtain the Limited License
discussed in Section V.O
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herein, then the Purchase Price shall be fixed as of the date
that all other closing conditions have been met.
E. Recapitalization. Buyer shall recapitalize Company to meet surplus,
reserve, and/or net worth requirements.
F. Termination. If Closing has not occurred by December 31, 1998, then
either party may terminate this Agreement on written notice to the
other party with no further obligation or liability (other than the
payment of any amounts pursuant to Section I.D.4), unless the reason
for failure to close is the bad faith or breach of one of the parties.
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF SELLERS
Except as set forth in the disclosure schedules attached hereto and made a
part hereof by reference, ("Disclosure Schedules") Seller represents and
warrants to Buyer that:
A. Ownership of Shares. Seller is the lawful record and beneficial owner
of all of the issued and outstanding Shares of Stock of the Company.
All such Shares are owned free and clear of all liens, encumbrances
and restrictions of every kind except for restrictions on transfer
under federal and state securities laws. Seller has full power and
authority to transfer the Stock and all of Seller's right, title and
interest in and to the Stock without the consent of any other person,
and upon the delivery of the Shares in the manner contemplated under
this Agreement, Buyer will acquire the beneficial and legal, valid and
indefeasible title to such Shares, free and clear of all liens,
encumbrances and restrictions of every kind except for restrictions on
transfer under federal and state securities laws.
B. Due Execution. This Agreement has been duly executed and delivered by
Seller and (assuming due execution and delivery by Buyer) constitutes
a valid and legally binding obligation of Seller, enforceable in
accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar rights
affecting creditors' rights generally, provided, however, that the
parties acknowledge that the approvals of the Illinois and Indiana
Departments of Insurance to this transaction and the expiration or
termination of the applicable waiting periods under the
Hart-Scott-Rodino ("HSR") Act are conditions precedent to Closing.
C. Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of
Illinois, has all corporate power and authority to carry on business
as now being conducted in the states of Illinois and Indiana, and to
own its properties and is duly licensed or qualified and in good
standing as a foreign corporation in each jurisdiction in which it is
required to be so licensed or so qualified, except where the failure
to be so licensed or so
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<PAGE> 6
qualified would not have a material adverse effect on the business,
condition or assets of the Company. The Company has no subsidiaries
nor does it own stock in any other corporation.
D. Capitalization. The authorized capital of the Company consists of 200
shares of common stock, $100 par value (the "Common Stock"), of which
200 shares are issued and outstanding and zero shares are reflected on
the books and records of the Company as Treasury Shares. All such
issued and outstanding shares have been validly issued and are fully
paid and non-assessable. Except for the rights created pursuant to
this Agreement, there are no subscriptions, calls, contracts,
commitments, understandings, restrictions, outstanding options,
warrants, rights (including conversion or preemptive rights) or
agreements for the purchase or acquisition from the Company or Seller
of any shares of the Company's capital stock. There are no voting
trusts or other agreements or understandings with respect to any of
the Stock.
E. No Violation. Neither the execution and delivery of this Agreement,
nor the performance and the consummation of the transactions
contemplated hereby will (i) violate or conflict with any provision of
the Articles of Incorporation or Bylaws of the Company, (ii) violate,
or be in conflict with, or constitute a default (or an event which,
with or without due notice or lapse of time, or both, would constitute
a default) under, or result in the modification or termination of, or
cause or permit the acceleration of the maturity of any material debt,
obligation, contract, commitment or other agreement to which the
Company is a party or by which its property may be bound, (iii) with
the exception of the Account Agreement set forth in Section V.G
herein, would result in the creation or imposition of any mortgage,
pledge lien, security interest, encumbrance, restriction, charge or
limitation of any kind of a material nature, upon any property or
assets of the Company under any debt, obligation, contract, agreement
or commitment to which the Company is a party or by which the Company
is bound, or (iv) violate any statute or law or any judgment, decree,
order, regulation or rule of any court or governmental authority.
F. Pending Litigation. There is no action, suit or governmental,
administrative, arbitration or regulatory proceeding or investigation
("Action") pending or, to the best of Seller's or Company's knowledge,
threatened against or relating to the Company, or any of the
businesses, assets or properties of the Company. None of such Actions,
if adversely determined against the Company, would have a material
adverse effect on the business, condition or assets of the Company,
taken as a whole.
G. Information Provided.
1. All information, data, and documents delivered by Seller or
Company to Buyer or made available by Seller to Buyer prior to
this Agreement ("Due Diligence Information"), when considered
together, fairly represented the
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condition of the Company in all material respects. In explanation
but not in limitation of the preceding sentence, except for
normal year-end adjustments with respect to the unaudited
financial statements, all financial statements contained in the
Due Diligence Information were complete and correct in all
material respects and were prepared in accordance with generally
accepted accounting principles consistently applied throughout
the periods indicated, and present fairly the financial position
of the Company at such dates and the results of its operations
for the periods then ended.
2. The Due Diligence Information was provided for the purpose of
allowing Buyer to determine whether to enter into this Agreement
and the terms which Buyer would offer or accept in this
Agreement, and Buyer reasonably relied upon such Information.
H. Financial Statements. To the best of Seller's knowledge, there are no
liabilities, debts, obligations or claims against the Company of any
nature, absolute or contingent, except (i) as and to the extent
reflected or specifically reserved against in the balance sheet of
August 31, 1998, and (ii) other liabilities, debts, obligations, or
claims arising since then in the ordinary course of business
consistent with past practices.
I. Corporate Records. Seller has provided Buyer with true, correct and
complete copies of the Articles of Incorporation and bylaws of the
Company.
J. Tax Matters. Since April 1, 1998, the Company or Seller on Company's
behalf has (i) timely filed or caused to be filed all federal state,
local, and foreign tax returns (including, without limitation,
consolidated and/or combined tax returns) required to be filed prior
to the date hereof, except where a timely extension has been obtained
and has not expired; and (ii) has paid or fully accrued for all taxes,
interest, penalties, assessments, and deficiencies shown to be due or
payable on such returns (which taxes are all the taxes due and payable
under such returns or pursuant to any assessment received with respect
to the Company). There are no tax liens on any of the assets of the
Company including without limitation income, franchise, real estate,
sales and withholding taxes and other employment-related taxes except
for taxes accrued and not yet due and payable. All tax returns filed
by Company since April 1, 1998 constitute complete and accurate
representations of the tax liabilities of Company for such years and
accurately set forth all items (to the extent required to be included
or reflected in such returns) relevant to future tax liabilities,
including the tax basis of its properties and assets. No examinations
of the federal, state, local, or foreign tax returns of Company is
currently in progress and since April 1, 1998 the Company has not
waived or extended any applicable statute of limitations relating to
the assessment of federal, state, local, or foreign taxes. Except as
set forth in Schedule II.J, no deficiency with respect to the Company
in the payment of taxes in
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<PAGE> 8
any period has been asserted in writing by any taxing body and
received by the Company since April 1, 1998 which remains unsettled as
of the date hereof. Since April 1, 1998, the Company has withheld and
paid all taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party.
K. Intellectual Property. To the best knowledge of Seller, none of the
processes currently used by the Company or any of the services or
programs sold by the Company, or trademarks, trade names, labels or
other marks or copyrights used by the Company, infringe the patent,
industrial property, trademark, trade name, label, other mark, right
or copyright of any other person or entity, and the Company has not
received any notice of adverse claim by any third party with respect
thereto. The Company has license agreements in force to the extent
necessary to permit its full use of all of the processes used by it
with respect to its business, properties and assets and to permit such
operations and sales in accordance with its present and planned
practices.
L. Accounts Receivable. The accounts receivable appearing on the balance
sheet of the Company as of August 31, 1998 and all accounts receivable
created since that date represent valid obligations owing to the
Company, and fully collectible by the Company, subject to the reserve
for doubtful accounts appearing on such balance sheet, and the
accounting policy for such reserves has been maintained since then.
M. No Material Change. Other than as disclosed on the unaudited financial
statements, since the date of the last audited financial statement of
the Company, there has been no material adverse change in the
financial condition, assets, liabilities (contingent or otherwise),
results of operations, or business or to the best knowledge of the
Sellers, business prospects of the Company considered as a whole,
except for the operating losses of the same approximate magnitude as
experienced through August 31, 1998, and except for the transfer of
assets and liabilities as contemplated in this Agreement.
N. Compliance with Laws, Contracts, and Environmental Regulations. Except
for when a failure to do so would not have a material adverse effect
on the Company's business, to the best of Seller's knowledge, the
Company is operating the Company's business in accordance with all
contracts or agreements binding on it, and the business of the Company
is not being conducted in violation of any law, ordinance, or
regulation of any governmental entity, whether federal, state, or
local, (including but not limited to authorities with jurisdiction
over environmental matters). All governmental approvals, permits, and
licenses, including those relating to environmental quality, required
by the Company to conduct its business (the "Permits") have been
obtained and are in full force and effect and are being complied with
in all material respects, except where the failure to obtain or
failure to comply
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<PAGE> 9
with such Permits would not have a materially adverse effect on the
business, condition or assets of the Company. Neither Seller nor the
Company has received any notification from a governmental agency or a
claimant's counsel that its business is being conducted in violation
of any state or federal laws, regulations, or statutes; or of any
local ordinances; or of any orders or decrees of any state, federal or
local governmental body or court. The Company's business is not being
conducted in violation of any state or federal laws, regulations or
statutes governing or effecting protection of the environment; or any
local ordinance governing or effecting protection of the environment;
or any presently or previously existing orders or decrees of any
state, federal, or local governmental body or court governing or
effecting protection of the environment, except for when a failure to
do so would not have a material adverse effect on the Company's
business.
O. No Defaults. There is not under any contract material to the business
of the Company set forth in the Due Diligence Information:
1. any existing material default by the Company or, to the best
knowledge of the Seller, by any other party thereto, or
2. an event which, after notice or lapse of time or both, would
constitute a material default by the Company or, to the best
knowledge of the Seller, by any other party, or result in a right
to accelerate or result in a loss of material rights as against
the Company.
P. Insurance. All of the Company's insurance polices are in full force
and effect, all premiums with respect thereto have been paid, and no
notice of cancellation or termination has been received with respect
to any such policy.
Q. Powers of Attorney. The Company has not granted any powers of attorney
to any entity or person.
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller that the representations and
warranties contained herein are true and correct as of the date of this
Agreement and shall be true and correct as of the closing:
A. Organization and Good Standing. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of Illinois, has
all corporate power and authority to carry on its business as now
being conducted, and to own its properties and is duly licensed or
qualified and in good standing as a foreign corporation in each
jurisdiction in which it is required to be so licensed or so
qualified, except where the
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failure to be so licensed or so qualified would not have a material
adverse effect on the business, condition or assets of the Buyer.
B. Power and Authority. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby
will conflict with or violate the Articles of Incorporation or Bylaws
of Buyer. The execution, delivery and performance of this Agreement by
Buyer have been duly authorized by all necessary corporate actions on
the part of Buyer. This Agreement constitutes the valid and binding
obligation of Buyer enforceable in accordance with its terms.
C. Due Execution. This Agreement has been duly executed and delivered by
Buyer and (assuming due execution and delivery by Seller) constitutes
a valid and legally binding obligation of Buyer, enforceable in
accordance with its terms, provided, however, that the parties
acknowledge that the approvals of the Illinois and Indiana Departments
of Insurance to this transaction and the expiration or termination of
the applicable waiting periods under the HSR Act are conditions
precedent to Closing.
D. No Violation. Neither the execution and delivery of this Agreement,
nor the performance and the consummation of the transactions
contemplated hereby will (i) violate or conflict with any provision of
the Articles of Incorporation or Bylaws of Buyer, (ii) violate, or be
in conflict with, or constitute a default (or an event which, with or
without due notice or lapse of time, or both, would constitute a
default) under, or result in the modification or termination of, or
cause or permit the acceleration of the maturity of any material debt,
obligation, contract, commitment or other agreement to which the Buyer
is a party or by which its property may be bound, (iii) with the
exception of the Account Agreement set forth in Section V.G herein,
would result in the creation or imposition of any mortgage, pledge
lien, security interest, encumbrance, restriction, charge or
limitation of any kind of a material nature, upon any property or
assets of the Company under any debt, obligation, contract, agreement
or commitment to which the Company is a party or by which the Company
is bound, or (iv) violate any statute or law or any judgment, decree,
order, regulation or rule of any court or governmental authority.
E. Compliance with Securities Laws. Buyer is acquiring the shares for its
own account for investment only, with no present intention of
reselling or otherwise disposing of all or any portion of the shares
in a manner which would constitute a violation of the federal or
applicable state securities laws and regulations. Buyer currently has,
or has made legally enforceable arrangements making available to
Buyer, sufficient funds to cover the Purchase Price.
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ARTICLE IV. REPRESENTATIONS AND WARRANTIES AS OF CLOSING
A. Representations and Warranties True as of Closing. The representations
and warranties contained in Articles II and III above shall be true on
and as of the Closing Date with the same effect as if such
representations and warranties had been made on and as of the Closing
Date and shall survive the execution of this Agreement for a period of
one year following the Closing.
ARTICLE V. COVENANTS
A. Access. Within (5) business days after the execution of this
Agreement, Seller shall provide Buyer such information as Seller
possesses, and as is reasonably necessary for Buyer to complete
applications for regulatory approval of the transactions contemplated
by this Agreement. To assist Buyer in planning the transition of the
business after Closing, (i) within ten (10) business days after the
Buyer's request, Seller shall provide such requested information as
Seller has reasonably available and (ii) upon request from Buyer
specifying the particular aspect of the Company's operations it needs
to understand, Seller shall arrange for one or more of the Buyer's
employees, at Buyer's sole cost and expense, to visit the premises of
the Company under the supervision of the Company's General Manager to
gather such information during such hours as are designated by the
General Manager, and in such a manner as is not disruptive of the
Company's business operations.
B. Certain Filings, Consents and Action. Buyer and Seller shall (i)
cooperate with each other in determining whether any other filings are
required to be made or consents, approvals, permits or authorizations
are required to be obtained under any federal, state or foreign law or
regulation or whether any consents, approvals or waivers are required
to be obtained from other parties to other contracts of the Company in
connection with the consummation of the transactions contemplated
hereunder, (ii) actively assist each other in obtaining any consents,
permits, authorizations, approvals or waivers which are required, and
(iii) use all reasonable efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things reasonably
necessary, proper or advisable to consummate and make effective as
promptly practicable the transactions contemplated by this Agreement
and to cooperate with each other in connection therewith.
C. Company Employees. The Company shall terminate all employment
relationships or contracts maintained by the Company effective as of
the Closing Date. Buyer shall have the right (but not the obligation)
to offer employment to any employees of the Company who are employed
by the Company immediately prior to the Closing Date ("Employees").
Seller shall be responsible for all pay, severance, incentive
compensation, profit sharing, retirement, pension, salary
continuation, post-retirement benefits, death benefits, continuation
of health benefits (sometimes called
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<PAGE> 12
COBRA continuation) or other pay benefits to which Employees may be
entitled as a result of employment or contracts of employment with the
Company prior to or on the Closing Date, and for administering such
benefits.
D. Company Name Change. As soon as reasonably practicable after the
Closing Date, Buyer shall change the name of Company to a name which
is different than, and not confusing with, Company's name as of
Closing.
E. Payment of Claims and Trade Payables. All claims for medical goods and
services for which Company is or may be liable and having dates of
service occurring on or before the Closing Date shall be adjudicated
and paid by Seller or Account in accordance with the applicable
subscriber certificate or other evidence of coverage and provider
agreement, if any, as in the ordinary course of business but in no
event later than 30 days after the appropriate billing therefor has
been received by Company. Any inpatient treatment commencing on or
before the Closing Date shall be treated as having occurred, in its
entirety, on or before the Closing Date.
F. Collection of Receivables. Seller shall be responsible for billings
and collections for premium revenue accrued for the billing period
through the date described in Article I.D.5 ("Financial Closing Date")
and for collections for tax benefits, COB payments, subrogation
payments and proceeds from insurance policies relating to periods
prior to the Financial Closing Date; provided, however, that Buyer
shall be entitled to retain any monies for tax benefits, COB payments,
subrogation payments and proceeds from insurance policies relating to
periods prior to the Financial Closing Date but collected three years
after the Closing Date through Buyer's or Company's efforts begun
after the aforesaid three year period elapsed. Buyer shall be
responsible for billings and collections for premium revenue for
billing periods after the Financial Closing Date. Buyer and Seller
shall use their best efforts to coordinate the transition of these
functions and to reconcile premiums received versus premium remitted
by customers. The identification and application of premiums remitted
to the proper billing period shall take into account factors including
but not limited to: customer's historical payment patterns,
identification by customer of period to which remittance relates,
correspondence included with the remittance, matching amount of
remittance to previous or current billing, and discussions with
customers as necessary to reconcile remittances to billings.
G. Account Agreement.
1. Prior to Closing, Buyer and Seller shall enter into a mutually
acceptable Account Agreement to collateralize Seller's obligation
to satisfy Transferred Liabilities. At the Closing, Seller shall
deposit into the Account cash or cash equivalents in an amount
equal to the accrued Transferred Liabilities. The Account
Agreement shall contain such terms and conditions such that the
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amount in the Account shall be recognized by the Illinois and
Indiana Departments of Insurance as an admitted asset of Company
after Closing. The Account Agreement shall, among other things,
provide the following: (i) any withdrawals from the Account shall
be used solely to pay Transferred Liabilities that actually
become due and owing as legal obligations of the Company, (ii)
withdrawals from the Account may be made only at the mutual
direction of and consent of the Seller and Buyer, and (iii) any
and all income and interest earned by the Account shall be
retained in the Account; (iv) the custodian of the Account shall
pay over to Seller such amounts as may remain in the Account
twelve months after the Closing or, if claims have been forwarded
to Seller, such additional time until such claims are paid, at
which time all funds remaining in the Account shall be delivered
to the Seller and the Account shall thereupon terminate
(notwithstanding the foregoing, at the end of the aforesaid
twelve month period, the custodian shall remit any funds
remaining in the Account to Seller that exceed the amount of
claims forwarded to Seller).
2. The parties shall evaluate the amount of Transferred Liabilities
from time to time during the duration of the Account but not less
frequently than quarterly. In the event that accrued liabilities
contained within the Transferred Liabilities are adjusted based
on claims experience and as a result of such adjustment it is
determined that the amount in the Account is insufficient to
cover the entirety of such accruals, then Seller shall contribute
additional funds to the Account such that the balance in the
Account at all times shall be equal to or greater than the
aggregate unpaid Transferred Liabilities.
3. Notwithstanding the termination of the Account, Seller shall
remain liable to Company and Buyer for any and all of the
obligations of the Company described in Section I.B.3 as
Transferred Liabilities.
4. The parties agree to cooperate and use all reasonable efforts to
achieve the stated objectives set forth in this Section V.G in a
manner acceptable to the relevant regulatory authorities.
H. Non-HMO Risk. Buyer acknowledges and understands that through
agreements ("POS Contracts") the Principal Life Insurance Company
("Principal Life"), Company arranges for coverage for medical benefits
risk which the Company cannot lawfully assume solely under its
certificate of authority as an HMO. Copies of the standard forms of
the POS Contracts are attached hereto as Exhibit V.H. Seller shall
cooperate with Buyer in requesting of Principal Life that Principal
Life reach agreement with Buyer, on terms acceptable to Buyer,
regarding the continuation or termination of POS Contracts. Buyer
understands that Seller has no control over Principal Life and
Seller makes no covenant as to the outcome.
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I. Transition Activities. Starting immediately upon the execution of this
Agreement and continuing through and including the Closing Date,
Seller shall cooperate with Buyer in a commercially reasonable manner
so as to permit, after the Closing, the continuation of all services,
payments, and benefit plans to Company's customers, enrollees, and
providers in an uninterrupted manner and (with the exception of
notices of change in ownership and name during the transition period).
Subject to applicable law, Seller shall make a reasonable effort to do
so in a manner which is transparent to any customer, enrollee or
provider. Without limiting the generality of the foregoing:
1. Seller shall provide to Buyer in such magnetic media and format
as Buyer shall reasonably specify, all data possessed by Seller
or by Company as to customers and groups, enrollment and
eligibility, claims and claims history, provided however, that
Seller shall not be required to provide or arrange for data
conversion except to the extent agreed by technical staffs of
Seller and Buyer.
2. Seller shall also provide in hard copy and magnetic media (in
such format as the same may be maintained by Seller) such forms
(including subscriber certificates or other evidences of coverage
and provider directories) and form letters and other internal or
external communications routinely used in the operation of
Company's business.
3. Prior to Closing, Seller shall provide Buyer with the following
materially complete, correct and detailed lists, in form and
substance reasonably acceptable to Buyer, specifying with respect
to the business, assets and obligations of the Company each and
every item in the following categories referred to below, and
shall make available for inspection by Buyer the documents and
other material that underlie such lists:
a. List 1 - all current in-force contracts to which Company is
a party, including but not limited to provider contracts,
group and individual subscriber agreements, vendor contracts
and contracts with the Health Care Financing Administration
("HCFA");
b. List 2 - the policies of insurance and reinsurance presently
in force.
c. List 3 - the name, current annual compensation rate
(including bonus and commissions), title, current base
salary rate of all current Company employees.
d. List 4 - all federal, state, local and foreign governmental
licenses, permits and other authorizations necessary in the
conduct of the
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business of the Company ("Permits"); all federal, state,
local and foreign governmental or judicial consents, orders,
decrees and other compliance agreements relating to the
Company under which the Company is operating or bound; all
reports of inspection of the Company which are in the
possession of Seller or Company under all applicable federal
and state laws and regulations; and copies of all of the
foregoing and applications relating thereto. Without
limiting the generality of the foregoing, such approvals
shall include all applications for and evidence of
regulatory approval of all subscriber certificates or other
evidences of coverage which Company has distributed to
enrollees and which are in the possession of Seller or
Company, all applications for and evidence of regulatory
approval of rates to be charged for any of the Company's
products which are in the possession of Seller or Company,
and all other applications for and evidence of regulatory
approval of any other document, act, or omission for which
regulatory approval is required by law, regulation, or
custom of regulatory agency;
e. List 5 - As of the date of this Agreement, all pending
grievances and appeals (or other written complaints, however
characterized) by any customer, subscriber or enrollee and
relating to any decision by Company to decline coverage for
any medical service or limit the amount of medical services
desired by any customer, enrollee, or provider), stating,
with respect to each such grievance, appeal, or complaint,
whether communication has been received from any regulatory
or governmental agency (including but not limited to the
Health Care Financing Administration and the federal Office
of Personnel Management) with respect to same.
4. Prior to Closing, Seller shall make available to Buyer all
Company files containing communications received from any
governmental or regulatory agency having or claiming jurisdiction
or authority over any aspect of the Company's business, including
but not limited to any state Department of Insurance or
Department of Health (or state agency, whatever named, designated
by such state as having regulatory authority over the operation
of health maintenance organizations, health insuring
corporations, or other managed care entities), to the extent
within the possession of Seller or Company. For purposes of this
paragraph, the Health Care Financing Administration and the
federal Office of Personnel Management shall be considered
regulatory agencies.
5. Prior to Closing, Seller shall make available to Buyer all
Company files containing materials relating to pending grievances
and appeals (or other
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written complaints, however characterized) by any customer,
subscriber or enrollee and relating to any decision by Company to
decline coverage for any medical service or limit the amount of
medical services desired by any customer, enrollee, or provider)
within the possession of Seller or Company.
J. Post-Closing Cooperation. If requested by Buyer, Seller agrees to
enter into good faith negotiations with Buyer to reach a final written
agreement to be executed no later than at the Closing, pursuant to
which Seller will agree to continue, for as long as one year following
the Closing, to Provide the Company with certain of the administrative
services currently provided by Seller to Company, and Buyer will agree
to compensate Seller therefor pursuant to a formula or fee schedule to
be set forth in such agreement by the parties.
K. Absence of Change or Event. From and after the date of this Agreement
and through Closing the Company will conduct its businesses only in
the ordinary course so as to preserve its business organization
intact, to retain the services of its employees and to preserve its
goodwill and relationship with its employees, customers, suppliers,
creditors and others having business relationships with it, and
without Buyer's prior written consent shall not (nor will Seller with
regard to the Company or the Stock):
1. incur any obligation or liability, absolute, accrued, contingent
or otherwise, whether due or to become due, except liabilities or
obligations incurred in the ordinary course of business and
consistent with past practices;
2. institute any litigation, action or proceeding before any court
or governmental body relating to it or its property, or waive or
compromise any right of a substantial value to the Company,
except for litigation instituted and waivers and compromises
given, in the ordinary course of business and consistent with
past practice;
3. grant any option, warrant or other right in respect of any
capital stock of the Company;
4. make any loan to any officer, director, employee or agent of the
Company or Affiliate or family member of the foregoing;
5. take any action or omit to take any action in violation of any
contract, commitment or other obligation to which it is bound
which would cause (after lapse of time, notice or both) the
breach, default or acceleration of any right, contract or
commitment or other obligation of the Company, any of which would
have a material and adverse effect on the business of Company
taken as a whole; or
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6. make any agreement or commitment to do any of the foregoing.
L. After the Closing, Seller and its representatives shall be afforded
complete access, at Seller's sole cost and expense, at the offices of
the Company to (and may, at Seller's expense, make copies of) all
records, files and documents relating in whole or in part to the
Company and its business and operations (including bank account
records) prior to the Closing for the sole purpose of (i) responding
to claims against or expenses incurred by the Seller from is ownership
of the Company or its obligations hereunder or (ii) recovering monies
to which Seller is entitled relating to tax benefits, COB payments,
subrogation payments and recoveries under insurance policies. Seller's
rights under this subparagraph V.L shall expire three years after
Closing; provided, however, that such rights shall continue after the
aforesaid three year period only to allow Seller to complete
investigations that began prior to the expiration of the three year
period. Seller's access to records hereunder shall be during such
hours as are designated by the Buyer, and in such a manner as is not
disruptive of the Company's business operations.
M. All data and information provided by Seller or Company to Buyer
pursuant to this Section V.I, Section V.A and the Due Diligence
Information shall, until Closing, remain the sole property of Seller
and Company, shall be held by Buyer as confidential; and Buyer shall
use standard industry measures to protect such data and information
from access by persons not authorized by law or by Seller to have
access, and shall promptly return such data and information (including
any and all copies thereof) to Seller in the event this Agreement is
terminated or expires without the occurrence of the Closing.
N. With the execution of this Agreement and continuing until Closing,
Seller shall notify Buyer as soon as reasonably practicable (a) after
learning about any labor union organizing activity or action,
threatened employees' strike, work stoppages, slow-downs or lock-outs,
or (b) after becoming aware of any loss or threatened loss of any
permit, license, qualification, special charter or certificate of
authority which would have a material adverse effect on the Company.
O. Seller shall cooperate with and assist Buyer in obtaining a limited
license from Principal Life to use the Company=s name for a period of
90 days after the Closing Date, on reasonable terms that are customary
in the industry (including, without limitation, without cost to Buyer)
and which meet Buyer's needs to operate the Company's business (the
"Limited License").
ARTICLE VI. INDEMNIFICATION
A. Buyer Indemnification. Buyer shall indemnify Seller against, and hold
it harmless from, any and all obligations and liabilities in respect
of suits, proceedings, demands,
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claims, judgments, damages, expenses and costs (including, without
limitation, interest, penalties and reasonable counsel fees) asserted
against, relating to, imposed on or suffered or incurred by Seller by
reason of or resulting from: (i) any failure by Buyer to pay, perform,
or discharge any of the obligations and liabilities which are assumed
by Buyer under this Agreement; (ii) any breach by Buyer of the
covenants, representations and warranties set forth in this Agreement.
B. Seller Indemnification. Seller shall indemnify, defend and hold
harmless Buyer from and against any suits, proceedings, demands,
judgments, claims, damages, expenses and costs (including, without
limitation, interest, penalties and reasonable counsel fees) asserted
against, relating to, imposed on or suffered or incurred by Buyer by
reason of or resulting from: (i) any breach by Seller of the
covenants, representations and warranties or agreements herein of
Seller; and (ii) the assertion against Buyer of any Transferred
Liabilities.
C. Time for Indemnification. The obligation of either party to hold
harmless, defend, and indemnify the other as set forth in this Article
shall extend to and until the first anniversary of the Closing,
provided, however, that Seller's indemnification of Buyer as to claims
for Transferred Liabilities under VI.B.(ii), above, shall extend to
and until the third anniversary of the Closing; provided further,
however, that if within such time either party has provided the other
notice of a claim or assertion of liability by any third party, and
regardless of whether such claim or assertion is groundless, false or
fraudulent, the obligation to hold harmless, defend, and indemnify
with respect to each such claim or assertion shall extend to and until
such claim or assertion is finally compromised, settled, or
adjudicated and all applicable appeals have been finally exhausted.
D. Indemnification Procedure. The obligations and liabilities of the
parties hereunder shall be subject to the following terms and
conditions:
1. Notice of Claims. Any party seeking indemnification under this
Agreement (the "Indemnified Party") shall give to the party from
which indemnification is sought (the "Indemnitor") a notice (a
"Claim Notice") describing in reasonable detail the facts giving
rise to any claim for indemnification hereunder and shall include
in such Claim Notice (if then known) the amount or the method of
computation of the amount of such claim, and a reference to the
provisions of this Agreement or any other agreement, document or
instrument executed or delivered hereunder or in connection
herewith upon which such claim is based; provided, that a Claim
Notice in respect of any claim, action at law or suit in equity
by or against a third Person as to which indemnification will be
sought shall be given promptly after such claim is made or after
the action or suit is commenced; and provided further that
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failure to give such notice shall not relieve the Indemnitor of
its obligations hereunder except to the extent it shall have been
prejudiced by such failure.
2. Third-Party Claims. The Indemnitor shall have twenty (20)
business days after receipt of any Claim Notices or information
necessary to make the Claim Notice complete, relating to any
third Person claim, action or suit (collectively, "Claim") to
notify the Indemnified Party of its election to conduct and
control the defense, compromise or settlement of such Claim.
Unless the Indemnitor gives the foregoing notice, the Indemnified
Party shall have the right to conduct and control, through
counsel of its own choosing, the defense, compromise or
settlement of such Claim, and in any such case the Indemnitor
shall cooperate in connection with such Claim and shall furnish
such records, information and testimony and attend such
conferences, discovery proceedings, hearings, trials and appeals
as may be reasonably requested by the Indemnified Party in
connection therewith unless the Indemnitor notified the
Indemnified Party that it believes that it has no obligation to
provide indemnification hereunder; provided that, should the
Indemnitor fail to timely give notice as provided above in this
Section, (a) the Indemnitor may, in any event, participate,
through counsel chosen by it and at its own expense, in the
defense of any such Claim and (b) if the Indemnitor has
acknowledged and agreed in writing that it has the obligation to
provide indemnification under this Agreement for any Loss
incurred in connection with or arising from such Claim, the
Indemnitor shall have the right to assume control of the defense,
compromise or settlement of such Claim from the Indemnified Party
at any time (provided it has fully paid all expenses of the
Indemnified Party theretofore and such change in control of the
Claim does not prejudice the position of the Indemnified Party in
the proceeding) by giving written notice of such election to the
Indemnified Party. If the Indemnitor timely gives notice as
provided above in this Section or assumes control of the defense,
compromise or settlement of any Claim, the Indemnified Party
shall cooperate in connection with such Claim and shall furnish
such records, information and testimony and attend such
conferences, discovery proceedings, hearings, trials and appeals
as may be reasonably requested by the Indemnitor in connection
therewith; provided, that the Indemnified Party may participate,
through counsel chosen by it and at its own expense, in the
defense of any such Claim, as to which the Indemnitor has so
elected to conduct and control the defense thereof; and provided
further, that the Indemnitor shall not, without the written
consent of the Indemnified Party (which consent shall not be
unreasonably withheld) pay, compromise or settle any such Claim
(a) in any case where the Indemnitor has not acknowledged in
writing its obligation to provide indemnification to the
Indemnified Party under this Agreement, or (b) seeking any relief
other than monetary damages; and provided further, that
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the Indemnitor shall, at any time prior to the settlement or
commencement of trial with respect to any Claim, tender the
defense, compromise and settlement of such Claim to the
Indemnified Party should the Indemnitor reasonably determine,
based upon the information furnished to it by the Indemnified
Party or obtained by the Indemnitor in the course of defending
the Claim, that the Indemnitor is not obligated to provide
indemnification to the Indemnified Party under this Agreement. In
the event that the Indemnified Party conducts and controls the
defense of any Claim, the Indemnified Party shall not, without
the prior written consent of the Indemnitor (which consent shall
not be unreasonably withheld), compromise or settle such Claim
unless the Indemnitor notifies the Indemnified Party that it
believes that it has no obligation to provide indemnification
hereunder.
E. Determination of Loss. Indemnification pursuant to this Article shall
be payable with respect to any claim described herein as subject to
indemnification upon the happening of the earliest of any of the
following:
1. Resolution of such claim by mutual agreement between Seller and
Buyer; or
2. The issuance of a final (not subject to appeal or not timely
appealed) judgment, award, order or other ruling by a court,
agency, arbitrator or any other tribunal or organization or
person having legal jurisdiction over the parties and the subject
matter of such claim or to whom such claim was submitted for
resolution by joint agreement between the Seller and Buyer; or
3. Final settlement of such claim by a third party pursuant to
mutual authorization by Seller and Buyer.
4. There shall be allowed as a setoff against any amount of any loss
the amounts of recovery attributable to such loss which is
received by way of coordination of benefits, subrogation, or
payment under any contract of insurance.
F. Set Off. Notwithstanding any other provision herein, and without
limiting any other right or remedy available, either party shall have
the right to set off any final (not subject to appeal or timely
appealed) determination of damages incurred as a result of any breach
of a representation, warranty, covenant in this Agreement or any other
Agreement, against any amount to be paid hereunder.
ARTICLE VII. TAXES
A. Tax Responsibility. Seller shall be responsible for all taxes not
scheduled herein that are attributable to the Company, its operations,
and the Company's assets for all periods through or which are paid
prior to or on the Closing Date. Seller will
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indemnify Buyer for any additional taxes relating to the ultimate
settlement of the Company's Closing balance sheet (including a
reduction in the Transferred Liabilities which may cause taxable
income to the Company subsequent to the Closing Date). Buyer will
reimburse Seller for any tax benefit received relating to the ultimate
settlement of the Closing balance sheet (including an increase in the
Transferred Liabilities which may cause a tax deduction to the Company
subsequent to the Closing Date).
B. Tax Returns. Seller has filed or will timely file all tax returns and
reports which it is required to file with respect to: (i) the Company,
its plant and its operations prior to the Closing Date; and (ii) the
Company's assets. Seller represents that the Company has paid or will
timely pay all Taxes for which the Company is responsible that could
create any liens or charges on or against any of the Company's assets
or which could subject the Company to any liability including any
corporate estimated income payments due the federal or state taxing
authorities, which payments would be statutorily due prior to the
Closing Date. Any personal property tax returns and reports with
respect to the Company's assets with due dates after the Closing Date
(and any other tax returns and reports for periods beginning after the
Closing Date) shall be prepared and timely filed by Buyer after the
Closing Date.
ARTICLE VIII. COVENANT NOT TO COMPETE
A. Non-Competition. From the Closing Date for a period of three (3) years
thereafter (the "Non-Competition Period"), Seller shall not, directly
or indirectly, within the following listed counties in the States of
Illinois and Indiana or any county contiguous thereto (the "Restricted
Area"), own, manage, operate, control or be employed by, participate
in, consult with or be otherwise connected in any manner with the
ownership, management, operation or control of any HMO business that
is directly competitive with the present HMO business of the Company.
The counties to which this restriction shall apply are Cook, DuPage,
Kane, Lake, McHenry, and Will Counties in the State of Illinois and
Lake and Porter Counties in the State of Indiana and all counties
contiguous to these counties. This Section VIII.A shall not apply to
any of the following:
(1) HMO business conducted in the Restricted Area by Seller or a
successor to or affiliate of Seller as a result of Seller
acquiring or being acquired after the date of this Agreement by
an entity (whether by merger, consolidation, stock purchase,
asset purchase or otherwise) which, at the time of such
acquisition, conducts HMO business in the Restricted Area
accounting for 25 percent or less of such other entity's total
HMO business;
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(2) HMO business conducted as of the date of this Agreement by Seller
or a subsidiary of Seller (other than the Company) in the
Restricted Area within Indiana; or
(3) HMO business commenced after the date of this Agreement by Seller
or a subsidiary of Seller (other than the Company), which HMO
business consists of group accounts where the group is located
primarily outside of the Restricted Area within Indiana, but
which has 25 percent or fewer of its members/beneficiaries (and
their dependents) located within the Restricted Area of Indiana.
B. Confidentiality. Seller recognizes and acknowledges that certain
confidential business information of the Company that includes,
without limitation, the identity of the Company's suppliers, and all
of the Company's internal procedures and processes, costs, pricing
techniques, operational procedures and operational policies, is a
valuable, special and unique asset of the Company. Seller shall not,
at any time, whether during or after the Non-Competition Period,
disclose such information, or any part thereof, to any person, firm,
corporation, association or other entity, for any purpose or reason
whatsoever. Nothing contained herein, however, shall prevent Seller
from serving as a consultant after the non-competition period to
entities who provide the same products or services as the Company as
long as such knowledge utilized by Seller in such consulting would
involve knowledge of procedures and processes generally known within
the industry and not be processes and procedures unique to the
Company.
C. No Solicitation of Employees or Suppliers. During the Non-Competition
Period Seller shall not, directly or indirectly, on its own behalf or
on behalf of any other person, firm or company: (i) in any manner
whatsoever induce, or assist others to induce, any employee, agent,
representative or other person associated with the Company to
terminate his or her association with the Company, or in any manner
interfere with the relationship between the Company and any such
person; or (ii) in any manner whatsoever induce, or assist others to
induce, any supplier of the Company to terminate its association with
the Company, or do anything, directly or indirectly, to interfere with
the business relationship between the Company and any of its current
or prospective suppliers. Seller shall not be deemed to be in breach
of the provisions of this paragraph solely by continued employment of
individuals which are employed by Company as of the date of this
Agreement, so long as such individuals do not thereafter become
employed by Buyer.
D. Scope of Restrictions. Buyer and Seller agree that should any covenant
set forth in paragraphs A, B or C of this Article VIII be
unenforceable because of the scope thereof, or the period covered
thereby, or otherwise, the covenant shall be deemed to be reduced and
limited to enable it to be enforced to the extent permissible under
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the laws and public policies applied in the jurisdiction in which
enforcement is sought.
E. Specific Performance. Buyer and Seller acknowledge and agree that
Seller's violation of the covenants and agreements stated in this
Article would cause irreparable damage to the Company and to Buyer,
and that the Company and Buyer would not have an adequate remedy at
law. Seller therefore agrees that the Company and Buyer shall be
entitled to an injunction restraining such conduct by Seller in the
event of a breach or threatened breach by Seller of this Article or
any of the terms or conditions hereof.
F. Enforcement. In the event that Buyer and/or the Company brings an
action against Seller to enforce the terms of this Article, the
prevailing party in such action shall be entitled to recover from the
other party any and all losses, costs, damages and expenses, including
reasonable attorneys' fees and disbursements, incurred or suffered by
the prevailing party in connection with such action, in addition to
any and all other remedies that the prevailing party may possess at
law or in equity.
ARTICLE IX. CONDITIONS TO CLOSING
The obligations of both Buyer and Seller to consummate the transactions
contemplated herein are subject to the fulfillment of the following conditions
on or prior to the Closing Date, provided, however, that the fact of Closing
shall not of itself constitute a waiver of any subsequent claim for breach of
any representation, warranty, or other obligation hereunder.
A. Conditions to Buyer's Obligations. The obligations of the Buyer under
this Agreement are subject to the satisfaction at or prior to the
Closing of the following conditions, any of which may be waived in
writing by the Buyer:
1. Each representation and warranty made by Seller in this Agreement
shall be true and correct in all material respects as of the
Closing;
2. Seller shall have fully performed all of its obligations under
this Agreement;
3. Seller shall have tendered and delivered the required documents,
instruments and certificates at the Closing as set forth in
Section X.A, below.
4. No investigation, suit, action, or other proceeding shall have
been commenced, pending or threatened in writing before any
agency or judicial forum (i) in which it is sought to restrain,
prohibit, or obtain damages or other relief in connection with
this Agreement, or the consummation of the transaction
contemplated hereby, or (ii) that may have the effect of
restraining, prohibiting, or otherwise materially interfering
with the
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transaction contemplated hereby or otherwise adversely affect any
License of the Company which is material to the operations of the
Company.
5. All necessary consents including the approval of the Illinois and
Indiana Departments of Insurance, licenses, and regulatory
approvals of the transaction contemplated hereby shall have been
received by Buyer, provided, however, in the event any such
approvals contain any terms or conditions which vary from those
currently imposed under any operative contract or License to
which the Company is currently a party, that such terms and
conditions be reasonably acceptable to Buyer.
6. The Related Transaction contemplated in Section I.B has been
completed; the Account Agreement contemplated in Section V.G has
been executed, and if Buyer requests post-closing services
agreement contemplated in Section V.J, such agreement has been
executed.
7. The Limited License has been given by Principal Life to Buyer.
If any one of the aforesaid conditions is not satisfied, this
Agreement shall be voidable prior to the Closing upon written election
of Buyer.
B. Conditions to Seller's Obligations. The obligations of Seller
hereunder are subject to the satisfaction at or prior to the Closing
of all of the following conditions, any of which may be waived by
Seller:
1. Each representation and warranty made by Buyer in this Agreement
shall be true and correct in all material respects as of the
Closing;
2. Buyer shall have fully performed all of its obligations under
this Agreement;
3. Buyer shall have tendered the purchase price and delivered the
required documents, instruments and certificates at the Closing
as set forth in Section X.B.
4. No investigation, suit, action, or other proceeding shall have
been commenced, pending or threatened in writing before any
agency or judicial forum (i) in which it is sought to restrain,
prohibit, or obtain damages or other relief in connection with
this Agreement, or the consummation of the transaction
contemplated hereby, or (ii) that may have the effect of
restraining, prohibiting, or otherwise materially interfering
with the transaction contemplated hereby or otherwise adversely
affect any License of the Company which is material to the
operations of the Company.
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5. All necessary consents including the approval of the Illinois and
Indiana Departments of Insurance, licenses, and regulatory
approvals of the transaction contemplated hereby shall have been
received by Buyer, provided, however, in the event any such
approvals contain any terms or conditions which vary from those
currently imposed under any operative contract or License to
which the Company is currently a party, that such terms and
conditions be reasonably acceptable to Buyer.
6. The Related Transaction contemplated in Section I.B has been
completed; the Account Agreement contemplated in Section V.G has
been executed, and if Buyer requests post-closing services
agreement contemplated in Section V.J, such agreement has been
executed.
If any one of the aforesaid conditions is not satisfied, this
Agreement shall be voidable prior to the Closing upon written election
of Seller.
ARTICLE X. CLOSING
A. Deliveries by Seller. At the Closing, Seller shall deliver to Buyer the
following:
1. Share certificates representing the Stock together with duly
executed stock powers executed in blank for transfer to
Buyer without any restriction whatsoever and free and clear
of all liens, claims, encumbrances, charges and security
interests.
2. The Company's minute books, stock transfer books, and
corporate seal.
3. A Certificate of good corporate standing for the Company
issued by the Illinois Secretary of State, dated within 14
days of the Closing Date, and evidencing the corporate
existence and good standing of Company in Illinois.
4. To the extent such certificates are customarily provided,
Certificates by the Illinois and Indiana Departments of
Insurance, dated within 14 days of the Closing Date,
evidencing the licensure and good standing of Company to
conduct health maintenance organization business in the
respective states.
5. The signed resignations of all directors and officers of the
Company, effective as of Closing.
6. The Account Agreement, signed by Seller and Custodian
thereof, as contemplated by Section V.G.
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7. The Post-Closing Services Agreement signed by Seller, if
requested by Buyer.
8. All books, records, and documents (whether kept by Company
or any corporate parent, subsidiary, or other corporate
entity over which Seller has control), used in the prior and
present operations of Company and its corporate
predecessors, including any entity purchased or merged or
operationally integrated into Company.
9. A certificate executed by the President or other duly
authorized officer of Seller certifying that all corporate
action on the part of Seller necessary to authorize the
execution, delivery and performance of this Agreement by
Seller has been duly taken.
10. A certificate executed by the President or other duly
authorized officer of Seller certifying that (i) all
representations and warranties of Seller are true and
correct in all material respects on and as of the Closing
Date with the same effect as though such representations and
warranties had been made on and as of such Closing Date; and
(ii) Seller has performed and complied with all of its
obligations under this Agreement which are to be performed
or complied with prior to or on the Closing Date.
11. Such other documents and instruments as Buyer may reasonably
request to accomplish this Transaction.
B. Deliveries by Buyer. At the Closing, Buyer shall deliver to
Seller:
1. The Purchase Price, by wire transfer to an account
designated by Seller not fewer than five days prior to
Closing.
2. A certificate of good corporate standing for Buyer issued by
the Illinois Secretary of State, dated within 14 days of the
Closing Date, and evidencing the corporate existence and
good standing of Buyer in Illinois.
3 The Account Agreement, signed by Buyer and Custodian
thereof, as contemplated by Section V.G.
4. The Post-Closing Services Agreement signed by Buyer, if such
agreement is requested by Buyer.
5. A certificate executed by the President or other duly
authorized officer of Buyer certifying that all corporate
action on the part of Buyer necessary to
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authorize the execution, delivery and performance of this
Agreement by Buyer has been duly taken.
6. A certificate executed by the President or other duly
authorized officer of Buyer certifying that (i) all
representations and warranties of Buyer are true and correct
in all material respects on and as of the Closing Date with
the same effect as though such representations and
warranties had been made on and as of such Closing Date; and
(ii) Buyer has performed and complied with all of its
obligations under this Agreement which are to be performed
or complied with prior to or on the Closing Date.
7. Such other documents and instruments as Seller may
reasonably request to accomplish this Transaction.
ARTICLE XI. RESOLUTION OF DISPUTE
All disputes between Buyer and Seller which cannot be resolved
between the parties shall be submitted to binding arbitration in
Chicago, Illinois in accordance with the rules of the American
Arbitration Association. Notwithstanding the provisions of this
paragraph, either party shall have the right to seek injunctive
relief in relation to any threatened conduct, which is permitted
by applicable law. Expenses of arbitration shall be borne by the
non-prevailing party in the arbitration proceeding, unless the
selected arbitrator shall determine otherwise. The procedure for
arbitration shall be in accordance with the rules of the American
Arbitration Association, except that Buyer and Seller shall each
endeavor to select one arbitrator agreeable to both parties; if
no agreement can be reached as to a single arbitrator within 15
days after arbitration is sought then each party shall select one
arbitrator, and the two selected arbitrators shall choose a third
arbitrator. Should either the Buyer or Seller fail to select an
arbitrator within days after expiration of the time within which
a single arbitrator could be chosen, or if the two arbitrators
shall fail to select a third arbitrator within 10 days after the
appointment of the latter of them, the American Arbitration
Association shall select the arbitrator.
ARTICLE XII. MISCELLANEOUS
A. Successors and Assigns. This Agreement and all of the covenants
and agreements contained herein shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs,
successors, assigns and personal representatives. However,
neither party may assign the benefits and obligations of this
Agreement without the prior written consent of the other party
which consent shall not be unreasonably withheld, and Buyer may,
without the prior written consent of Seller assign this Agreement
to any subsidiary thereof, provided, however, that no such
assignment shall relieve Buyer of any of its obligations under
this Agreement.
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B. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Illinois.
C. Entire Agreement; Amendment. This Agreement including all
schedules, exhibits, lists and related documents embodies the
entire agreement and understanding between the parties hereto
with respect to the subject matter hereof, and may not be amended
except in a writing signed by both of the parties hereto. This
Agreement supersedes all prior agreements and understandings,
written or oral, including without limitation that Letter of
Intent dated September 11, 1998.
D. Further Assurances. Seller and Buyer shall take any and all
further actions and execute any and all further documents
necessary to fully consummate the transactions contemplated
herein.
E. Waiver. Neither of the parties to this Agreement will be deemed
to have waived any right, power or privilege under this Agreement
unless such waiver will have been duly executed in writing and
acknowledged by the party to be charged with such waiver. The
failure of either party to enforce at any time any of the
provisions of this Agreement will in no way be construed to be a
waiver of such provisions, nor in any way affect the validity of
this Agreement or any part of it, or the right of any party to
thereafter enforce each and every such provision. No waiver of
any breach of this Agreement will be held to be a waiver of any
other or subsequent breach. All remedies afforded in this
Agreement will be taken and construed as cumulative and in
addition to every other remedy provided for herein or by law or
in equity.
F. Expenses. Buyer and Seller will pay their own expenses,
including, without limitation, the fees and expenses of their
respective brokers, agents, representatives, counsel,
accountants, and other experts, in connection with the
preparation, negotiation and consummation of this Agreement, even
if this Agreement is terminated.
G. Counterparts. This Agreement may be signed in counterparts, each
of which shall be an original, but all of which together shall
constitute one and the same instrument.
H. Knowledge. Any matter of which any officer of Company (including
but not limited to its General Manager or Medical Director) has
knowledge on or before the Closing Date shall be imputed to
Seller.
I. Notices. Any notices required to be given under this Agreement
shall be deemed to have been properly made if made in writing and
delivered (including delivery by telecopier)to the following
persons at the following addresses or to such other persons or
addresses as Seller and Buyer may from time to time set forth in
a notice conforming to this Section:
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1. If provided to Seller: Dale Wolf
Executive Vice President, Chief
Financial Officer and Treasurer
Coventry Health Care, Inc.
6705 Rockledge Drive - Suite 900
Bethesda, Maryland 20817
With a copy to (which shall not
constitute notice): Thomas Farah, Esq.
Epstein, Becker & Green
1227 25th Street B Seventh Floor
Washington, D.C. 20037
2. If provided to Buyer: M. Daniel Splain
Senior Executive Vice President
First American Group
of Companies, Inc.
142 Town Center Road
Matteson, Illinois 60443
With a copy to (which shall not
constitute notice: Richard A. Hemmings, Esq.
Lord, Bissell & Brook
115 South LaSalle Street
Chicago, Illinois 60603
J. Announcements. Buyer and Seller agree that, except for any press release
made by Seller as required by law, no publicity announcements or
disclosures of any kind concerning this Agreement or the terms of this
Agreement shall be made without the mutual consent of Buyer and Seller,
except to the extent that disclosure is required by legal process or is to
accountants, counsel, other professionals, and to lenders on a "need to
know" basis who similarly agree to maintain the confidentiality of this
Agreement and its terms. The parties shall jointly develop a mutually
acceptable press release for distribution upon execution of this Agreement
and upon the Closing.
29
<PAGE> 30
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first written above.
SELLER:
Coventry Health Care, Inc.
/s/ Dale Wolf
----------------------------------------------
By: Dale Wolf
Its: Executive Vice President, Chief Financial
Officer and Treasurer
BUYER:
First American Group of Companies, Inc.
/s/ Asif A. Sayeed
-----------------------------------------------
By: Asif A. Sayeed
Its: President and Chief Executive Officer
30
<PAGE> 1
COVENTRY HEALTH CARE, INC.
SUBSIDIARIES
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ ----------------------
1. Coventry Corporation Tennessee
2. Coventry Health and Life Insurance Company Texas
3. Coventry Healthcare Management Corporation Delaware
d/b/a HealthAssurance
4. Coventry HealthCare Management Corporation Virginia
(i) Southern Health Services, Inc. Virginia
(ii) Southern Health Benefit Services, Inc. Virginia
5. Coventry HealthCare Development Corporation Delaware
(i) Coventry Health Plan of West Virginia West Virginia
6. Group Health Plan, Inc. Missouri
(i) Specialty Services of Missouri, Inc. Missouri
7. HealthAmerica Pennsylvania, Inc. Pennsylvania
(i) The Medical Center HPJV, Inc. Pennsylvania
(a) Riverside Health Plan, Inc. Pennsylvania
8. HealthCare USA, Inc. Florida
(i) HealthCare USA of Missouri, Inc. Missouri
9. HealthPass, Inc. Pennsylvania
10. Pennsylvania HealthCare USA, Inc. Pennsylvania
11. Principal Health Care of Iowa, Inc. Iowa
12. Principal Health Care Management Corporation Iowa
13. Principal Health Care of the Carolinas, Inc. North Carolina
14. Principal Health Care of Delaware, Inc. Delaware
15. Principal Health Care of Florida, Inc. Florida
16. Principal Health Care of Georgia, Inc. Georgia
17. Principal Health Care of Illinois, Inc. Illinois
18. Principal Health Care of Indiana, Inc. Delaware
19. Principal Health Care of Louisiana, Inc. Louisiana
20. Principal Health Care of Kansas City, Inc. Missouri
21. Principal Health Care of Nebraska, Inc. Nebraska
22. Principal Health Care of Pennsylvania, Inc. Pennsylvania
23. Principal Health Care of St. Louis, Inc. Delaware
24. Principal Health Care of South Carolina, Inc. South Carolina
25. Principal Health Care of Tennessee, Inc. Tennessee
26. United HealthCare Services of Iowa, Inc. Iowa
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COVENTRY HEALTH CARE, INC. FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 310,081
<SECURITIES> 202,947
<RECEIVABLES> 73,837
<ALLOWANCES> 21,228
<INVENTORY> 0
<CURRENT-ASSETS> 526,844
<PP&E> 98,946
<DEPRECIATION> 55,208
<TOTAL-ASSETS> 1,111,968
<CURRENT-LIABILITIES> 607,286
<BONDS> 45,414
0
0
<COMMON> 593
<OTHER-SE> 431,362
<TOTAL-LIABILITY-AND-EQUITY> 1,111,968
<SALES> 0
<TOTAL-REVENUES> 593,278
<CGS> 0
<TOTAL-COSTS> 591,099
<OTHER-EXPENSES> (8,389)
<LOSS-PROVISION> 5,671
<INTEREST-EXPENSE> 2,580
<INCOME-PRETAX> 7,988
<INCOME-TAX> 2,920
<INCOME-CONTINUING> 5,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,068
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
