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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 1-8865
SIERRA HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0200415
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2724 NORTH TENAYA WAY
LAS VEGAS, NV 89128
(Address of principal executive offices) (Zip Code)
(702) 242-7000
(Registrant's telephone number, including area code)
N/A (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
As of August 3, 1998 there were 27,661,000 shares of common
stock outstanding.
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<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1998
INDEX
Page No.
Part I - FINANCIAL INFORMATION
Item l. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997................... 3
Condensed Consolidated Statements of Operations -
three and six months ended June 30, 1998
and June 30, 1997..................................... 4
Condensed Consolidated Statements of Cash Flows -
six months ended June 30, 1998 and June 30, 1997...... 5
Notes to Condensed Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 9
Item 3. Quantitative and Qualitative Disclosures
about Market Risk..................................... 16
Part II - OTHER INFORMATION
Item l. Legal Proceedings................................... 17
Item 2. Changes in Securities............................... 17
Item 3. Defaults Upon Senior Securities..................... 17
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 17
Item 5. Other Information................................... 18
Item 6. Exhibits and Reports on Form 8-K.................... 18
Signature............................................................. 20
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents................................................... $ 73,273,000 $ 96,841,000
Short-term Investments...................................................... 120,676,000 115,498,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts: 1998 - $9,173,000; 1997 - $7,916,000)......................... 87,048,000 42,041,000
Prepaid Expenses and Other Assets............................................ 45,516,000 46,226,000
Total Current Assets..................................................... 326,513,000 300,606,000
LAND, BUILDINGS AND EQUIPMENT................................................. 218,564,000 197,917,000
Less-Accumulated Depreciation............................................... (56,611,000) (49,086,000)
Land, Buildings and Equipment - Net...................................... 161,953,000 148,831,000
LONG-TERM INVESTMENTS....................................................... 168,504,000 155,153,000
RESTRICTED CASH AND INVESTMENTS............................................. 17,174,000 16,540,000
REINSURANCE RECOVERABLE (Less Current Portion) 19,246,000 20,245,000
GOODWILL ................................................................... 41,870,000 42,803,000
OTHER ASSETS................................................................ 48,028,000 39,758,000
TOTAL ASSETS.................................................................. $783,288,000 $723,936,000
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities.............................. $ 63,496,000 $ 58,439,000
Medical Claims Payable...................................................... 75,426,000 55,943,000
Current Portion of Reserves for Losses and
Loss Adjustment Expense ................................................. 71,399,000 63,358,000
Unearned Premium Revenue.................................................... 20,750,000 29,763,000
Current Portion of Long-term Debt........................................... 6,079,000 4,726,000
Total Current Liabilities................................................ 237,150,000 212,229,000
RESERVES FOR LOSSES AND LOSS ADJUSTMENT
EXPENSE (Less Current Portion) ............................................. 132,844,000 139,341,000
LONG-TERM DEBT (Less Current Portion)......................................... 95,330,000 90,841,000
OTHER LIABILITIES............................................................. 21,825,000 15,843,000
TOTAL LIABILITIES............................................................. 487,149,000 458,254,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 Par Value,
1,000,000 Shares Authorized; None Issued
Common Stock, $.005 Par Value
60,000,000 Shares Authorized;
Shares Issued: 1998 - 28,025,000; 1997 - 27,709,000...................... 140,000 139,000
Additional Paid-in Capital.................................................. 169,774,000 164,247,000
Treasury Stock: 426,750 Common Shares....................................... (5,601,000) (5,601,000)
Unrealized Holding Gain on
Available-for-Sale Securities .......................................... 846,000 655,000
Retained Earnings........................................................... 130,980,000 106,242,000
TOTAL STOCKHOLDERS' EQUITY.................................................... 296,139,000 265,682,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $783,288,000 $723,936,000
</TABLE>
See notes to condensed consolidated financial
statements.
Page 3
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
OPERATING REVENUES:
<S> <C> <C> <C> <C>
Medical Premiums.................................... $143,221,000 $125,250,000 $281,039,000 $247,589,000
Specialty Product Revenues.......................... 40,721,000 37,079,000 76,882,000 71,792,000
Military Contract Revenues.......................... 41,852,000 60,388,000
Professional Fees................................... 11,171,000 7,538,000 22,094,000 15,059,000
Investment and Other Revenues 7,580,000 6,454,000 14,551,000 12,459,000
Total ............................................ 244,545,000 176,321,000 454,954,000 346,899,000
OPERATING EXPENSES:
Medical Expenses.................................... 119,482,000 101,813,000 233,798,000 201,489,000
Specialty Product Expenses.......................... 39,518,000 36,348,000 75,759,000 70,999,000
Military Contract Expenses.......................... 40,038,000 57,019,000
General, Administrative and Marketing Expenses 26,957,000 23,057,000 52,165,000 45,066,000
Merger and Related Expenses ........................ 11,000,000
Total ............................................ 225,995,000 161,218,000 418,741,000 328,554,000
OPERATING INCOME...................................... 18,550,000 15,103,000 36,213,000 18,345,000
INTEREST EXPENSE AND OTHER, NET ...................... (1,619,000) (1,207,000) (2,900,000) (2,609,000)
INCOME BEFORE INCOME TAXES ........................... 16,931,000 13,896,000 33,313,000 15,736,000
PROVISION FOR INCOME TAXES............................ 4,380,000 3,335,000 8,575,000 3,777,000
NET INCOME ........................................... $ 12,551,000 $ 10,561,000 $ 24,738,000 $ 11,959,000
NET INCOME PER COMMON SHARE........................... $.46 $.39 $.90 $.45
NET INCOME PER COMMON SHARE
ASSUMING DILUTION.................................... $.45 $.39 $.89 $.44
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING.......................................... 27,546,000 26,954,000 27,476,000 26,864,000
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ASSUMING DILUTION....................... 28,023,000 27,323,000 27,939,000 27,203,000
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
Page 4
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income.............................................................. $24,738,000 $ 11,959,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization.................................... 8,455,000 6,602,000
Provision for Doubtful Accounts.................................. 3,171,000 2,198,000
Changes in Assets and Liabilities ...................................... (32,536,000) (3,358,000)
Net Cash Provided by Operating Activities 3,828,000 17,401,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Net of Equipment Dispositions............................................ (17,211,000)(22,003,000)
Changes in Short-term Investments....................................... (5,318,000) 13,356,000
Changes in Long-term Investments........................................ (13,062,000) (52,832,000)
Changes in Restricted Cash and Investments..................................................... (674,000)(1,063,000)
Corporate Disposition, net of cash disposed 1,373,000
Loan to Third Party..................................................... __________ (16,750,000)
Net Cash Used for Investing Activities.............................. (34,892,000) (79,292,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowings................................................ 15,450,000 17,000,000
Payments on Debt and Capital Leases..................................... (12,678,000) (1,229,000)
Exercise of Stock in Connection with Stock Plans............................................... 4,724,000 7,400,000
Purchase of Treasury Stock.............................................. (5,471,000)
Net Cash Provided by Financing Activities.................................................. 7,496,000 17,700,000
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................. (23,568,000) (44,191,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 96,841,000 103,587,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 73,273,000 $ 59,396,000
Six Months Ended June 30
Supplemental Condensed Consolidated
Statements of Cash Flows Information: 1998 1997
Cash Paid During the Period for Interest
(Net of Amount Capitalized)............................................. $3,316,000 $2,217,000
Cash Paid During the Period for Income Taxes..................................................... 8,885,000 4,989,000
Non-cash Investing and Financing Activities:
Tax Benefits of Stock Issued for Exercise of Options ......................................... 804,000 1,142,000
Additions to Capital Leases............................................. 3,070,000
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
Page 5
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements include the consolidated
accounts of Sierra Health Services, Inc. ("Sierra", a holding company, together
with its subsidiaries, collectively referred to herein as the "Company"). All
material intercompany balances and transactions have been eliminated. These
statements have been prepared in conformity with the generally accepted
accounting principles used in preparing the Company's annual audited
consolidated financial statements but do not contain all of the information and
disclosures that would be required in a complete set of audited financial
statements. They should, therefore, be read in conjunction with the Company's
annual audited consolidated financial statements and related notes thereto for
the years ended December 31, 1997 and 1996. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments, consisting only of normal and recurring adjustments, necessary for
a fair presentation of the financial results for the interim periods presented.
2. On June 5, 1998, the Company's subsidiary, HMO Texas, L.C. ("HMO
Texas"), entered into definitive agreements to acquire certain assets of Kaiser
Foundation Health Plan of Texas ("Kaiser"), a health plan operating in
Dallas-Forth Worth with approximately 120,000 members and Permanente Medical
Association of Texas ("Permanente"), a 150 physician medical group operating in
that area. The purchase price was $129 million, which is net $20 million in
operating cost support to be paid to Sierra by Kaiser Foundation Hospitals in
five quarterly installments following the closing of the transaction. The
purchase price includes amounts for real estate and eight medical and office
facilities encompassing more than 500,000 square feet. The purchase price may
increase by $30 million over three years if certain growth, member retention and
accreditation goals are met by the health plan.
Sierra is assuming no prior liabilities for malpractice or other
litigation, or for any unanticipated future adjustments to claims
expenses for periods prior to closing. The transaction will be financed
with bank debt. The transaction has been approved by the Boards of
Directors of Kaiser and the Company. Subject to applicable regulatory
approvals and other closing conditions, the transaction is expected to
close no later than October 31, 1998.
3. On May 5, 1998, the Company announced a three-for-two stock split. Each
stockholder of record of the Company owning one share of common stock,
par value of $.005, as of the close of business on the record date of
May 18, 1998, received an additional one-half share on June 18, 1998.
In lieu of any fractional share resulting from the stock split, a
stockholder received a cash payment based on the closing price of the
Company's common stock on the record date. The par value remains $.005
per share. Common stock and earnings per share amounts have been
retroactively adjusted to account for the split.
4. The following tables provide a reconciliation of basic and diluted earnings
per share ("EPS"):
Dilutive
Basic Stock Options Diluted
For the Three Months ended
June 30, 1998:
Income from Continuing
Operations ......... $12,551,000 $12,551,000
Shares................. 27,546,000 477,000 28,023,000
Per Share Amount....... $.46 $.45
For the Three Months ended
June 30, 1997:
Income from Continuing
Operations........... $10,561,000 $10,561,000
Shares................. 26,954,000 369,000 27,323,000
Per Share Amount....... $.39 $.39
Page 6
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Dilutive
Basic Stock Options Diluted
For the Six Months ended
June 30, 1998:
Income from Continuing
Operations ......... $24,738,000 $24,738,000
Shares................. 27,476,000 463,000 27,939,000
Per Share Amount....... $.90 $.89
For the Six Months ended
June 30, 1997:
Income from Continuing
Operations........... $11,959,000 $11,959,000
Shares................. 26,864,000 339,000 27,203,000
Per Share Amount....... $.45 $.44
5. The Company has adopted Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" which requires companies to
classify items of other comprehensive income by their nature in a
financial statement. Other comprehensive income is comprised entirely
of unrealized holding gains and losses on available for-sale
investments, net of taxes, arising during the period, adjusted for
gains and losses included in net income.
The following table presents comprehensive income for the three month
and six month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET INCOME:........................... $12,551,000 $10,561,000 $24,738,000 $11,959,000
Change in net unrealized Holding
Gains (loses) on Investments,
net of income taxes................. 708,000 450,000 191,000 (1,217,000)
COMPREHENSIVE INCOME................... $13,259,000 $11,011,000 $24,929,000 $10,742,000
</TABLE>
6. During 1997 the Financial Accounting Standards Board issued
"Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 is effective for fiscal years beginning after
December 31, 1997; however, the statement need not be applied to
interim statements in the initial year of application. FAS 131
establishes additional standards for segment disclosures in the
financial statements. Management has not determined the effect of this
statement on its financial statement disclosure.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed For or Obtained For Internal Use." Under SOP 98-1,
effective for years beginning after December 15, 1998, certain computer
software costs are required to be capitalized and amortized over the
software's estimated useful life. The Company will adopt SOP 98-1 for
the fiscal year ending December 31, 1999 and does not believe this
statement will have a material impact on its financial statements.
In June 1998, the Financial Accounting Standards Board issued
"Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). FAS 133 is effective for fiscal years beginning after June 15,
1999. FAS 133 addresses the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and hedging activities. The Company does not believe this statement
will have a material
Page 7
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
impact on its financial statements.
7. Certain amounts in the Condensed Consolidated Financial Statements for
the three and six months ended June 30, 1997 have been reclassified to
conform with the current year presentation.
Page 8
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant for an assessment and understanding of the Company's
consolidated financial condition and results of operations. The discussion
should be read in conjunction with the Condensed Consolidated Financial
Statements and Related Notes thereto. Any forward-looking information contained
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations and any other sections of this Quarterly Report on Form 10-Q
should be considered in connection with certain cautionary statements contained
in the Company's Current Report on Form 8-K dated March 19, 1998 incorporated
herein by reference. Such cautionary statements are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 and
identify important risk factors that could cause the Company's actual results to
differ from those expressed in any projected, estimated or forward-looking
statements relating to the Company.
Results of Operations, three months ended June 30, 1998, compared to three
months ended June 30, 1997.
The Company's total operating revenues for the three months ended June 30, 1998
increased approximately 38.7% to $244.5 from $176.3 million for the three months
ended June 30, 1997. The increase was primarily due to military contract revenue
of $41.9 million and an increase in premium revenue of $18.0 million. During the
fourth quarter of 1997 Sierra Military Health Services, Inc. ("SMHS"), a
wholly-owned subsidiary of the Company, began the implementation phase of its
TRICARE contract. The military contract revenue is a result of the continued
implementation of that contract as well as health care delivery which began on
June 1, 1998. The operating margin for SMHS was 4.3% for the current quarter.
With health care delivery starting in June 1998, operating margins for SMHS are
expected to decrease in future quarters.
Medical premium revenue from the Company's HMO and managed indemnity insurance
subsidiaries increased $18.0 million, or 14.3%. The increase in premium revenue
reflects a 5.9% increase in member months (the number of months of each period
that an individual is enrolled in a plan). Medicare member months increased
19.6% which contributed to the increase in medical premium revenue. Such growth
in Medicare member months contributes significantly to the increase in premium
revenues as the Medicare per member premium rates are over three times higher
than the average commercial premium rate. The Company's premium rates increased
an average of 3% to 5% for its HMO commercial groups and in excess of 10% for
its managed indemnity commercial groups. The Company also realized a slight
increase in its capitation rate established by the Health Care Financing
Administration ("HCFA"). Approximately 75% of the Company's Nevada Medicare
members are enrolled in the Social HMO Medicare program. HCFA is considering
adjusting the reimbursement factor for the Social HMO members in the future. If
the reimbursement for these members decreases significantly and related benefit
changes are not made timely, there could be a material adverse effect on the
Company's business.
Specialty product revenue increased $3.6 million, or 9.8%, for the three months
ended June 30, 1998 compared to the same three-month period in the prior year.
The increase was due to revenue growth in the workers' compensation insurance
operation offset in part by a decrease in administrative services revenue of
$900,000 due primarily to the termination of the Company's workers' compensation
administrative services contract with the State of Nevada. Professional fee
revenue increased approximately $3.6 million primarily due to the acquisition of
the operations of two medical clinics in southern Nevada. In addition
approximately $1.1 million of the increase in professional fees is due to the
operations of Total Home Care, Inc. ("THC"). THC was acquired in the third
quarter of 1997 and provides home infusion, oxygen and durable medical equipment
services in Nevada and Arizona. Investment and other revenue increased
approximately $1.1 million over the comparable period in the prior year
primarily due to an increase in invested balances and capital gains realized on
the sale of investments.
Page 9
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations, three months ended June 30, 1998, compared to three
months ended June 30, 1997 (continued).
Medical expenses as a percentage of medical premiums and professional fees
("Medical Loss Ratio") increased from 76.7% to 77.4%. The increase in the
medical loss ratio was due to an increase in Medicare members as a percentage of
fully-insured members, continued expansion in Texas which has higher medical
expenses and the acquisitions of THC and two medical clinics for which costs of
operations are included in medical expenses. The cost of providing medical care
to Medicare members generally requires a greater percentage of the premiums
received. Specialty product expenses increased $3.2 million, or 8.7%, due
primarily to the 9.8% increase in specialty product revenue discussed
previously. Specialty product revenue and expense is primarily related to the
workers' compensation insurance business.
The combined ratio for the workers' compensation insurance business was 99.6%
compared to 101.7% for the comparable prior year period. The reduction was due
to a 225 basis point decrease in the expense ratio which was offset slightly by
a 12 basis point increase in the loss ratio. The reduction in the expense ratio
was primarily due to a larger net earned premium. The dollar amount of those
expenses that are not a direct function of premium revenues were substantially
the same between the periods. Incurred losses for the current accident year were
reduced as a result of the Company's ability to overlay and implement managed
care techniques to the workers' compensation claims as well as net favorable
loss development on prior accident years totaling $2.6 million, which was the
same as the comparable prior year period. There can be no assurance that
favorable development, or the magnitude thereof, will continue in the future.
The losses and loss adjustment expense ratio for the three months ended June 30,
1998 reflect the Company's current projection of the ultimate costs of claims
occurring in the current as well as prior accident years. Such projections are
subject to change and any change would be reflected in the income statement.
Workers' compensation claims are paid over several years. Until payment is made,
the Company invests the monies, earning a yield on the invested balance.
General, administrative and marketing ("G&A") costs increased $3.9 million, or
16.9%, compared to the second quarter of 1997. As a percentage of revenues, G&A
costs for the second quarter of 1998 decreased to 11.0% from 13.1% during the
comparable period in 1997. The decrease in the G&A ratio is primarily due to the
addition of military contract revenues offset in part by costs for additional
infrastructure needed to support overall Company growth. Of the $3.9 million
increase in G&A, $1.1 million consisted of increased compensation expense
resulting primarily from additional employees supporting expanded services and
new benefit programs for management. Broker, third-party administration and
premium tax expenses increased approximately $600,000 due to increased
membership. The remaining G&A increase is due to additional expenses in several
areas including an increase in depreciation of $400,000. The Company markets its
products primarily to employer groups, labor unions and individuals enrolled in
Medicare through its internal sales personnel and independent insurance brokers.
Such brokers receive commissions based on the premiums received from each group.
The Company's agreements with its member groups are usually for twelve months
and are subject to annual renewal. For the quarter ended June 30, 1998, the
Company's ten largest commercial HMO employer groups were, in the aggregate,
responsible for less than 10% of its total revenues. Although none of such
employer groups accounted for more than 2% of total revenues for that period,
the loss of one or more of the larger employer groups could, if not replaced
with similar membership, have a material adverse effect on the Company's
business.
Interest expense and other increased approximately $400,000 compared to the same
period in the prior year primarily due to the addition of a new mortgage as well
as capital leases for equipment at SMHS.
Page 10
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations, three months ended June 30, 1998, compared to three
months ended June 30, 1997 (continued).
For the period, the Company recorded approximately $4.4 million of tax expense
for an effective tax rate of 25.9% compared to 24.0% in 1997. The Company's
current low operating tax rate is primarily a result of taxpreferred investments
and the change in the deferred tax valuation allowance, which is due primarily
to the ability to use a portion of net operating loss carryovers. The effective
tax rate will increase in future periods after the remaining valuation
allowances for net operating loss carryforwards are utilized.
Net income for the three months ended June 30, 1998 increased $2.0 million or
18.8%, compared to the three months ended June 30, 1997.
Results of Operations, six months ended June 30, 1998, compared to six months
ended June 30, 1997.
The Company's total operating revenues for the six months ended June 30, 1998
increased approximately 31.1% to $455.0 from $346.9 million for the six months
ended June 30, 1997. The increase was primarily due to military contract revenue
of $60.4 million and an increase in premium revenue of $33.5 million. The
military contract revenue is a result of the continued implementation of the
TRICARE contract as well as one month of health care delivery.
Medical premium revenue from the Company's HMO and managed indemnity insurance
subsidiaries increased $33.5 million, or 13.5%. The increase in premium revenue
reflects a 6.5% increase in member months. Medicare member months increased
19.3% which contributed to the increase in medical premium revenue. Such growth
in Medicare member months contributes significantly to the increase in premium
revenues as the Medicare per member premium rates are over three times higher
than the average commercial premium rate. The Company's premium rates increased
an average of 3% to 5% for its HMO commercial groups and in excess of 10% for
managed indemnity commercial groups. The Company also realized a slight increase
in its capitation rate established by HCFA. Approximately 75% of the Company's
Nevada Medicare members are enrolled in the social HMO Medicare program. HCFA is
considering adjusting the reimbursement factor for the Social HMO members in the
future. If the reimbursement for these members decreases significantly and
related benefit changes are not made timely, there could be a material adverse
effect on the Company's business.
Specialty product revenue increased $5.1 million, or 7.1%, for the six months
ended June 30, 1998 compared to the same six-month period in the prior year. The
increase was due to revenue growth in the workers' compensation insurance
operation offset in part by a decrease in administrative services revenue of
$2.3 million due primarily to the termination of the Company's workers'
compensation administrative services contract with the State of Nevada.
Professional fee revenue increased approximately $7.0 million primarily due to
the acquisition of the operations of two medical clinics in southern Nevada. In
addition approximately $1.9 million of the increase in professional fees is due
to the operations of THC. Investment and other revenue increased approximately
$2.1 million over the comparable period in the prior year primarily due to an
increase in invested balances and capital gains realized on the sale of
investments.
The medical loss ratio increased from 76.7% to 77.1% for the six months ended
June 30, 1998 compared to the prior period. The increase in the medical loss
ratio was due to an increase in Medicare members as a percentage of
fully-insured members, continued expansion in Texas which has higher medical
expenses and the acquisitions of THC and two medical clinics for which costs of
operations are included in medical expenses. The cost of providing medical care
to Medicare members generally requires a greater percentage of the premiums
received. Specialty product expenses increased $4.8 million, or 6.7%, due
primarily to the 7.1% increase in specialty product revenue discussed
previously. Specialty product revenue and expense is
Page 11
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations, six months ended June 30, 1998, compared to six months
ended June 30, 1997 (continued).
primarily related to the workers' compensation insurance business.
The combined ratio for the workers' compensation insurance business was 101.0%
compared to 103.1% for the comparable prior year period. The reduction was due
to a 159 basis point decrease in the expense ratio and a 45 basis point decrease
in the loss ratio. The reduction in the expense ratio was primarily due to a
larger net earned premium. The dollar amount of those expenses that are not a
direct function of premium revenues were substantially the same between the
periods. Incurred losses for the current accident year were reduced as a result
of the Company's ability to overlay and implement managed care techniques to the
workers' compensation claims as well as net favorable loss development on prior
accident years totaling $4.5 million compared to net favorable loss development
of $4.4 million for the comparable prior year period. There can be no assurance
that favorable development, or the magnitude thereof, will continue in the
future. The losses and loss adjustment expense ratio for the six months ended
June 30, 1998 reflect the Company's current projection of the ultimate costs of
claims occurring in the current as well as prior accident years. Such
projections are subject to change and any change would be reflected in the
income statement. Workers' compensation claims are paid over several years.
Until payment is made, the Company invests the monies, earning a yield on the
invested balance.
G&A costs increased $7.1 million, or 15.8%, compared to the first six months of
1997. As a percentage of revenues, G&A costs for the six months of 1998
decreased to 11.5% from 13.0% during the comparable period in 1997. The decrease
in the G&A ratio is primarily due to the addition of military contract revenues
offset in part by costs for additional infrastructure needed to support overall
Company growth. Of the $7.1 million increase in G&A, $2.4 million consisted of
increased compensation expense resulting primarily from additional employees
supporting expanded services and new benefit programs for management. Broker,
third-party administration and premium tax expenses increased approximately
$900,000 due to increased membership. The remaining G&A increase is due to
additional expenses in several areas including an increase in depreciation of
$600,000. The Company markets its products primarily to employer groups, labor
unions and individuals enrolled in Medicare, through its internal sales
personnel and independent insurance brokers. Such brokers receive commissions
based on the premiums received from each group. The Company's agreements with
its member groups are usually for twelve months and are subject to annual
renewal. For the six months ended June 30, 1998, the Company's ten largest
commercial HMO employer groups were, in the aggregate, responsible for less than
10% of its total revenues. Although none of such employer groups accounted for
more than 2% of total revenues for that period, the loss of one or more of the
larger employer groups could, if not replaced with similar membership, have a
material adverse effect on the Company's business.
Interest expense and other increased slightly compared to the same period in the
prior year primarily due to the acquisition of new debt.
Page 12
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations, six months ended June 30, 1998, compared to six months
ended June 30, 1997 (continued).
For the period, the Company recorded approximately $8.6 million of tax expense
for an effective tax rate of 25.7% compared to 24.0% in 1997. The Company's
current low operating tax rate is primarily a result of taxpreferred investments
and the change in the deferred tax valuation allowance, which is due primarily
to the ability to use a portion of net operating loss carryovers. The effective
tax rate will increase in future periods after the remaining valuation
allowances for net operating loss carryforwards are utilized.
Net income for the six months ended June 30, 1998 increased $12.8 million,
compared to the six months ended June 30, 1997. Excluding the effect of the
merger related expenses, net income increased $4.4 million, or 21.7% compared to
the same period in the prior year.
Liquidity and Capital Resources
The Company's cash flow from operating activities during the six months ended
June 30, 1998 resulted primarily from $24.7 million of net income, $8.5 million
in depreciation and amortization and $3.2 million in provision for doubtful
accounts offset by a $32.5 million net change in assets and liabilities. The
decrease in cash flow resulting from the change in assets and liabilities was
primarily due to an increase in accounts receivable and a decrease in unearned
premium revenue. The increase in accounts receivable resulted primarily from
work performed in conjunction with the Region 1 TRICARE contract for which the
Company had not been paid as of June 30, 1998. The Company received
approximately $28.8 million of this receivable in July 1998. The decrease in
unearned premium revenue resulted primarily from the early receipt of the
subsequent month's HCFA Medicare capitation payment as of December 31, 1997.
The $27.4 million used for investing and financing activities since December 31,
1997 consisted of a $19.1 million net increase in investments, and $17.2 million
in capital expenditures for construction costs associated with office
facilities, furniture and equipment for the newly constructed six-story
headquarters building, continued implementation of three new computer systems,
computer and medical equipment, and other capital needs to support the Company's
growth. The Company received $15.5 million from new debt primarily related to
financing for the newly constructed headquarters building offset in part by
$12.7 million used for the reduction of debt, including an $8.0 million payment
on the Company's line of credit. In July 1998, the Company repaid an additional
$9.0 million on its line of credit. The remaining $92.0 million available
balance of the line of credit as of July 31, 1998, may be used for additional
working capital, if necessary. In addition the Company received $4.7 million in
connection with the sale of stock through the Company's stock plans and $1.4
million in connection with the sale of THC's Arizona operations.
On June 5, 1998, HMO Texas entered into signed definitive agreements to acquire
certain assets of Kaiser and Permanente in Dallas, Texas. The purchase price was
$129 million, which is net $20 million in operating cost support to be paid to
Sierra by Kaiser Foundation Hospitals in five quarterly installments following
the closing of the transaction. The purchase price may increase by $30 million
over three years if certain growth, member retention and accreditation goals are
met by the health plan. Sierra is assuming no prior liabilities for malpractice
or other litigation, or for any unanticipated future adjustments to claims
expenses for periods prior to closing. The transaction will be financed with
bank debt. Subject to applicable regulatory and other closing conditions, the
transaction is expected to close by the end of October 1998.
The holding company may receive dividends from its HMO and insurance
subsidiaries which generally must be approved by certain state insurance
departments. The Company's HMO and insurance subsidiaries are required by state
regulatory agencies to maintain certain deposits and must also meet certain net
worth and
Page 13
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
reserve requirements. The HMO and insurance subsidiaries had restricted assets
on deposit in various states totaling $17.2 million as of June 30, 1998. The HMO
and insurance subsidiaries must also meet requirements to maintain minimum
stockholder's equity, on a statutory basis, ranging from $500,000 to $5.2
million. Of the cash and cash equivalents held at June 30, 1998, $62.3 million
is designated for use only by the regulated subsidiaries. Such amounts are
available for transfer to the holding company from the HMO and insurance
subsidiaries only to the extent that they can be remitted in accordance with the
terms of existing management agreements and by dividends. Remaining amounts are
available on an unrestricted basis. The holding company will not receive
dividends from its regulated subsidiaries if such dividend payment would cause
violation of statutory net worth and reserve requirements.
The National Association of Insurance Commissioners (the "NAIC") has undertaken
an initiative that would impose new minimum capitalization requirements for
HMOs, health care insurance entities and other risk bearing health care
entities. If those capitalization requirements are adopted, certain of the
Company's subsidiaries may have increased minimum capital requirements. The
Company does not believe that any such required increase in the amount of funds
to be contributed to the subsidiaries will be material.
On September 30, 1997, the Company was awarded a TRICARE contract to provide
managed health care coverage to eligible beneficiaries in Region 1. This region
includes more than 600,000 individuals in Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island, Vermont, Virginia, West Virginia and Washington, D.C. In 1998, the
award will result in a total of approximately $150.0 to $200.0 million of
revenue for the five-month implementation phase and seven months of health care
delivery. SMHS was notified on February 13, 1998 that the United States General
Accounting Office ("GAO") sustained a competitor's protest of the contract award
for TRICARE Managed Care Support Region 1 and recommended that the contract be
re-bid. The TRICARE Management Activity ("TMA") along with the Company, has
filed a motion requesting the GAO reconsider its recommendation. If the GAO does
not change its recommendation and the TMA follows the recommendation, there are
several possible outcomes, including litigation. While it is not possible to
predict the outcome, the Company anticipates that it will continue to provide
health care under the contract for a currently undetermined amount of time if
the TMA and the Company are unsuccessful in their reconsideration request.
The Company is in the process of modifying or replacing its computer systems and
applications to accommodate the "Year 2000". The Year 2000 issue exists because
many computer systems and applications currently use two-digit date fields to
designate a year. As the century date change occurs, date-sensitive systems will
recognize the year 2000 as 1900, or not at all. This inability to recognize or
properly treat the Year 2000 may cause systems to process critical financial and
operational information incorrectly. The Company currently expects to complete
all material replacements or modifications of its computer systems and
applications sufficiently in advance of the Year 2000 to allow for adequate
testing so as not to have any material negative impact on its operations. The
Company is in the process of implementing three major systems at an estimated
cost of $25.0 million to $30.0 million. These systems will be Year 2000
compliant. The Company is expensing the costs to make modifications to existing
computer systems as incurred. Management currently estimates the remaining
modification costs to be approximately $3.0 million to $5.0 million over the
next two years. While this is a substantial effort, it will give the Company the
benefits of new technology and functionality for many of its financial and
operational computer systems and applications. The inability of the Company to
timely complete its Year 2000 modifications and replacements, or the inability
of companies with which the Company does business to timely complete their Year
2000 modifications, could have a material effect on the Company's operations.
During the first six months of 1998, the Company spent approximately $7.0
million on both system implementations and Year 2000 items.
The Company has a 1998 capital budget of approximately $50.0 million,
primarily for computer hardware and
Page 14
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
software, furniture and equipment for the newly constructed 180,000 square foot,
six-story corporate headquarters building, and other requirements due to the
Company's projected growth and expansion. Excluding the acquisition from Kaiser,
which will be financed with bank debt, the Company's liquidity needs over the
next 12 months will primarily be for the capital items noted above, the
Company's stock repurchase program, debt service and expansion of the Company's
operations, including potential acquisitions. Excluding the acquisition from
Kaiser, the Company believes that existing working capital, operating cash flow
and, if necessary, mortgage financing, equipment leasing, and amounts available
under its credit facility will be sufficient to fund its capital expenditures
and debt service. Additionally, subject to unanticipated cash requirements, the
Company believes that its existing working capital and operating cash flow and,
if necessary, its access to new credit facilities, will enable it to meet its
liquidity needs on a longer term basis.
Page 15
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Membership
The Company's membership at June 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Number of Members at Period Ended
June 30 June 30
1998 1997
HMO
<S> <C> <C>
Commercial................................................... 161,000 155,900
Medicare..................................................... 38,600 32,500
Managed Indemnity.............................................. 50,400 47,300
Medicare Supplement............................................ 25,100 24,800
Administrative Services (1)................................... 312,600 334,600
Total Members.................................................. 587,700 595,100
</TABLE>
(1) For comparability purposes, enrollment information has been restated to
reflect the September 30, 1997 termination of the company's workers'
compensation administrative services contract with the State of Nevada.
Enrollment in the terminated plan was approximately 175,000 members at
June 30, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.
Page 16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 18, 1997, the Company announced it had terminated its merger agreement
with Physician Corporation of America ("PCA"). The original agreement had been
entered into in November 1996. On March 18, 1997, prior to termination of the
merger agreement, PCA filed a lawsuit against the Company in the United States
District Court for the Southern District of Florida (the "District Court"),
seeking, among other things, specific performance of the merger agreement and
monetary damages in excess of $20 million. The lawsuit has been dismissed
(without prejudice to PCA's claims) for failure to join an indispensable party.
On March 27, 1997, the Company commenced a lawsuit against PCA in the Court of
Chancery of the State of Delaware. On July 31, 1998, the Company filed a Second
Amended Complaint alleging, among other things, breach of the merger agreement,
negligent misrepresentation, common law fraud and equitable fraud, and seeking
monetary damages and other remedies. The Company intends to vigorously pursue
all remedies available to it, however, there can be no assurance that the
Company will prevail in such litigation.
The Company is subject to various claims and other litigation in the ordinary
course of business. Such litigation includes claims of medical malpractice,
claims for coverage or payment for medical services rendered to HMO members,
claims by providers for payment for medical services rendered to HMO members.
Also included in such litigation are claims for dividends and claims denials in
the workers' compensation division and claims by providers for payment for
medical services rendered to injured workers. In the opinion of the Company's
management, the ultimate resolution of pending legal proceedings should not have
a material adverse effect on the Company's financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Sierra held its annual meeting of stockholders on May 12, 1998 in
Las Vegas, Nevada.
The following persons were elected directors for a two-year term
ending in 2000 based on the voting results below:
<TABLE>
<CAPTION>
Name For Withheld Abstain Non-votes
<S> <C> <C> <C> <C>
Erin MacDonald 16,325,014 130,665 0 0
William J. Raggio 16,325,014 130,665 0 0
Charles L. Ruthe 16,325,014 130,665 0 0
</TABLE>
The following persons' terms as directors continued after the
meeting and end in 1999.
Anthony M. Marlon, M.D.
Thomas Y. Hartley
Page 17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (continued)
The stockholders also ratified the appointment of Deloitte &
Touche LLP as the Company's independent auditors for the year
ending 1998. The voting results were as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
<S> <C> <C> <C> <C>
16,406,902 33,012 15,765 0
</TABLE>
The stockholders also approved an amendment to the 1995 Long-Term
Incentive Plan for the purpose of increasing by 900,000 the
number of shares of common stock (1,350,000 shares after the
stock split) reserved for issuance to participants and to
authorize cash annual incentive awards thereunder. The voting
results were as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
<S> <C> <C> <C> <C>
11,171,202 5,268,665 15,812 0
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Master Purchase and Sale Agreement between Kaiser Foundation Health
Plan of Texas (as Seller) and HMO Texas, L.C. (as Buyer), dated June 5, 1998
(10.2) Asset Sale and Purchase Agreement Kaiser Foundation Health Plan of
Texas, A Texas Non-Profit Corporation and HMO Texas, L.C., a Texas Limited
Liability Company, dated June 5, 1998
(10.3) Asset Sale and Purchase Agreement between Permanente Medical
Association of Texas, a Texas Professional Association and HMO Texas, L.C., a
Texas Limited Liability Company, dated June 5, 1998
(10.4) Sierra Health Services, Inc. 1995 Long-Term Incentive Plan, as
amended and restated through May 18, 1998
(10.5) Sierra Health Services, Inc. 1995 Non-Employee Directors' Stock
Plan, as amended and restated through May 18, 1998
(27) Financial Data Schedule
(99) Registrant's current report on Form 8-K dated March 19, 1998,
incorporated herein by reference.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated May 15, 1998, with
the Securities and Exchange Commission to announce a 3 for 2 split of its common
stock.
Page 18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
The Company filed a Current Report on Form 8-K, dated
June 5, 1998, with the Securities and Exchange
Commission to announce an agreement to acquire the
business and assets of Kaiser Foundation Health Plan of
Texas and Permanente Medical Association of Texas.
Page 19
<PAGE>
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.
SIERRA HEALTH SERVICES, INC.
(Registrant)
Date August 14, 1998 /S/ PAUL H. PALMER
Paul H. Palmer
Acting Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 20
<PAGE>
EXHIBIT 10.1
MASTER PURCHASE AND SALE AGREEMENT
Between
KAISER FOUNDATION HEALTH PLAN OF TEXAS
(As Seller)
and
HMO TEXAS, L.C.
(As Buyer)
Dated: June 5, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
<TABLE>
<CAPTION>
<S> <C>
GENERAL...........................................................................................................1
1.1 Agreement to Sell and Purchase................................................1
1.2 Purchase Price................................................................4
1.3 Escrow Deposit................................................................4
ARTICLE II
TITLE COMMITMENT AND SURVEY;
REVIEW AND INSPECTION BY BUYER....................................................................................4
2.1 Title Commitment and Survey...................................................4
2.2 Review and Inspection by Buyer................................................5
2.3 Due Diligence Notice..........................................................6
ARTICLE III
REPRESENTATIONS, WARRANTIES, COVENANTS,
AND AGREEMENTS....................................................................................................7
3.1 Representations and Warranties of Seller......................................7
(a) Organization and Good Standing................................................7
(b) Seller's Authority and No Breach..............................................8
(c) No Violations.................................................................8
(d) Seller's Financial Statements.................................................8
(e) Litigation....................................................................8
(f) No Brokers or Finders.........................................................8
(g) Seller's Consents.............................................................9
(h) Tax Returns and Tax Liabilities...............................................9
(i) No Untrue Representation or Warranty..........................................9
(j) Inspection, Representations and Warranties of Seller..........................9
(k) Due Diligence Materials......................................................11
(l) Licenses and Permits.........................................................11
(m) Zoning.......................................................................11
(n) Proceedings..................................................................11
(o) Improvements.................................................................11
(p) Representations and Warranties True and Correct at Closing;
Breaches
11
3.2 Representations and Warranties of Buyer......................................12
(a) Organization and Good Standing...............................................12
(b) Buyer's Authority and No Breach..............................................12
<PAGE>
(c) No Brokers or Finders........................................................12
(d) Buyer's Consents.............................................................12
(e) No Untrue Representation or Warranty.........................................12
(f) Representations and Warranties True and Correct at Closing;
Breaches
12
3.3 Survival of Provisions.......................................................13
3.4 Operations Pending Closing...................................................13
3.5 Communications...............................................................14
3.6 Indemnification..............................................................15
(a) Indemnification by Seller....................................................15
(b) Indemnification by Buyer.....................................................15
(c) Limitation...................................................................15
3.7 Guarantees...................................................................16
ARTICLE IV
CONDITIONS PRECEDENT; TERMINATION................................................................................16
4.1 Conditions to Buyer's Obligations............................................16
4.2 Conditions to Seller's Obligations...........................................17
4.3 Joint Conditions Precedent to Closing........................................17
4.4 Termination..................................................................17
ARTICLE V
THE CLOSING......................................................................................................18
5.1 The Closing Date.............................................................18
5.2 Seller's Obligations at the Closing..........................................18
5.3 Buyer's Obligations at the Closing...........................................19
5.4 Closing Costs................................................................20
5.5 Prorations...................................................................20
ARTICLE VI
DAMAGE OR CONDEMNATION PRIOR TO THE CLOSING......................................................................21
6.1 Damage.......................................................................21
6.2 Condemnation.................................................................21
ARTICLE VII
DEFAULTS.........................................................................................................22
7.1 Default by Seller............................................................22
7.2 Default by Buyer.............................................................22
ii
<PAGE>
ARTICLE VIII
MISCELLANEOUS....................................................................................................22
8.1 Notices......................................................................22
8.2 Waiver.......................................................................24
8.3 Counterparts.................................................................24
8.4 Brokerage Fees and Commissions...............................................24
8.5 Entire Agreement.............................................................24
8.6 Modification.................................................................24
8.7 Applicable Law...............................................................24
8.8 Headings.....................................................................25
8.9 Assignment...................................................................25
8.10 Further Assurances...........................................................25
8.11 Time of Essence..............................................................25
8.12 Severability.................................................................25
8.13 Attorneys' Fees..............................................................25
8.14 Construction.................................................................25
</TABLE>
LIST OF EXHIBITS:
EXHIBIT A - The Land
EXHIBIT B - Special Warranty Deed With Vendor's Lien
EXHIBIT C - Bill of Sale
EXHIBIT D - Assignment and Assumption of Intangible Property
EXHIBIT E - Assignment and Assumption of Leases
EXHIBIT F - Note
EXHIBIT G - Deed of Trust
EXHIBIT H - Certificate of Nonforeign Status
EXHIBIT I - Estoppel Certificate
EXHIBIT J - Subleases
EXHIBIT K - Limited Guaranty
EXHIBIT L - Sublease Guaranty
DEFINITIONS:
"ADA" can be found in Paragraph 2.3.
"Adjustment Date" can be found in Paragraph 5.5.
"Agreement" can be found on page 1.
"Applicable Environmental Laws" can be found in Paragraph 3.1(j)(viii).
"Applicable Laws" can be found in Paragraph 3.1(j)(vii).
"Appurtenances" can be found in Paragraph 1.1(b).
"Business day" can be found in Paragraph 1.3.
iii
<PAGE>
"Buyer" can be found on page 1.
"Buyer's Due Diligence Notice" can be found in Paragraph 2.3.
"Buyer's Parent" can be found in Paragraph 3.7(b).
"CERCLA" can be found in Paragraph 3.1(j)(viii).
"Centex" can be found in Paragraph 3.4(c).
"Closing" can be found in Paragraph 5.1.
"Closing Date" can be found in Paragraph 5.1.
"Closing Rent Roll" can be found in Paragraph 5.2(c).
"Damage" can be found in Paragraph 6.1.
"Deeds" can be found in Paragraph 1.1(a).
"Down Payment" can be found in Paragraph 1.2(a).
"Due Diligence Materials" can be found in Paragraph 2.2.
"Escrow Deposit" can be found in Paragraph 1.3.
"Estoppels" can be found in Paragraph 3.4(i).
"Execution Date" can be found on page 1.
"HMO Agreement" can be found in Recital A.
"Hazardous substance" can be found in Paragraph 3.1(j)(viii).
"Health Plan Agreements" can be found in Recital A.
"Improvements" can be found in Paragraph 1.1(c).
"Intangible Property" can be found in Paragraph 1.1(e).
"Land" can be found in Paragraph 1.1(a).
"Leases" can be found in Paragraph 1.1(f).
"Loan Documents" can be found in Paragraph 1.2(b).
"Loss" and "Losses" can be found in Paragraph 3.6(a).
"Material" can be found in Paragraph 6.1(c).
"Notice Date" can be found in Paragraph 2.3.
"Owner Title Policy" can be found in Paragraph 5.2(e).
"Permitted Exceptions" can be found in Paragraph 2.1(b).
"Personal Property" can be found in Paragraph 1.1(d).
"Property" or "Properties" can be found in Paragraph 1.1(f).
"Purchase Price" can be found in Paragraph 1.2.
"RCRA" can be found in Paragraph 3.1(j)(viii).
"Real Property" can be found in Paragraph 1.1(f).
"Rent Roll" can be found in Paragraph 2.2(c).
"Returns" can be found in Paragraph 3.1(h).
"Seller" can be found on page 1.
"Seller's Affiliate" can be found in Paragraph 3.7(a).
"Seller's Title Indemnity" can be found in Paragraph 2.1(b).
"Subleases" can be found in Paragraph 5.3(b).
"Tenant Deposits" can be found in Paragraph 1.1(f).
"Tenant Notices" can be found in Paragraph 5.2(f).
"Title Commitment" can be found in Paragraph 2.1(a).
"Title Company" can be found in Paragraph 1.3.
"Title Exceptions" can be found in Paragraph 2.1(b).
iv
<PAGE>
"Violation" can be found in Paragraph 3.1(c).
v
<PAGE>
MASTER PURCHASE AND SALE AGREEMENT
THIS MASTER PURCHASE AND SALE AGREEMENT ("Agreement") is made and
entered into as of this 5th day of June, 1998 ("Execution Date"), by and between
HMO TEXAS, L.C., a Texas limited liability company ("Buyer"), and KAISER
FOUNDATION HEALTH PLAN OF TEXAS, a Texas non-profit corporation ("Seller").
RECITALS:
A. Buyer, Seller and their affiliates have entered into various
agreements pursuant to which Seller or its affiliates will convey to Buyer or
its affiliates certain assets and liabilities of the Kaiser Permanente Health
Care Program in the State of Texas. These agreements include, without
limitation, that certain Asset Sale and Purchase Agreement of even date herewith
between Buyer and Seller (the "HMO Agreement"). The HMO Agreement and the other
agreements referenced in this recital are hereinafter sometimes collectively
referred to as the "Health Plan Agreements."
B. Seller owns in fee simple eight (8) medical office and
administrative office facilities in Tarrant and Dallas Counties in the State of
Texas, which constitute a portion of the operating assets used by Seller in the
operation of its health care delivery system. Buyer desires to purchase from
Seller and Seller desires to sell to Buyer Seller's interest in these Properties
(as further defined in Article I below) on the terms and conditions set forth
herein.
C. The parties intend for this Agreement to be executed, closed and
funded concurrently with the execution, closing and funding of the Health Plan
Agreements.
NOW, THEREFORE, for and in consideration of the above recitals and the
representations, warranties, mutual covenants, and agreements herein expressed,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby expressly acknowledged, the parties hereby agree as follows:
ARTICLE I
GENERAL
1.1 Agreement to Sell and Purchase. Seller hereby agrees to sell and
convey to Buyer, and Buyer hereby agrees to purchase and accept from Seller, for
the Purchase Price (hereinafter defined) and upon and subject to the terms and
conditions hereinafter
set forth, all of the following described property:
<PAGE>
(a) Land. Eight (8) improved parcels of land (the "Land") located in
Tarrant and Dallas Counties in the State of Texas and described in Exhibit A
hereto, commonly known as:
o NorthPoint I
9229 LBJ
Dallas, TX 75245
o NorthPoint II
9330 Amberton Pkwy
Dallas, TX 75243
o North Point III (North Dallas)
9250 Amberton Pkwy
Dallas, TX 75243
o Northpoint IV (Dallas Specialty Center)
12606 Greenville Avenue
Dallas, TX 75243
o Mesquite
2727 Military Parkway
Mesquite, TX 75149
o SW Dallas
4201 Brookspring Dr.
Dallas, TX 75244
o Central FW
1001 12th Avenue
Ft. Worth, TX 76104
o Arlington
7011-20 East
Arlington, TX 76018
All of the Land shall be conveyed to Buyer through a special warranty deed for
the Dallas County Real Property and a special warranty deed for the Tarrant
County Real Property with vendor's lien in the form of Exhibit B hereto (the
"Deeds");
(b) Appurtenances. All rights, privileges and easements appurtenant to
and for the benefit of the Land of Seller, including, without limitation, all
minerals, oil, gas and other hydrocarbon substances on and/or under the Land, as
well as all development
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rights, air rights, water, water rights and water stock relating to the Land and
any easements, rights-of-way or appurtenances relating to or used in connection
with the ownership, operation, use, occupancy or enjoyment of the Land, the
Improvements (as defined in Paragraph 1.1(c) below), the Intangible Property (as
defined in Paragraph 1.1(e) below), or any other appurtenance, together with all
rights of Seller in and to streets, sidewalks, alleys, driveways, parking areas
and areas adjacent thereto or used in connection therewith, and any land lying
in the bed of any existing or proposed street adjacent to the Land (all of which
are collectively referred to as the "Appurtenances");
(c) Improvements. All improvements, structures, buildings and fixtures
owned by Seller and presently and/or hereafter located on the Land and all
apparatus, equipment and appliances located on and/or used in connection with
the ownership, operation, use, occupancy or enjoyment thereof (such as heating
and air conditioning systems, and facilities used to provide any utility
services, parking services, refrigeration, ventilation, garbage disposal,
recreation or other services thereto including, without limitation, any and all
computers and/or computer systems used for or in connection with any building
operating systems, elevator systems, irrigation systems, climate control systems
and security systems), all landscaping thereon and all leasehold improvements of
tenants, if any, which remain a part of the Property upon expiration of any
Lease (as defined in Paragraph 1.1(f) below) (all of which are collectively
referred to as the "Improvements");
(d) Personal Property. All personal property owned by Seller located
on, situated in or used in connection with the Land, the Appurtenances and/or
the Improvements including, without limitation, that certain personal property
described in the schedule of personal property attached to Exhibit C hereto
("Personal Property"), and all of which Personal Property shall be transferred
and assigned to Buyer pursuant to an instrument in the form of Exhibit C hereto
(the "Bill of Sale");
(e) Intangible Property. All of the interest of Seller in any
contractual rights and intangible personal property owned by Seller relating to
or used in connection with the ownership, operation, use, occupancy or enjoyment
of the Land, Appurtenances, Improvements or Personal Property, and, to the
extent approved by Buyer in writing pursuant to the provisions of this
Agreement, any and all development agreements, permits, contracts, service and
vendor contracts, warranties, guarantees, indemnities, agreements, utility
contracts, permits, licenses and other rights owned by Seller relating to or
used in connection with the ownership, operation, use, occupancy or enjoyment of
all or any part of the Land, Appurtenances, Improvements or Personal Property
(all of which are collectively referred to as the "Intangible Property"), and
all of which shall be assigned to Buyer pursuant to an assignment in the form of
Exhibit D hereto (the "Assignment and Assumption of Intangible Property"); and
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(f) Leases. All of the interest of Seller, as landlord, in and to the
leases of the Land or space in the Improvements and any amendments,
modifications or supplements thereto in effect now and on the Closing Date (as
defined in Paragraph 5.1 below) including, without limitation, those certain
leases described in the schedule of leases attached to Exhibit E hereto (the
"Leases"), and all security, advance rental and other deposits made under the
tenant leases (the "Tenant Deposits"); all of which shall be assigned to Buyer
pursuant to an instrument in the form of Exhibit E attached hereto (the
"Assignment and Assumption of Leases").
All of the items described in Paragraphs 1.1(a), 1.1(b), 1.1(c),
1.1(d), 1.1(e) and 1.1(f) above are sometimes hereinafter collectively referred
to as the "Property" or the "Properties;" provided however that, notwithstanding
the foregoing, the Personal Property and Intangible Property shall not include
any Assets or Excluded Assets, as defined in the HMO Agreement or any other
asset expressly retained by Seller pursuant to the terms of the Health Plan
Agreements. The items described in Paragraphs 1.1(a), 1.1(b) and 1.1(c) above
are sometimes hereinafter referred to collectively as the "Real Property."
1.2 Purchase Price. The purchase price (the "Purchase Price") to be paid
for the Properties shall be Forty Four Million and No/100 Dollars
($44,000,000.00), payable to Seller on the Closing Date (hereinafter defined) as
follows:
(a) The sum of $8,800,000, inclusive of the Escrow Deposit, as hereinafter
defined (the "Down Payment"), and
(b) A promissory note in the amount of $35,200,000 in the form of
Exhibit F attached hereto (the "Note"), secured by a Deed of Trust and Security
Agreement in the form of Exhibit G attached hereto (the "Deed of Trust"), which
Note and Deed of Trust are sometimes hereinafter referred to as the "Loan
Documents."
1.3 Escrow Deposit. Within five (5) business days after the execution
hereof, and as a condition to Seller's obligations hereunder, Buyer shall
deposit with Republic Title Insurance Company of Texas, Inc., 300 Crescent
Court, Dallas, Texas 75201 (Attn: Bill Kramer, Escrow Officer) (the "Title
Company"), in escrow, the sum equal to Seventy Five Thousand and No/100 Dollars
($75,000.00), which amount shall be invested by the Title Company in an
interest-bearing account with a financial institution approved by Seller and
Buyer whose accounts are insured by the Federal Deposit Insurance Corporation,
and be held and disbursed by the Title Company strictly in accordance with the
terms and provisions of this Agreement. The amount of such deposit is
hereinafter referred to as the "Escrow Deposit." At the Closing, the Escrow
Deposit shall be applied to the payment of the Purchase Price. If this Agreement
is terminated due to the default of the Buyer, the Escrow Deposit shall be
released and paid to Seller and shall constitute Seller's liquidated damages.
All accrued interest on the Escrow Deposit shall
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be paid to Buyer regardless of the ultimate disposition of the Escrow Deposit
itself. The term "business day" shall mean Monday through Friday, excluding
federal holidays.
ARTICLE II
TITLE COMMITMENT AND SURVEY;
REVIEW AND INSPECTION BY BUYER
2.1 Title Commitment and Survey. Prior to the date of this Agreement,
Seller has caused to be issued and delivered to Buyer the following:
(a) A commitment for title insurance for the Properties (the "Title
Commitment") prepared by Title Company, accompanied by a copy of all recorded
documents affecting the Properties and listed as title exceptions in Schedule B
of the Commitment; and
(b) All of the surveys of the Properties in Seller's possession,
prepared by a licensed land surveyor.
Buyer shall review the Title Commitment and may order surveys of the Properties.
Buyer agrees to accept the condition of title subject only to the liens,
encumbrances and exceptions arising out of the actions of Buyer, and any
encumbrances that do not materially interfere with Buyer's intended use of the
Properties (the "Permitted Exceptions"). Notwithstanding the foregoing, none of
the following items shall constitute Permitted Exceptions, and all of such items
shall be discharged, satisfied, cured or insured over, as appropriate, by Seller
at or prior to the Closing:
(i) All mortgages or deeds of trust affecting the Properties;
(ii) All past due ad valorem taxes and assessments of
any kind constituting a lien against the Property, except
taxes for the year 1998, not yet due and payable, which shall
be prorated between the parties and any special assessments in
excess of $10,000;
(iii) All mechanic's, materialman's and similar liens
(and/or affidavits claiming the same) filed against all or any
portion of the Property;
(iv) Judgments which have been abstracted and become a lien against all or
any portion of the Property; and
(v) Any federal tax lien against all or any portion
of the Property.
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If Seller is unable to discharge, satisfy, cure or insure over any title or
survey defects, encroachments over building and property lines, liens,
encumbrances or exceptions that materially interfere with Buyer's intended use
of the Property (the "Title Exceptions") on or before the Closing Date, Buyer
agrees to take title subject to the Title Exceptions; provided that Seller shall
indemnify and hold Buyer harmless in accordance with Paragraph 3.6 ("Seller's
Title Indemnity"). Title Exceptions shall not include matters set forth in
Paragraph 2.1(b)(i) through (v), above, which Seller shall discharge, satisfy,
cure or insure over, as appropriate, at or prior to the Closing.
2.2 Review and Inspection by Buyer. Seller has delivered to Buyer or will
deliver to Buyer within ten (10) days after the Execution Date all of the books,
inspection reports and other information in Seller's possession containing
material information pertaining to the Properties (the "Due Diligence
Materials"). The Due Diligence Materials include the following information and
documents:
(a) An unaudited Income and Expense Statement for the calendar quarter
ended March, 1998, showing first quarter 1998 operating income and expenses for
the Properties;
(b) A copy of each of the Leases;
(c) A Rent Roll (the "Rent Roll") for any Property subject to a Lease,
including for each Lease (i) the tenant's name, (ii) the area leased to the
tenant, (iii) the monthly rental payable by the tenant, (iv) the amount of any
security or other deposit, (v) the date of commencement of the Lease, (vi) the
term and the date of expiration of the Lease, (vii) any renewal or expansion
options, and (viii) any rents or other charges in arrears or prepaid thereunder
and the period for which the rents or other charges are in arrears or have been
prepaid;
(d) A copy of the most recent ad valorem tax statement for each of the
Properties;
(e) Any "as-built" plans and specifications with respect to the
Improvements that Seller possesses;
(f) A copy of any licenses and permits owned by Seller in connection
with the ownership, occupancy and operation of the Property;
(g) A copy of any hazardous materials inspection reports in Seller's
possession; and
(h) Copies of any guaranties and warranties in Seller's possession
pertaining to all Personal Property and equipment at the Properties.
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From the Execution Date through the Closing Date, Buyer, its counsel,
accountants, and other representatives shall, subject to confidentiality
covenants made by Seller to third parties and state and federal antitrust laws,
have the right to inspect (without copying) additional books and records of
Seller relating to the Properties located at Seller's administrative offices in
Dallas, Texas, except for market valuation information such as Property
appraisals, purchase and sale agreements, and information pertaining to the book
value of the Properties. Any such inspection shall occur during normal business
hours and shall be scheduled by Buyer and Seller following request for
inspection made to Seller. Buyer and its representatives shall use their best
efforts to conduct their inspection in such a manner as not to be disruptive to
Seller's employees or business operations and without infringing upon the
confidential nature of physician-patient encounters. Buyer shall reimburse
Seller for any damage to the Property caused by Buyer or Buyer's representatives
during the inspection process. All information provided by Seller to Buyer or
obtained by Buyer relating to the Property in the course of its review shall be
treated as confidential information by Buyer. Buyer shall defend, indemnify and
hold Seller harmless from and against any liabilities, claims, demands, actions,
loss or damage to the Property incident to, resulting from or in any way arising
out of any entry upon or inspection by or on behalf of Buyer of the Property. By
entering into this Agreement, Buyer shall be deemed to have determined that the
Property is in satisfactory condition and suitable for Buyer's purposes.
2.3 Due Diligence Notice. Buyer shall have thirty-five (35) days from
the Execution Date (the "Notice Date") to notify Seller in writing of any
matters pertaining to (i) the presence or release of Hazardous Materials on the
Properties, (ii) the violation of any zoning laws pertaining to the Properties,
and (iii) any violations of the Americans with Disabilities Act (the "ADA")
arising from any improvements or renovations performed by Seller after the
passage of the ADA ("Buyer's Due Diligence Notice"). Buyer's Due Diligence
Notice shall describe the nature of the concern arising from Buyer's due
diligence review and shall include any supporting documentation that may be
necessary for Seller to fashion an appropriate cure for the matter referenced in
said notice. Within fifteen (15) days after receipt of Buyer's Due Diligence
Notice, Seller shall advise Buyer in writing that Seller will either remedy,
discharge, repair, remediate, insure over or cure said matters referenced in
Buyer's Due Diligence Notice. Alternatively, Seller may notify Buyer that it
will indemnify Buyer with regard to such matters in accordance with Paragraph
3.6.
BUYER ACKNOWLEDGES THAT SELLER HAS NOT MADE AND DOES NOT HEREBY MAKE
ANY REPRESENTATIONS, WARRANTIES, OR COVENANTS OF ANY KIND OR CHARACTER
WHATSOEVER WITH RESPECT TO THE PROPERTIES, WHETHER EXPRESSED OR IMPLIED, EXCEPT
AS EXPRESSLY SET FORTH IN THIS AGREEMENT, AND AS LIMITED BY THE INFORMATION
PROVIDED IN BUYER'S DUE DILIGENCE NOTICE. FURTHERMORE, WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, BUYER ACKNOWLEDGES AND AGREES THAT SELLER HAS NOT
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MADE AND DOES NOT MAKE, AND BUYER HEREBY DISCLAIMS THE EXISTENCE OF OR RELIANCE
UPON, ANY IMPLIED WARRANTY, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE. BUYER HEREBY REPRESENTS THAT IT IS NOT RELYING
UPON ANY WARRANTIES, PROMISES, GUARANTEES, OR REPRESENTATIONS MADE BY SELLER OR
ANYONE ACTING OR CLAIMING TO ACT ON BEHALF OF SELLER IN PURCHASING THE
PROPERTIES, OTHER THAN THE WARRANTIES SET OUT IN THE DEEDS OR THIS AGREEMENT.
ARTICLE III
REPRESENTATIONS, WARRANTIES, COVENANTS,
AND AGREEMENTS
3.1 Representations and Warranties of Seller. As of the Execution Date,
Seller represents and warrants to Buyer as follows:
(a) Organization and Good Standing. Seller is a non-profit corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, has all requisite corporate power and
authority to own, lease and operate the Properties and is duly qualified and in
good standing to do business under the corporate law of each jurisdiction in
which the ownership or leasing of the Properties makes such qualification
necessary, except where the failure to be so qualified would not have a Material
Adverse Effect, as defined in the HMO Agreement.
(b) Seller's Authority and No Breach. Seller has all requisite
corporate power and corporate authority to enter into this Agreement and all of
the other agreements contemplated hereby, and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Seller. This Agreement and each
other agreement contemplated hereby constitute valid and binding agreements of
Seller, enforceable against Seller in all material respects in accordance with
their respective terms except insofar as enforcement may be limited by
insolvency or similar laws affecting the enforcement of creditors' rights in
general, and except as enforceability may be limited by general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
(c) No Violations. Except for consents of third parties required under
any contracts, the execution and delivery of this Agreement and the other
agreements contemplated hereby and the consummation of the transactions
contemplated hereby or thereby will not: (i) conflict with, or result in any
material violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any material obligation or the loss of a material benefit
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under, or the creation of a material lien, material security interest or other
material encumbrance pursuant to, any material contract, lease, mortgage,
instrument or other agreement to which Seller is a party or by which it is bound
that will not be paid or satisfied prior to or at Closing, with respect to, any
Property (any such conflict, violation, default, right of termination,
cancellation or acceleration, loss or creation, a "Violation"), pursuant to any
provisions of the Articles of Incorporation or Bylaws of Seller; (ii) result in
any Violation of any material agreement to which the Properties are subject;
(iii) result in any Violation of any judgment, order, injunction or decree
entered into with respect to Seller or to which the Properties are subject, or;
(iv) to Seller's knowledge, result in any Violation of any statute, law,
ordinance, rule or regulation applicable to the Properties, except in each of
clauses (i) through (iv), where such Violations, individually or in the
aggregate, would not have a Material Adverse Effect, as defined in the HMO
Agreement.
(d) Seller's Financial Statements. Seller has delivered or will deliver
to Buyer as Seller's Financial Statements in accordance with Section 2.1.5 of
the HMO Agreement.
(e) Litigation. To Seller's knowledge, there are no actions, suits,
proceedings, or investigations of any kind now pending or threatened in writing
against Seller that may have a Material Adverse Effect (as defined in the HMO
Agreement), except as set forth in the HMO Agreement.
(f) No Brokers or Finders. No broker or finder is involved on behalf of
Seller or any affiliate of Seller in connection with the sale of the Properties,
nor may any broker or finder involved on behalf of Seller claim any commission
on account of the sale of the Properties, except for Wasserstein Perella & Co.
The fees due Wasserstein Perella & Co. relating to this transaction are not real
estate broker commissions and shall be paid
in accordance with the HMO Agreement.
(g) Seller's Consents. Except as set forth in the HMO Agreement, Seller
is not required to obtain the consent or approval of any government agency,
department or other government body to perform its obligations under this
Agreement.
(h) Tax Returns and Tax Liabilities. To Seller's knowledge, Seller has
made and is current with respect to all reports, returns and other filings
(collectively, the "Returns") required to be furnished from time to time to all
federal, state, local or other governmental tax or fiscal authorities
(including, without limitation, all real and personal property, franchise and
withholding taxes and other Returns); all such Returns so furnished were correct
in all material respects; and based on the applicable measure of Seller's
operations or Assets during the period in question; each such Return correctly
stated and reported the amount due in all material respects; true and correct
copies of all such Returns are included in Seller's files; and all amounts
reflected as due and payable on the Returns have been paid.
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(i) No Untrue Representation or Warranty. To Seller's knowledge, no
representation or warranty by Seller in this Agreement, nor any statement or
certificate furnished or to be furnished to Buyer pursuant hereto or in
connection with the transactions contemplated hereby contains or will contain
any untrue statement of a
material fact.
(j) Inspection, Representations and Warranties of Seller. Seller
represents and warrants to Buyer as follows, except as set forth to the contrary
in the Due Diligence Materials, that:
(i) There are no adverse or other parties in possession of the Property, or
of any part thereof, except Seller and tenants under the Leases;
(ii) There is direct access between the Properties
and adjacent public streets, and there are utilities necessary
for the operation of the Property as it is currently being
operated, and no fact or condition exists that would result in
the termination of access to and from the Property or the
cessation of utilities necessary for the operation of the
Property as it is currently being or intended to be operated;
(iii) Each Lease furnished to Buyer pursuant to this
Agreement is in good standing and in full force and effect,
and has not been amended, modified, or supplemented in any way
that has not been shown on the Rent Roll and Closing Rent Roll
(hereinafter defined);
(iv) Neither Seller nor, to Seller's knowledge, any
of Seller's predecessors in interest has within the past five
(5) years has claimed with respect to the Land the benefit of
any law permitting a special use valuation (such as
"agricultural" or "open space") for the purpose of obtaining a
lower tax assessment or rate;
(v) No condemnation proceedings or similar actions or proceedings are now
pending or, to Seller's knowledge, threatened against the Property or any part
thereof;
(vi) Seller now has, and on the Closing Date Seller
will have, and will convey to Buyer good and indefeasible
title to the Property. The Properties consist of all of the
real property owned by Seller in the State of Texas;
(vii) To Seller's knowledge, the occupancy, operation
and use of the Property does not violate any applicable law,
statute, ordinance, rule,
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regulation, order or determination of any Governmental Authority affecting
the Property, including without limitation the Americans With Disabilities Act
of 1990, 42 U.S.C. ss.ss. 12101 et seq. and regulations thereunder (hereinafter
sometimes collectively called "Applicable Laws");
(viii) To Seller's knowledge, no asbestos, material
containing asbestos which is or may become friable, or
material containing asbestos deemed hazardous by Applicable
Laws has been installed in the Property, and the Property and
Seller are not in violation of or subject to any existing
investigation or inquiry by any governmental authority or to
any remedial obligations under any Applicable Laws pertaining
to health, safety or the environment (such Applicable Laws as
they now exist or are hereafter enacted and/or amended
hereinafter sometimes collectively called "Applicable
Environmental Laws"), including without limitation the
Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended (hereinafter called
"CERCLA"), and the Resource Conservation and Recovery Act of
1976, as amended (hereinafter called "RCRA"). As used in this
Agreement, the term "release" shall have the meaning specified
in CERCLA, the terms "solid waste" and "disposal" (or
"disposed") shall have the meanings specified in RCRA, and the
term "hazardous substance" shall mean: (i) any "hazardous
substance" as defined in CERCLA and regulations promulgated
thereunder; (ii) any "hazardous substance" as defined in RCRA
and regulations promulgated thereunder; (iii) any petroleum,
including crude oil or any fraction thereof which is not
otherwise specifically listed or designated as a hazardous
substance under the definition of hazardous substance in
CERCLA as well as natural gas, natural gas liquids, liquefied
natural gas, or synthetic gas usable for fuel (or mixtures of
natural gas and such synthetic gas), and other petroleum
products and by-products; (iv) formaldehyde, urea,
polychlorinated biphenyls, radon, and "source," "special
nuclear" and "by-product" materials as defined in the Atomic
Energy Act of 1985, 42 U.S.C. ss.ss. 3011 et seq.; (v) any
material defined as hazardous or toxic under any statute or
regulation of the State of Texas or any agency thereof; and
(vi) any other material or substance which is toxic,
ignitable, reactive or corrosive and which is regulated by any
Applicable Environmental Law; provided, (i) all such terms
shall be deemed to include all similar terms used in any
Applicable Environmental Laws or regulations thereunder
(including by way of example, but not limitation, pollutant,
contaminant, toxic substance, discharge and migration), and
(ii) to the extent that any Applicable Environmental Laws or
regulations thereunder are amended so as to broaden the
meaning, or otherwise establish a meaning, for "hazardous
substance," "release," "solid waste," or "disposal" (or
"disposed"), or any similar terms, which is broader than that
specified
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above, such broader meaning shall apply. Applicable
Environmental Laws shall not include any substance that is
customarily used in the delivery of health care services;
detergents, solvents and other substances that are customarily
used in administrative and medical offices; and biohazardous
and other wastes, chemicals and pharmaceuticals stored and
used in accordance with Applicable Law;
(k) Due Diligence Materials. The Due Diligence Materials contain all of
the information in Seller's possession relating to the existence of any
hazardous materials, as defined by state and federal law, in, on or under any of
the Properties.
(l) Licenses and Permits. To Seller's knowledge, Seller has obtained
all licenses, permits, variances, approvals, authorizations, easements and
rights of way, including proof of dedication, required from all Governmental
Authorities having jurisdiction over the Property or from private parties for
the intended use, operation and occupancy of the Property and to insure
vehicular and pedestrian ingress to and egress
from the Property.
(m) Zoning. To Seller's knowledge, the zoning of the Property permits
the current use of the Property, and there exists no judicial, quasi-judicial,
administrative or other proceeding which might adversely affect the validity of
such zoning.
(n) Proceedings. To Seller's knowledge, there exists no judicial,
quasi-judicial, administrative or other proceeding or court order, building code
provision, deed restriction or restrictive covenant (recorded or otherwise) or
other private or public limitation which might in any way impede or adversely
affect the use of the Property by Buyer as offices or medical offices.
(o) Improvements. To Seller's knowledge, the Improvements are in good
condition and repair, free of any patent structural defects.
(p) Representations and Warranties True and Correct at Closing;
Breaches. Seller shall execute and deliver to Buyer a certificate signed by an
authorized representative of Seller, dated as of the Closing Date, stating that
each of the representations and warranties of Seller made herein are true and
correct in all respects as of the Closing Date, or describing the manner in
which such representations and warranties are not true and correct. If any of
the representations and warranties of Seller are not true and correct as of the
Closing Date, then Buyer shall be entitled to indemnification for any and all
losses arising therefrom in accordance with Paragraph 3.6, but shall
nevertheless be obligated to conclude the transactions contemplated hereby. The
consummation of the transactions under this Agreement by Buyer shall not
constitute a waiver of Buyer's rights to indemnification for a breach of a
representation or warranty
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provided for in this Paragraph. Seller's representations and warranties
shall survive for a period of five (5) years after the Closing Date.
3.2 Representations and Warranties of Buyer. As of the Execution Date,
Buyer represents and warrants to Seller as follows:
(a) Organization and Good Standing. Buyer is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Texas. Buyer is authorized under state law to conduct business in
the State of Texas.
(b) Buyer's Authority and No Breach. Buyer has all requisite corporate
power and corporate authority to enter into this Agreement and all of the other
agreements contemplated hereby, and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Buyer. This Agreement and each other agreement
contemplated hereby constitute valid and binding agreements of Buyer,
enforceable against Buyer in all material respects in accordance with their
respective terms, except insofar as enforcement may be limited by insolvency or
similar laws affecting the enforcement of creditors' rights in general, and
except as enforceability may be limited by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law.)
(c) No Brokers or Finders. No broker or finder is involved on behalf of
Buyer or any affiliates of Buyer in connection with the sale of the Properties
nor may any broker or finder involved on behalf of Buyer claim any commission on
account of the sale of the Properties. The parties acknowledge that Bear Stearns
has been engaged by Buyer as a financial advisor to Buyer, and the fees of Bear
Stearns shall be paid for by Buyer in accordance with the HMO Agreement.
(d) Buyer's Consents. Except as set forth in the HMO Agreement, Buyer
is not required to obtain the consent or approval of any government agency,
department or other government body to perform its obligations under this
Agreement.
(e) No Untrue Representation or Warranty. To Buyer's knowledge, no
representation or warranty by Buyer in this Agreement, nor any statement or
certificate furnished or to be furnished to Seller pursuant hereto or in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of a
material fact.
(f) Representations and Warranties True and Correct at Closing;
Breaches. Buyer shall execute and deliver to Seller a certificate signed by an
authorized representative of Buyer, dated as of the Closing Date, stating that
each of the representations and warranties of Buyer made herein is true and
correct in all respects
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as of the Closing Date, or describing the manner in which such representations
and warranties are not true and correct. If any of the representations and
warranties of Buyer are not true and correct as of the Closing Date, then Seller
shall be entitled to indemnification for any and all losses as provided in
Paragraph 3.6. The consummation of the transactions under this Agreement by
Seller shall not constitute a waiver of Seller's rights to indemnification for a
breach of a representation or warranty provided for in this Paragraph.
3.3 Survival of Provisions. The representations, warranties, covenants,
agreements, indemnities, terms and provisions contained herein shall survive the
Closing for a term of five (5) years and shall not be deemed to have been merged
with or into the
Deeds.
3.4 Operations Pending Closing. From the date hereof through the Closing
Date, Seller agrees as follows:
(a) Seller will manage, operate, repair and maintain the Property in
the same manner as it operated the Property prior to the date hereof and will
keep the Property in its present state of repair subject to normal wear and
tear, exercising the same degree of care in such matters as Seller has
previously exercised and in compliance with Applicable Laws and Applicable
Environmental Laws. Except for the sale or use of operating inventories in the
ordinary course of business, Seller shall not remove any item of Personal
Property from the Property without replacing the same with property of equal or
greater value.
(b) Except as permitted by the HMO Agreement, Seller will not enter
into any renewal, extension, modification or replacement of any existing service
contract or enter into any new employment, maintenance, service, supply or other
agreement relating to the Property without the express written permission of
Buyer.
(c) Without the prior written consent of Buyer, Seller shall not (i)
enter into any new leases or occupancy agreements for space at the Property,
(ii) modify, amend, terminate, renew, extend or waive any rights under any
existing Lease, (iii) apply any rental security deposits against sums payable
under any Lease, (iv) grant any concession, rebate, allowance or free rent to
any tenant for any period, or (v) accept the surrender of or terminate any
Lease. Notwithstanding the foregoing, to the extent available at the time of
Closing, Buyer shall use its best efforts to lease to Seller up to 10,000 square
feet, at Seller's option, of currently built-out administrative space in either
North Point I (9229 LBJ Freeway, Dallas, Texas) or Hillcrest (12720 Hillcrest,
Dallas, Texas) (but in no event less than 5,000 square feet) for not more than
18 months for gross rent equal to $11.00 per foot per year (Seller shall pay for
electricity). The lease, if entered into, shall be executed and delivered at
Closing, shall allow Seller to release space back to Buyer as Seller's
operations wind down, in 1,000 square foot increments,
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at months end, and shall contain such other terms as are typically including in
third party leases at the same building. In addition, Seller shall attempt to
satisfy Seller's transition space requirements from Centex Real Estate
Corporation ("Centex") first and shall have the option to sublease any portion
of the premises now leased to Centex and not subleased to third parties upon
such terms as Seller may deem appropriate as between Centex and Seller without
modification of the terms of the Lease Agreement now in effect between Centex
and Seller covering premises located in North Point I. There are approximately
15,000 square feet of space not subleased by Centex to third parties at this
time. Buyer agrees not to compete for the Centex space until Seller's space
requirements have been satisfied.
(d) Seller will continue to self-insure for all existing fire and
casualty liability, which self-insurance shall inure to the benefit of Buyer.
(e) Seller shall perform its obligations when due pursuant to the
Leases, including, without limitation, any maintenance or repair of the Property
to be performed by Seller as landlord under the Leases; and except as provided
this Agreement, all construction of tenant improvements and other work required
to be performed under any Lease entered into prior to the Closing shall be
completed, satisfied and paid in full by Seller prior to Closing.
(f) Buyer or representatives of Buyer shall have access to the Property
during normal business hours if Buyer notifies Seller in writing at least 48
hours in advance of the time Buyer desires access to the Property.
(g) Seller will not cause any action to be taken which would cause any
of the representations or warranties made by Seller in this Agreement to be
false on or as of the Closing Date. Seller shall promptly notify Buyer in
writing of the occurrence of any event or condition which occurs prior to the
Closing Date which causes an adverse change in any of the representations or
warranties made in Article III of this Agreement.
(h) Seller shall give Buyer prompt notice of the institution of any
litigation, arbitration or administrative proceeding or condemnation proceeding
of which it becomes aware prior to the Closing Date involving Seller relating to
the Real Property.
(i) Seller shall make best efforts to obtain estoppel certificates in
the form of Exhibit I attached hereto (the "Estoppels") and deliver said
Estoppels to Buyer on or before the Closing Date. If Seller is unable to obtain
such Estoppels, Seller may substitute a certificate from Seller substantially in
the form of the Estoppels.
3.5 Communications. Between the Execution Date and the Closing Date,
and unless otherwise specifically authorized in this Agreement, Buyer may not
communicate, orally or in writing, with Members (as defined in the HMO
Agreement), service providers
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of Seller, employees of Seller, vendors of Seller, suppliers of Seller, or other
third party contractors of Seller, concerning this transaction, without the
prior written consent of Seller (which shall not be unreasonably withheld)
except for communications with Peter Hohl, Director of Acquisitions/Alliance
Services for Seller, and George Tomberlin, Senior Counsel for Seller, or their
designees, or as provided in the Health Plan Agreements. Nothing in this
Paragraph shall preclude either Buyer or Seller from communicating as it deems
advisable with its own subscribers, government regulators, service providers,
employees, vendors, shareholders, suppliers, and third party contractors as
required by law in the ordinary course of business, or prohibit Buyer from doing
its due diligence review, including inspections with surveyors, property
inspectors, environmental consultants and title officers and the obtaining of
zoning and other similar property related information from local governmental
authorities. In no event shall either party cause any oral or written
communication to be issued relating to this transaction which disparages any
other party or its affiliates, unless required by law. Communications with the
media shall be subject to the joint work plan to be developed by Buyer and
Seller pursuant to the HMO Agreement.
3.6 Indemnification.
(a) Indemnification by Seller. Subject to Paragraph 3.6(c) below,
Seller shall indemnify and hold harmless Buyer and its respective officers,
directors, employees, agents and affiliates against any and all actual damages
resulting from claims, losses, costs, expenses, fees, liabilities and damages,
including interest, penalties and reasonable attorneys' fees and disbursements
(each individually a "Loss" and collectively "Losses") arising out of, in
connection with or otherwise relating to:
(i) Seller's indemnification obligation set forth in Paragraph 2.1;
(ii) Seller's indemnification obligation set forth in Paragraph 2.3; and
(iii) The material breach by Seller of any
representation, warranty, covenant or agreement made by Seller
in this Agreement, or in any other agreement executed in
connection herewith.
(b) Indemnification by Buyer. Subject to the limitations of Paragraph
3.6(c) below, Buyer shall indemnify and hold harmless Seller and its respective
officers, directors, employees, agents and affiliates, against any losses
arising out of, in connection with or otherwise relating to the material breach
by Buyer of any representation, warranty, covenant or agreement made by Buyer in
this Agreement, or
in any other agreements executed in connection therewith.
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(c) Limitation. The indemnification rights and obligations set forth in
this Paragraph 3.6 shall survive the Closing and shall expire as provided in
Paragraph 3.3; provided, however, that with respect to claims notified in good
faith to the indemnifying party prior to the expiration of the indemnity rights,
the parties' obligations with respect to its indemnity rights and obligations
shall continue in effect until payment or other resolution of such claims. Each
party's liability hereunder shall be limited to actual damages and no party
shall be liable to any other party hereunder for special, consequential,
incidental, punitive or other damages. If a party is entitled to indemnification
under the specific indemnification provisions of this Agreement with respect to
a particular claim, then such indemnification shall be such party's sole and
exclusive remedy; provided however, indemnification shall not be the sole and
exclusive remedy under the documents, agreements and certificates delivered at
Closing pursuant to Paragraph 5.2 hereof. This subparagraph shall be subject to
and limited by the provisions contained in Sections 11.4 and 11.6 of the HMO
Agreement, which are incorporated herein by reference.
3.7 Guarantees.
(a) Seller's Guarantor. Kaiser Foundation Hospitals ("Seller's
Affiliate") hereby irrevocably and unconditionally agrees to cause Seller to
fully perform its obligations under this Agreement in a timely manner, and
unconditionally guarantees the full and timely performance of this Agreement by
Seller in accordance with its terms. The foregoing guarantee includes a
guarantee of the immediate payment when due of all amounts for which Seller may
at any time be liable on account of the Agreement. Buyer may, at it option,
proceed directly against Seller's Affiliate for the performance of any
obligations of Seller hereunder or for any amounts which may be recoverable as a
result of any misrepresentation, breach of warranty, breach of covenant or other
cause of Seller's liability under this Agreement, without any requirement to
proceed against Seller either prior to or concurrently with proceeding against
Seller's Affiliate. Seller's Affiliate further agrees that its guarantee shall
continue in effect notwithstanding any modification, extension, waiver or other
changes in or under this Agreement or any guaranteed obligation of any other act
or thing which might otherwise operate as a legal or equitable discharge of a
guarantor. Seller's Affiliate hereby waives all special suretyship defenses and
notice requirements.
(b) Buyer's Guarantor. Sierra Health Services, Inc. ("Buyer's Parent")
shall enter into the guarantees referenced in Paragraph 5.3(c) below.
ARTICLE IV
CONDITIONS PRECEDENT; TERMINATION
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4.1 Conditions to Buyer's Obligations. Buyer's agreement to purchase
and to pay for the Properties hereunder is subject to compliance with and the
occurrence of each of the following conditions on or before Closing, except as
any thereof may be
waived in writing by Buyer:
(a) Agreements. Seller shall have executed and delivered to Buyer all
agreements, instruments, certificates and other documents to be delivered by
Seller, including those required by Paragraph 5.2 below. Buyer shall be
obligated to consummate this transaction if Seller has substantially performed
its obligations under Paragraph 3.4 and is proceeding in good faith and with due
diligence with respect to such obligations.
(b) Corporate Resolutions. Seller shall provide Buyer with appropriate
resolutions from its Board of Directors, authorizing Seller to effectuate the
actions required by Seller to consummate the transactions contemplated by this
Agreement.
(c) Delivery of Certificate. The representations and warranties of
Seller set forth in Paragraphs 3.1(a), 3.1(b), 3.1(d) and 3.1(j)(vi) shall be
true and correct in all material respects as of the Execution Date and as of the
Closing Date as though made on and as of the Closing Date. Buyer shall have
received a certificate signed on behalf of Seller by an authorized officer of
Seller to the effect that such representations and warranties of Seller (as
amended by the Due Diligence Notice and through disclosures submitted to Buyer
on or before the Closing Date regarding events arising since the Execution Date)
shall be true and correct in all material respects as of the Execution Date and
as of the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated in this Agreement.
Except as provided to the contrary herein, in the event that any of the
foregoing conditions are not satisfied as of the Closing Date, Buyer shall have
the right at its option to terminate this Agreement by written notice thereof
given to both Seller and the Title Company, and upon receipt of such notice, the
Title Company shall forthwith return the Escrow Deposit to Buyer.
4.2 Conditions to Seller's Obligations. Seller's agreement to sell and
to deliver the Properties to be sold hereunder is subject to the payment at
Closing of the Purchase Price and compliance with and the occurrence of each of
the following conditions on or before Closing, except as any thereof may be
waived in writing by Seller:
(a) Agreements. Buyer shall have executed and delivered to Seller all
agreements, instruments, certificates and other documents to be delivered by
Buyer, including those required by Paragraph 5.3.
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(b) Delivery of Purchase Price; Documents. Buyer shall deliver the
Purchase Price on the Closing Date.
(c) Delivery of Corporate Resolution. Buyer shall provide Seller with
appropriate resolutions from its Board of Directors (which resolutions were
obtained prior to the execution of this Agreement), authorizing Buyer to
effectuate the actions required by Buyer to consummate the transactions
contemplated by this Agreement.
(d) Buyer's Representations and Warranties True and Correct. The
representations and warranties of Buyer set forth in Paragraphs 3.2(a) and
3.2(b) shall be true and correct in all material respects as of the Execution
Date and as of the Closing Date as though made on and as of the Closing Date.
Seller shall have received a certificate signed on behalf of Buyer by an
authorized officer of Buyer to the effect that the representations and
warranties set forth in those Paragraphs (as amended through disclosures
submitted to Buyer on or before the Closing Date regarding events arising since
the Execution Date) shall be true and correct in all material respects as of the
Execution Date and as of the Closing Date as though made on and as of the
Closing Date, except as otherwise contemplated in this Agreement.
4.3 Joint Conditions Precedent to Closing. The transactions contemplated by
the HMO Agreement and referenced in Section 7.4 therein and further described in
the Health Plan Agreements shall have closed concurrently with the transactions
contemplated by this Agreement.
4.4 Termination. This Agreement and the transactions contemplated
hereby may be terminated or abandoned at any time prior to the Closing Date:
(a) By the mutual consent of Buyer and Seller; or
(b) By Seller or Buyer if the Closing shall not have occurred on or
before October 31, 1998, in which event the Escrow Deposit shall be returned to
Buyer.
ARTICLE V
THE CLOSING
5.1 The Closing Date. The actions contemplated to consummate the
transactions under this Agreement shall take place on the date which, unless
otherwise agreed by Buyer and Seller, shall be the Closing Date set forth in the
HMO Agreement (the "Closing Date") in accordance with the HMO Agreement. Unless
otherwise agreed to by the parties, the closing ("Closing") shall be deemed to
be effective as of and to occur, and the risk of loss shall pass Seller to
Buyer, at 12:01:01 a.m. (Central Standard Time, adjusted for daylight savings
time, if applicable) on the Closing Date. Closing shall
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commence on the Closing Date at the offices of Seller's counsel, the law firm of
Jenkens & Gilchrist, A Professional Corporation, 1445 Ross Avenue, Suite 3200,
Dallas Texas 75202, at 10:00 a.m. (Central Standard Time, adjusted for daylight
savings time, if
applicable).
5.2 Seller's Obligations at the Closing. Seller shall deliver or cause
to be delivered to Buyer the following items at the Closing.
(a) The Deeds, executed by Seller conveying the Real Property to Buyer,
subject to the Permitted Exceptions and the Title Exceptions;
(b) The Bill of Sale executed by Seller;
(c) The Assignment and Assumption of Leases executed by Seller, with a
Rent Roll dated as of the Closing Date (the "Closing Rent Roll") and the
Subleases, as defined below.
(d) A certificate of nonforeign status (the "Certificate of Nonforeign
Status"), executed by Seller, in the form of the Certificate of Nonforeign
Status attached hereto as Exhibit H.
(e) An Owner Policy of Title Insurance (the "Owner Title Policy")
issued by the Title Company, insuring good and indefeasible fee simple title to
the Property in Buyer in a face amount equal to the Purchase Price, and
containing no exceptions other than the Permitted Exceptions and the Title
Exceptions, the standard printed title company exceptions, an exception for
taxes for the calendar year in which the Closing occurs and subsequent years,
and subsequent assessments for prior years due to change in land usage or
ownership, an exception for "shortages in area," and an exception for the rights
of the tenants (as tenants only) in possession under the Leases listed in the
Closing Rent Roll.
(f) Notices to each of the tenants of the Property (the "Tenant
Notices"), executed by Seller, advising each of the tenants of the Property of
the sale of the Property to Buyer, and stating that future rents should be paid
as specified by Buyer. The Tenant Notices shall also be executed by Buyer and
shall contain a statement acknowledging that Buyer has received and is
responsible for the tenants' security deposit and specifying the exact dollar
amount of the deposit.
(g) All executed original Estoppels in the form of the Estoppel
Certificate attached hereto as Exhibit I (or Seller's certificate in lieu
thereof), Leases and contracts to be assumed by Buyer in Seller's possession.
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(h) Keys and electronic pass cards or devices to all entrance doors to,
and equipment and utility rooms and vault boxes located in, the Property.
(i) The closing certificates described in Paragraphs 3.1(p) and 4.1(c)
above. ----------------------------
(j) A credit in the amount of the Tenant Deposits.
(k) Appropriate resolutions from Seller's Board of Directors, authorizing
Seller to effectuate the actions required by Seller to consummate the
transactions contemplated by this Agreement.
(l) Such other documents as may be required by this Agreement or by the
Title Company in order to consummate this transaction and issue the Title Policy
to Buyer.
5.3 Buyer's Obligations at the Closing. Buyer shall deliver or cause to
be delivered to Seller the following items at the Closing:
(a) The Purchase Price required above, by delivery to Seller of (i) the
Down Payment, as prorated and adjusted in accordance with Paragraphs 5.4 and 5.5
herewith, in readily available funds via federal wire transfer to the account of
Seller, and (ii) the
Note and Deed of Trust;
(b) The subleases substantially in the form attached as Exhibit J for
Seller's leasehold estates located at 3501 MacArthur Blvd., Suite 100, Irving,
Texas; 1816 Norwood Plaza, Hurst, Texas; 1832 Norwood Plaza, Suite 200, Hurst,
Texas; 555 Republic Drive, Suite 418, Plano, Texas; One Forest Medical Plaza,
12200 Park Central, Suite 210, Dallas, Texas; 12720 Hillcrest, Suites 200, 518
and 600, Dallas, Texas; and 1320 South University, Suites 201, 502 and 505, Fort
Worth, Texas, subject to subleases to third parties (collectively, the
"Subleases");
(c) The Limited Guaranty attached as Exhibit K executed by Buyer's
Parent and the Sublease Guaranty attached as Exhibit L executed by Buyer's
Parent; and
(d) Buyer shall provide Seller with appropriate resolutions from Buyer's
managers authorizing Buyer to effectuate the actions required by Buyer to
consummate the transactions contemplated by this Agreement.
5.4 Closing Costs. The premium for issuing the Owner Title Policy, the
cost of insuring over any Title Exceptions, as set forth in this Agreement, and
the escrow fees of the Title Company shall be borne by Seller. Buyer shall pay
for any surveys, the cost of recording the Deeds and the cost of any survey
endorsements. Except as otherwise provided herein, each party shall pay its own
attorneys' fees and costs.
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5.5 Prorations. At the Closing, the following items of revenue and expense
shall be adjusted and apportioned in cash as of 12:01 a.m. on the Closing Date
(the "Adjustment Date"):
(a) Real estate and other ad valorem taxes, personal property or use
taxes, on the basis of the fiscal year for which such taxes or charges are
assessed. If the actual ad valorem taxes are not available on the Closing Date
for the tax year in which the Adjustment Date occurs, the proration of such
taxes at the Closing shall be estimated based upon reasonable information
available to the parties, including information disclosed by the local tax
office or other public information, and an adjustment shall be made when actual
figures are published or otherwise become available; provided, however, that any
prorations made pursuant to the HMO Agreement shall not be duplicated in making
the prorations hereunder.
(b) All costs and expenses of operating the Property, and amounts paid
or payable under the service contracts shall be determined to the Adjustment
Date and paid by the Seller. If Buyer assumes any service contract or agrees to
pay any of such charges, an appropriate cash adjustment will be made at the
Closing.
(c) Water and sewer charges, fuel charges, electricity, gas or utility
charges (including, without limitation, telephone, gas and electricity) shall be
prorated as of the Adjustment Date, and Seller shall terminate its account (but
not the service itself) with the providers of all such services as of the
Adjustment Date. Buyer shall, prior to the Closing Date, make application to the
providers of such services for the continuation of such services in the name of
Buyer or its designee. If termination of such accounts on the Adjustment Date is
not feasible, the meters will be read on or about the Adjustment Date and the
Seller shall be responsible for paying the bills for such services accruing
prior to the Adjustment Date and the Buyer shall be responsible for the payment
of all such accounts accruing on or after the Adjustment Date.
(d) Collected rents and other sums payable under the Leases which have
accrued prior to the Adjustment Date shall be prorated as of the Closing Date
and Seller shall receive a credit at Closing for such amounts. Buyer and Seller
shall have the right to collect delinquent rents directly from a tenant by any
legal means, provided that neither party shall be obligated to attempt to
collect such delinquent rents, and any recovery, after the costs of collection,
shall be prorated equitably as of the Adjustment Date.
ARTICLE VI
DAMAGE OR CONDEMNATION PRIOR TO THE CLOSING
6.1 Damage. If, at any time after the date hereof and on or before the
Closing Date, all or a portion of any Property is damaged, destroyed or rendered
inoperative
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(collectively, the "Damage"), by fire, flood, natural elements or other causes
beyond Seller's control, then the following shall apply:
(a) If the Damage is not Material (hereinafter defined), Buyer shall
proceed to close and purchase the Property as diminished by such Damage, subject
to a reduction in the Purchase Price equal to the cost of repairing or restoring
the Damage, as determined under subparagraph (c) below.
(b) If the Damage is Material, then Buyer, at its sole option, may
elect either (i) to terminate this Agreement by written notice to Seller given
at or prior to the Closing, whereupon the Title Company shall immediately return
the Escrow Deposit to Buyer and, upon Buyer's receipt thereof, neither party
hereto shall have any further rights against, or obligations to, the other under
this Agreement; or (ii) require Seller to agree to close and complete the repair
or restoration of the Damage after the Closing.
(c) For the purposes of this Paragraph 6.1, Damage shall be deemed to
be "Material" if (i) the cost of repairing the Damage equals or exceeds
$250,000. The cost of repairing the Damage shall be determined in the following
manner: Within 10 days after the Damage occurs, each party shall designate an
engineering firm to act on its behalf, and the firms designated shall promptly
consult with each other in an attempt to mutually agree upon the cost of
repairing the Damage. If the firms cannot agree on the cost within the 10-day
period after they have both been designated, they shall, within five days after
such 10-day period, designate a third engineering firm, which shall be
instructed to determine the cost of repairing the Damage within 10 days after
its designation. The cost of repairing the Damage as determined by the third
engineering firm shall be conclusive.
(d) This Agreement shall not be interpreted as including an agreement
by the parties that they shall have the rights and duties prescribed by Section
5.007 of the Texas Property Code.
6.2 Condemnation. If, prior to the Closing Date, all or a material
portion of the Property is taken by, or made subject to, condemnation, eminent
domain or other governmental acquisition proceedings, then Buyer, at its sole
option, may elect either:
(a) To terminate this Agreement by written notice to Seller given at or
prior to the Closing, whereupon the Title Company shall immediately return the
Escrow Deposit to Buyer and, upon Buyer's receipt thereof, neither party hereto
shall have any further rights against, or obligations to, the other under this
Agreement; or
(b) To agree to close and deduct from the Purchase Price an amount
equal to any sum paid to Seller for such governmental acquisition, in which
event Seller shall assign, transfer and set over to Buyer all of Seller's right,
title and interest in and to any awards which may in the future be made on
account of such governmental acquisition.
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(c) A "Material" taking shall be a taking and the payment of
compensation in excess of $5,000,000.
ARTICLE VII
DEFAULTS
7.1 Default by Seller. In the event Seller shall default in its
obligation to convey the Real Property to Buyer pursuant to this Agreement, the
Buyer may, as its sole alternatives, either (i) enforce specific performance of
this Agreement, or (ii) terminate this Agreement by written notice to Seller and
the Title Company, in which event the Escrow Deposit shall be returned to Buyer,
or (iii) institute suit against Seller for damages.
7.2 Default by Buyer. In the event Buyer defaults in its obligation to
purchase the Real Property from Seller pursuant to this Agreement, Seller may,
as its sole and exclusive remedy for such breach, terminate this Agreement by
written notice to Buyer and the Title Company, and upon any such termination the
Title Company shall immediately deliver the Escrow Deposit to Seller, such sum
being agreed upon as the amount payable by Buyer to Seller as liquidated damages
and in consideration of Buyer having the option to refuse to purchase the
Property without any liability on account of its refusal other than payment of
the Escrow Deposit.
ARTICLE VIII
MISCELLANEOUS
8.1 Notices. All notices and other communications hereunder shall be in
writing and shall be either (i) be deposited in first class United States mail,
certified, with postage prepaid, (ii) delivered by messenger, (iii) sent by
overnight courier, or (iv) sent by fully completed and confirmed facsimile
transmission (with a written confirmation simultaneously sent in first class
United States mail), as follows:
If to the Seller: Copy to:
Kaiser Foundation Health Plan of Texas Jenkens & Gilchrist
c/o Kaiser Foundation Hospitals 1445 Ross Avenue, Suite 3200
One Kaiser Plaza Dallas, Texas 75202
Oakland, California 94612 Attention: Edward F.Walker
Attention: Peter Hohl, Director of Fax: (214) 855-4300
Acquisitions/Alliance Services
Fax: (510) 271-2309
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With an Additional Copy to:
Kaiser Foundation Hospitals
1950 Franklin Street, 17th Fl.
Oakland, CA 94612
Attention: Indrajit Obeysekere, Counsel
Fax: (510) 873-5080
If to the Buyer: Copy to:
HMO Texas, L.C. Morgan, Lewis & Bockius, LLP
c/o Sierra Health Services, Inc. 300 South Grand Avenue
2724 N. Tenaya Way (for Fed. Exp.) Twenty-Second Floor
Las Vegas, Nevada 89128 Los Angeles, California 90071-3132
P. O. Box 15645 (for U.S. mail) Attn: Richard J. Maire, Jr.
Las Vegas, Nevada 89114-5645 Fax: (213) 612-2554
Attn: Frank Collins
Corporate Counsel
Fax: (702) 240-7148
With an Additional Copy to:
Thompson & Knight
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201-4693
Attn: M. Lawrence Hicks, Jr.
Fax: (214) 969-1751
or such other address or fax number as any party may request by notice given as
aforesaid. Notices sent as provided herein shall be deemed given on the date
received by the recipient. If a recipient rejects or refuses to accept a notice
given pursuant to this Paragraph, or if a notice is not deliverable because of a
changed address or fax number of which no notice was given in accordance with
the provisions hereof, such notice shall be deemed to be received two days after
such notice was mailed (whether as the actual notice or as the confirmation of a
faxed notice) in accordance with the terms hereof. The foregoing shall not
preclude the effectiveness of actual written notice given to a party at any
address or by any means.
8.2 Waiver. No waiver by either Buyer or Seller hereto of its rights
under any provision of this Agreement shall constitute a waiver of such party's
rights under such provision at any other time or a waiver of such party's rights
under any other provision of this Agreement.
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8.3 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. An executed faxed copy of
this Agreement shall
be deemed an original executed copy of this Agreement.
8.4 Brokerage Fees and Commissions. Except as set forth herein, neither
Seller nor Buyer has contracted with any other real estate broker, agent, finder
or similar person in connection with the negotiation and execution of this
Agreement, the transactions contemplated hereby or the sale and purchase of the
Property. It is agreed that if any claims for any other brokerage fees are ever
made against Seller or Buyer in connection with the transactions contemplated by
this Agreement, all such claims shall be paid by the party whose commitments
form the basis of such claims. Seller and Buyer each agree to indemnify and hold
harmless the other from and against any and all liabilities, claims, demands or
actions for or with respect to any other brokerage fees asserted by any person,
firm or corporation in connection with this Agreement or the transactions
contemplated hereby, and any court costs, attorneys' fees or other costs and
expenses arising therefrom, insofar as any such liabilities, claims, demands or
actions are based upon a contract or commitment of the indemnifying party.
8.5 Entire Agreement. This Agreement (including the Exhibits and
Schedules) and the other agreements, certificates and documents of Seller and
Buyer contemplated herein constitute the entire agreement between the parties
hereto with respect to the matter hereof, and supersedes all prior agreements or
understandings between the parties. No amendment, alteration, or modification of
this Agreement shall be valid unless in each instance such amendment,
alteration, or modification is expressed in a written instrument duly executed
by the parties hereto.
8.6 Modification. Neither this Agreement nor any provision hereof may
be waived, modified, amended, discharged or terminated except as provided herein
or by an instrument in writing signed by the party against which the enforcement
of such waiver, modification, amendment, discharge or termination is sought, and
then only to the extent set forth in such instrument.
8.7 Applicable Law. This Agreement is to be governed by and interpreted
under the laws of the State of Texas, without resort to choice of law or
conflict of law principles which direct the application of the laws of a
different state.
8.8 Headings. The headings contained in this Agreement have been
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
8.9 Assignment. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the respective successors and assigns of the
parties hereto.
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Notwithstanding the foregoing, this Agreement shall not be assignable by any
party without the prior written consent of the other, and any attempt at an
assignment in violation of this Paragraph shall be void ab initio; provided,
however, that this Agreement may be assigned to an affiliate of Buyer without
Seller's consent.
8.10 Further Assurances. Each party hereto agrees for the benefit of
the other parties hereto to execute and deliver any necessary documents,
instruments or agreements, and to take any and all necessary actions, in order
to (i) fully vest in Buyer all right, title and interest to the Property, and
(ii) carry out the terms of this Agreement
and the transactions contemplated by this Agreement.
8.11 Time of Essence. Time is of the essence of this Agreement and of
each covenant and agreement that is to be performed at a particular time or
within a particular period of time. However, if the final date of any period
which is set out in any provision of this Agreement (other than the Closing
Date) falls on a Saturday, Sunday or legal holiday under the laws of the United
States or the State of Texas, then the time of such period shall be extended to
the next date which is not a Saturday, Sunday or legal holiday.
8.12 Severability. If any provision of this Agreement is held by final
judgment of a court of competent jurisdiction to be invalid, illegal or
unenforceable, such invalid, illegal or unenforceable provision shall be severed
from the remainder of this Agreement, and the remainder of this Agreement shall
be enforced. In addition, the invalid, illegal or unenforceable provision shall
be deemed to be automatically modified, and, as so modified, to be included in
this Agreement, such modification being made to the minimum extent necessary to
render the provision valid, legal and enforceable. Notwithstanding the
foregoing, however, if the severed or modified provision concerns all or a
portion of the essential consideration to be delivered under this Agreement by
one party to the other, the remaining provisions of this Agreement shall also be
modified to the extent necessary to adjust equitably the parties' respective
rights and obligations hereunder.
8.13 Attorneys' Fees. If either party defaults in its obligations
hereunder, the defaulting party shall pay the reasonable attorneys' fees
incurred by the other party in order to enforce its rights hereunder.
8.14 Construction. Whenever the context of this Agreement
requires, the gender of all words herein shall include the masculine, feminine,
and neuter, and the number of all words herein shall include the singular and
plural. All parties to this Agreement have been represented by counsel and,
accordingly, this Agreement shall not be construed strictly for or against any
party hereto. The Schedules and Exhibits attached hereto are incorporated herein
for all purposes and made a part of this Agreement as if set out in full in this
Agreement.
27
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[Signatures on following page]
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Execution Date.
BUYER:
HMO TEXAS, L.C.,
a Texas limited liability company
By: /s/ Larry S. Howard
Name: Larry S. Howard
Title: President
SELLER:
KAISER FOUNDATION HEALTH PLAN OF
TEXAS, a Texas non-profit corporation
By: /s/ Deborah Stokes
Name: Deborah Stokes
Title: President
Sierra Health Services, Inc. and Kaiser Foundation Hospitals have executed
this Agreement below solely with respect to their respective guarantee
obligations set forth in Paragraph 3.7. SIERRA HEALTH SERVICES, INC.
By: /s/ Anthony M. Marlon
Name: Anthony M. Marlon, M.D.
Title: Chairman and CEO
SELLER:
KAISER FOUNDATION HOSPITALS
By: /s/ Deborah Stokes
Name: Deborah Stokes
Title: Acting Senior Vice President
<PAGE>
EXHIBIT 10.2
ASSET SALE AND PURCHASE AGREEMENT
Between
KAISER FOUNDATION HEALTH PLAN OF TEXAS
A TEXAS NON-PROFIT CORPORATION
("SELLER")
AND
HMO TEXAS, L.C.
A TEXAS LIMITED LIABILITY COMPANY
("BUYER")
JUNE 5, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1. SALE OF ASSETS..................................................................................2
1.1. Sale and Purchase of Assets...................................................2
1.2. Excluded Assets...............................................................4
1.3. Liabilities...................................................................5
1.3.1. Assumed Liabilities...................................................5
1.3.2. Liabilities Not to be Assumed.........................................6
1.3.3. Property and Premium Taxes............................................7
1.3.4. Transfer Taxes; Recording Fees........................................7
1.4. Purchase Price................................................................7
1.4.1. Purchase Price........................................................7
1.4.2. Certain Balance Sheet Adjustments to Purchase Price...................7
1.4.3. Collection of Receivables............................................10
1.4.4. Purchase Price Earn-Out for Growth in Certain Member
Accounts.............................................................10
1.4.5. Purchase Price Earn-Out for NCQA Accreditation.......................12
1.4.6. Purchase Price Decrease for Decrease in Certain Member
Accounts.............................................................12
1.4.7. Purchase Price Adjustment for Premium Yield Attributable
to Certain Members...................................................13
1.4.8. Allocation...........................................................14
1.5. Closing and Closing Date.....................................................14
1.6. Actions to be Taken at Closing...............................................14
1.6.1. Buyer's Deliveries...................................................14
1.6.2. Seller's Deliveries..................................................16
1.6.3. Third Party Consents.................................................17
2. REPRESENTATIONS AND WARRANTIES OF SELLER.......................................................18
2.1. Representations and Warranties of Seller.....................................19
2.1.1. Organization and Good Standing.......................................19
2.1.2. Seller's Authority and No Breach.....................................19
2.1.3. No Violations........................................................19
2.1.4. No Consents..........................................................20
2.1.5. Seller's Financial Statements........................................20
2.1.6. Litigation...........................................................20
2.1.7. Compliance With Applicable Laws......................................21
2.1.8. Labor and Employment Matters.........................................21
2.1.9. Absence of Certain Changes...........................................21
2.1.10.Material Contracts....................................................22
2.1.11.Title to and Condition of Assets......................................23
2.1.12.Patents, Copyrights, Service Marks and Trademarks.....................23
2.1.13.No Broker or Finders..................................................23
2.1.14.Tax Returns and Tax Liabilities.......................................23
2.1.15.No Untrue Representation or Warranty..................................23
2.2. Representations and Warranties True and Correct at Closing;
Breaches
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.................................................................................................................24
3. REPRESENTATIONS AND WARRANTIES OF BUYER........................................................24
3.1. Representations and Warranties of Buyer......................................24
3.1.1. Organization and Good Standing.......................................24
3.1.2. Buyer's Authority and No Breach......................................24
3.1.3. No Brokers or Finders................................................25
3.1.4. Buyer's Consents.....................................................25
3.1.5. No Untrue Representation or Warranty.................................25
3.2. Representations and Warranties True and Correct at Closing;
Breaches
.................................................................................................................25
4. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.....................................................25
5. BUYER'S CONDITIONS PRECEDENT TO CLOSING........................................................26
5.1. Opinion of Counsel...........................................................26
5.2. Agreements...................................................................26
5.3. Corporate Resolutions........................................................26
5.4. Seller's Representations and Warranties True and Correct.....................26
5.5. Litigation...................................................................27
5.6. Certain Covenants............................................................27
6. SELLER'S CONDITIONS PRECEDENT TO CLOSING.......................................................27
6.1. Opinion of Counsel...........................................................27
6.2. Corporate Resolutions........................................................27
6.3. Agreements...................................................................27
6.4. Buyer's Representations and Warranties True and Correct......................27
6.5. Litigation...................................................................28
7. JOINT CONDITIONS PRECEDENT TO CLOSING..........................................................28
7.1. Medical Services Agreement...................................................28
7.2. Governmental Consents and Approvals..........................................28
7.3. Hart-Scott-Rodino............................................................28
7.4. Closing of Transactions Under Related Agreements.............................28
8. ADDITIONAL AGREEMENTS OF SELLER................................................................29
8.1. Conduct of Business Pending Closing..........................................29
8.2. Access to Documents and Premises.............................................29
8.2.1. Inspection of Books and Records......................................29
8.2.2. Request for Access...................................................30
8.3. Breach by Seller.............................................................30
8.4. Noncompetition and Nonsolicitation...........................................30
9. ADDITIONAL AGREEMENTS OF BUYER.................................................................31
9.1. Maintenance of Records.......................................................31
9.2. Communications...............................................................31
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10. ADDITIONAL AGREEMENTS OF BUYER AND SELLER......................................................32
10.1. Regulatory Milestones Prior to Closing.......................................32
10.1.1. HSR Filing..................................................32
10.1.2. Texas Department of Insurance...............................32
10.2. Health Care Financing Administration.........................................32
10.3. Office of Personnel Management...............................................33
10.4. Employment Matters...........................................................34
10.4.1. Severance Payments..........................................34
10.4.2. WARN, COBRA and HIPAA Notices...............................35
10.4.3. Health Care Coverage for Terminated Employees...............36
10.4.4. Health Care Coverage for Seller's Board of Directors........36
10.5. Transition Issues............................................................36
10.5.1. Use of Materials............................................36
10.5.2. Transition Agreement........................................36
10.6. Public Information Releases..................................................37
10.7. Cooperation..................................................................37
10.8. Group 3000...................................................................37
10.9. Reciprocity Agreement........................................................38
11. INDEMNIFICATION................................................................................38
11.1. Indemnification by Seller....................................................38
11.2. Indemnification by Buyer.....................................................39
11.3. Limitations..................................................................39
11.3.1. Minimum.....................................................39
11.3.2. Maximum.....................................................40
11.4. Notice and Right to Defend...................................................40
11.5. Exclusive Remedy.............................................................41
11.6. Failure to Provide Records Cooperation.......................................41
12. TERMINATION....................................................................................41
12.1. Termination..................................................................41
12.2. Liability for Termination....................................................41
13. ARBITRATION....................................................................................42
13.1. Conciliation and Mediation...................................................42
13.2. Arbitration..................................................................42
13.3. Equitable Relief.............................................................43
13.4. No Applicability.............................................................43
14. GUARANTEES.....................................................................................43
14.1. Seller's Guarantor...........................................................43
14.2. Buyer's Guarantor............................................................43
15. MISCELLANEOUS..................................................................................44
15.1. Notices......................................................................44
15.2. Waiver.......................................................................45
15.3. Counterparts.................................................................45
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15.4. Headings.....................................................................45
15.5. Severability.................................................................45
15.6. Entire Agreement.............................................................46
15.7. Successors and Assigns.......................................................46
15.8. Governing Law................................................................46
15.9. Cost of Transaction..........................................................46
15.10. Further Assurances...........................................................47
15.11. Construction.................................................................47
15.12. Third Parties................................................................47
15.13. Time is of the Essence.......................................................47
15.14. Confidentiality..............................................................47
15.15. Offsets......................................................................48
15.16. No Duplication...............................................................48
</TABLE>
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<TABLE>
<CAPTION>
LIST OF SCHEDULES
<S> <C>
Schedule 1.1(b) Provider Agreements
Schedule 1.1(c) Contracts
Schedule 1.1(d) Tangible Personal Property
Schedule 1.1(i) Assets of Seller's Affiliates
Schedule 1.1(j) Software, Hardware and Related Data of Seller or Seller's
Affiliates
Schedule 1.2(m) Other Assets to be Excluded
Schedule 1.4.4 Membership Base
Schedule 2.1.6 Litigation
Schedule 2.1.7 Compliance with Applicable Laws
Schedule 2.1.8 Labor and Employment Matters
Schedule 2.1.9 Absence of Certain Changes
Schedule 2.1.11 Title to and Condition of Assets
LIST OF EXHIBITS
Exhibit 1.4.2(a) Opening Balance Sheet
Exhibit 1.4.2(a)-1 Rules
Exhibit 1.6.1(b) Bill of Sale, Assignment and Assumption Agreements
Exhibit 1.6.1(c) Assumption Reinsurance Agreement
Exhibit 1.6.1(d) Insurance Assumption Reinsurance Agreement
Exhibit 1.6.1(l) Subsidy Agreement
Exhibit 1.6.1(m) Transition Agreement
Exhibit 1.6.1(n) Medical Services Agreement
Exhibit 5.1 Opinion Letter of Seller's Counsel
Exhibit 6.1 Opinion Letter of Buyer's Counsel
Exhibit 10.8(a) Seller's Group 3000 Rates
Exhibit 10.8(b) Seller's Affiliates' Standard Group 3000 Rates
Exhibit 13.2 Exceptions to AAA Arbitration Rules
</TABLE>
LIST OF DEFINITIONS
"Affiliates" can be found in Recital C.
"Agreement" can be found on page 1.
"Applicant"or "Applicants" can be found in Section 10.4.1(c).
"Assets" can be found in Section 1.1.
"Assumed Liabilities" can be found in Section 1.3.1.
"Assumption Reinsurance Agreement" can be found in Section 1.6.1(c).
"Board of Arbitration" can be found in Section 13.2.
"Business" can be found in Recital B.
"Buyer" can be found on page 1.
"Buyer's Parent" can be found in Section 14.2.
"CRF" can be found in Section 10.3(a).
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<PAGE>
"COBRA" can be found in Section 10.4.2.
"Closing" can be found in Section 1.5.
"Closing Balance Sheet" can be found in Section 1.4.2(b).
"Closing Date" can be found in Section 1.5.
"Closing Working Capital" can be found in Section 1.4.2(b).
"Code" can be found in Recital A.
"Columbia Hospital Contract" can be found in Section 1.6.3(b).
"Commercial HMO Members" can be found in Section 1.4.6.
"Competitive Business" can be found in Section 8.4(a).
"Confidentiality Agreement" can be found in Recital E.
"Contracts" can be found in Section 1.1(c).
"Control" can be found in Recital C.
"Delivery System" can be found in Recital B.
"Earn-Out Accounts" can be found in Section 1.4.4.
"Excluded Assets" can be found in Section 1.2.
"Excluded Liabilities" can be found in Section 1.3.2.
"Execution Date" can be found on page 1.
"Governmental Entity" can be found in Section 2.1.4.
"HCFA" can be found in Recital C.
"HCFA Novation Agreement" can be found in Section 10.2.
"HIPAA" can be found in Section 10.4.2.
"HMO" can be found in Section 1.1(h).
"HMO Business" can be found in Recital B.
"HSR Act" can be found in Section 2.1.4.
"Indemnification Liability" can be found in Section 10.3(b).
"Indemnity Business" can be found in Recital B.
"Insurance Assumption Reinsurance Agreement" can be found in Recital D.
"Interim Balance Sheet" can be found in Section 1.4.2(b).
"KFH" can be found in Recital C.
"KFHP" can be found in Recital C.
"KPIC" can be found in Recital B.
"Leased Real Property" can be found in 1.6.1(e).
"Liens" can be found in Section 2.1.11.
"Loss" or "Losses" can be found in Section 11.1.
"Master Purchase and Sale Agreement" can be found in Section 1.6.1(e).
"Material Adverse Effect" can be found in Section 2 and Section 3.
"Medical Services Agreement" can be found in Section 1.6.1(n).
"Member" or "Members" can be found in Recital C.
"Membership Base" can be found in Section 1.4.4.
"NCQA" can be found in Section 1.4.5.
"New Accounts" can be found in Section 1.4.4.
"Non-Texas Group 3000 Members" can be found in Section 10.8.
"Notifying Party" can be found in Section 1.4.2(e).
"OPM" can be found in Recital C.
"OPM Novation Agreement" can be found in Section 10.3.
"Old National Accounts" can be found in Section 1.4.4.
"Opening Balance Sheet" can be found in Section 1.2(k).
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"PMAT" can be found in Section 1.2(b).
"Pharmacy Business" can be found in Recital B.
"Premium Yield" can be found in Section 1.4.7.
"Provider Agreements" can be found in Recital C.
"Property Taxes" can be found in Section 1.3.3.
"Purchase Price" can be found in Section 1.4.1.
"Receiving Party" can be found in Section 1.4.2(e).
"Reinsurance Agreements" can be found in Recital D.
"Related Agreements" can be found in Section 7.4.
"Returns" can be found in Section 2.1.14.
"Rules" can be found in Section 1.4.2(a).
"Seller" can be found on page 1.
"Seller's Permits" can be found in Section 2.1.7.
"Severance Payments" can be found in Section 10.4.1(b).
"Subscriber Agreements" can be found in Recital C.
"Subsidy Agreement" can be found in Section 1.3.2(i).
"Tangible Personal Property" can be found in Section 1.1(d).
"Terminated Employees" can be found in Section 10.4.1(a).
"Texas Group 3000 Members" can be found at Section 10.8(a).
"Transfer" can be found in Section 10.2.
"Transition Agreement" can be found in Section 1.6.1(m).
"US GAAP" can be found in Section 2.1.5.
"Violation" can be found in Section 2.1.3.
"WARN" can be found in Section 10.4.2.
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<PAGE>
ASSET SALE AND PURCHASE AGREEMENT
THIS ASSET SALE AND PURCHASE AGREEMENT ("Agreement") is made and entered
into as of this 5th day of June, 1998 ("Execution Date"), by and between HMO
Texas, L.C., a Texas limited liability company ("Buyer"), and Kaiser Foundation
Health Plan of Texas, a Texas non-profit corporation ("Seller").
RECITALS:
A. Seller is a Texas non-profit corporation that is exempt from federal
income taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended ("Code"). Buyer is a Texas limited liability company.
B. Seller's business operations are comprised of several business segments,
including (i) its operation in the State of Texas of a health maintenance
organization ("HMO Business"), (ii) the provision and delivery of health care
services in the State of Texas (as distinct from the financial coverage of
health care services that are part of the HMO Business) ("Delivery System"), and
(iii) the provision and delivery of pharmacy services in the State of Texas
("Pharmacy Business"). The HMO Business, the Delivery System, and the Pharmacy
Business are collectively referred to as the "Business." In addition, one of
Seller's Affiliates (as herein defined), Kaiser Permanente Insurance Company, a
California domiciled life and disability insurer ("KPIC"), issues certain
indemnity products in Texas ("Indemnity Business") in support of Seller's
Business.
C. Seller desires to sell, assign, and deliver to Buyer, or to arrange or
cause to be sold, assigned, and delivered by Seller's Affiliates to Buyer, and
Buyer desires to purchase, accept assignment, and accept delivery from Seller or
Seller's Affiliates, substantially all of the operating assets used by Seller in
the operation of its Business, including, without limitation, (1) the subscriber
agreements ("Subscriber Agreements") and government contracts under which Seller
has agreed to provide or arrange for the provision of health care services to be
delivered to covered individuals and group enrollees (including their covered
spouses and covered dependents) under direct pay, group, welfare trust, and
other plans or policies, and (2) certain provider agreements ("Provider
Agreements") through which Seller has arranged for health care services to be
delivered to Members (as hereinafter defined), and certain other property owned,
leased or otherwise used by Seller in the operation of its Business. Each person
enrolled under the Subscriber Agreements or under governmental contracts with
the Health Care Financing Administration ("HCFA") or the Office of Personnel
Management ("OPM"), or Texas and Non-Texas Group 3000 Members is referred to
individually as a "Member" or collectively as "Members." The term "Affiliates"
shall mean any entity which controls, which is under control of, or which is
under common control with, either Buyer or Seller. Affiliates of Seller shall
include Kaiser Foundation Hospitals ("KFH") and Kaiser Foundation Heath Plan,
Inc. ("KFHP"). "Control," as used in the definition of Affiliates, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of management and policies of another entity, whether through the
authority to elect the board of directors of such entity or otherwise.
<PAGE>
D. KPIC desires to sell, assign and deliver the Indemnity Business to Buyer
or an Affiliate of Buyer, such sale, assignment and delivery to be the subject
of a separate agreement, including its exhibits, ("Insurance ") between KPIC or
Buyer or Buyer's Affiliate. The Insurance and the Assumption Insurance Agreement
including its exhibits, (as herein defined) shall be referred to as the
"Reinsurance Agreements."
E. Buyer and Seller executed two confidentiality agreements
("Confidentiality Agreement") dated March 28 and March 30, 1998, respectively,
relating to the transactions set forth in this Agreement.
F. Buyer and Seller wish to set forth the terms and conditions under which
Buyer will buy and Seller will sell, or cause to be sold, the assets of the
Business.
NOW, THEREFORE, for and in consideration of the above recitals and the
representations, warranties, mutual covenants, and agreements herein expressed,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby expressly acknowledged, the parties hereby agree as follows:
1. SALE OF ASSETS.
1.1. Sale and Purchase of Assets.
Seller hereby agrees to sell and assign to Buyer, or cause to be sold and
assigned to Buyer, and Buyer hereby agrees to purchase and accept assignment
from Seller or Seller's Affiliates, for payment of the Purchase Price specified
in Section 1.4, on the Closing Date referred to in Section 1.5, all of the
assets ("Assets") of every kind and description that are owned and used by
Seller in the operation of the Business, or owned by Seller's Affiliates (as
listed on Schedule 1.1(i)) including, without limitation, the following assets:
(a) All of Seller's rights, title and interests in the Subscriber
Agreements, as more fully described in the Reinsurance Agreements. Buyer and
Seller shall execute the Assumption Reinsurance Agreement simultaneous with the
execution of this Agreement, and the Assumption Reinsurance Agreement is hereby
incorporated by reference into this Agreement;
(b) Seller's rights, title and interests in the Provider Agreements,
including, without limitation, those with hospitals, ancillary and other
institutional providers, laboratories, vision providers, durable medical
equipment services providers, and provider HMOs that are set forth on Schedule
1.1(b), as may be amended prior to Closing through terminations, expirations,
and additions made in the ordinary course of business, but specifically
excluding (i) those contracts to obtain services or supplies on a group basis
that are listed as Excluded Assets in Section 1.2(d), and (ii) those certain
provider agreements providing for transplant services, except with respect to
Group 3000 Members for whom Seller shall make such contracts available through
December 31, 1999. To the extent that there
2
<PAGE>
are parties to any particular Provider Agreement other than Seller and the
provider, Seller shall arrange to have the Provider Agreement amended or
otherwise restructured as necessary for Buyer to receive substantially all of
the benefits and to assume substantially all of the performance obligations
accruing or arising with respect to periods after Closing previously assumed by
Seller under such Provider Agreement;
(c) All of Sellers' rights, title and interests in all other contracts of
Seller which relate to the Business, including, without limitation, vendor
agreements set forth on Schedule 1.1(c), as may be amended prior to Closing
through terminations, expirations, and additions made in the ordinary course of
business ("Contracts"), but specifically excluding contracts solely between
Seller and Seller's Affiliates and any other contract listed as an Excluded
Asset;
(d) All of Seller's rights, title and interests in the tangible personal
property used in the operation of the Business, including, without limitation,
(i) furniture, fixtures and equipment, whether leased or owned, unless such
furniture, fixtures and equipment are attached to real property not to be
transferred to Seller pursuant to this Agreement or any other agreement between
the parties and dated as of the date hereof, less any dispositions plus any
additions made prior to the Closing Date in the ordinary course of business, and
(ii) all supplies, stock-in-trade, over-the-counter drug inventory, and all
replacements thereof ("Tangible Personal Property"), as specifically listed on
Schedule 1.1(d);
(e) All of Seller's rights, title and interests in intangible personal
property, including, without limitation, (i) to the extent shown on the Closing
Balance Sheet (as herein defined), cash, cash deposits, cash investments,
securities and receivables, and (ii) all licenses, permits, and warranties to
the extent permitted by law and the terms of such licenses, permits and
warranties, and (iii) all other rights necessary to Seller's operation of the
Business;
(f) All of Seller's rights, title and interests in prepayments or other
payments by or on behalf of Members, except to the extent otherwise expressly
agreed in Sections 10.2 and 10.3;
(g) Originals of or true and correct copies of financial and other books,
records and title documents necessary for Buyer to operate the Business;
(h) All of Seller's rights, title and interests in and to the formulary,
the software license and the hardware comprising Seller's Pharmacy Business
information system known as "NDC," except that with regard to the formulary,
Seller hereby grants to Buyer a non-exclusive, non-transferable, royalty-free
license, to use the formulary for the limited purpose of Buyer's health
maintenance organization ("HMO") business in the service area (as
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<PAGE>
of the Execution Date) of Seller in Texas and any contiguous expansion of
such area by Buyer;
(i) Certain assets of Seller's Affiliates, as set forth on Schedule 1.1(i);
and
(j) The software listed on Schedule 1.1(j).
1.2. Excluded Assets.
The following assets of Seller are not included in the defined term
"Assets," and are not being transferred or assigned to Buyer under this
Agreement ("Excluded Assets"):
(a) Seller's rights, title and interests in the real property owned or
leased by Seller or Seller's Affiliates which is being transferred pursuant to a
Master Purchase and Sale Agreement (as herein defined);
(b) Seller's rights, title and interests in that certain Medical Services
Agreement, dated January 1, 1990, as amended, between Seller and Permanente
Medical Association of Texas ("PMAT") under which PMAT agrees to arrange or
provide professional services to Members;
(c) Seller's rights, title and interests in its contracts of employment;
(d) Except as otherwise set forth in this Agreement, Seller's rights, title
and interests in contracts (i) between Seller and Seller's Affiliates, (ii)
among third parties and Seller and Seller's Affiliates, and (iii) between
Seller's Affiliates and third parties that inure to Seller's benefit, including,
without limitation, contracts to obtain services or supplies on a group basis
(including contracts for the procurement of pharmaceuticals);
(e) Seller's rights, title and interests in its prescription drug
inventory;
(f) Seller's rights, title and interests in Seller's contracts with HCFA
and OPM and amounts due to Seller from OPM for periods prior to the Closing,
which shall be transferred in accordance with Sections 10.2 and 10.3;
(g) Seller's rights, title and interests in the insurance policies or
programs covering Seller, its officers, directors, employees and agents, and any
claims for refunds or recoveries under any insurance policies or programs;
(h) Seller's rights, title and interests in claims against third parties
arising with respect to acts and omissions occurring on dates prior to the
Closing, if any;
(i) Except as set forth in Section 1.1(h), Seller's rights, title and
interests in the name of Seller and all derivations thereof, including, without
limitation, trademarks, service marks, trade names and logos, and all pending
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applications for the foregoing, and Seller's patents, copyrights, trade
secrets, know-how, processes and other intellectual property and all pending
applications for the foregoing, other than Excluded Assets that Buyer may be
entitled to utilize under the terms of the Transition Agreement;
(j) Seller's rights, title and interests in the assets of the
administrative facility known as the "Consolidated Service Center" used in
connection with the provision of membership accounting and third party
administration services for Seller and certain of Seller's Affiliates, including
all employment contracts with employees of Seller working for the Consolidated
Service Center, other than Excluded Assets that Buyer may be entitled to utilize
under the terms of the Transition Agreement;
(k) Seller's rights, title and interests in the assets which shall be
disposed of after the date of the opening balance sheet, attached as Exhibit
1.4.2(a) ("Opening Balance Sheet"), but prior to the Closing Date in the
ordinary course of business;
(l) Seller's rights, title and interests in the administrative procedures
and systems used by Seller, including, without limitation, internal policies and
methodologies, other than Excluded Assets that Buyer may be entitled to utilize
under the terms of the Transition Agreement;
(m) Seller's rights, title and interests in certain other assets to be
retained by Seller and Seller's Affiliates, as specifically listed on Schedule
1.2(m); and
(n) Any assets expressly listed as being excluded in Section 1.1.
1.3. Liabilities.
1.3.1. Assumed Liabilities.
As of the Closing, Buyer shall assume and agree to pay, discharge, and
perform, as appropriate, all of the following obligations of Seller and no
others (collectively, "Assumed Liabilities"):
(a) All obligations shown on the Closing Balance Sheet;
(b) All obligations accruing or arising under the Subscriber Agreements, on
the terms and conditions described in the Assumption Reinsurance Agreement;
(c) All obligations accruing or arising with respect to periods after the
Closing under those Provider Agreements and Contracts assigned or otherwise
transferred to Buyer, including, without limitation, all obligations to pay and
administer payment under the Provider Agreements;
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<PAGE>
(d) All obligations accruing or arising with respect to periods after the
Closing relating to the other Assets transferred to Buyer under Section 1.1 and
not listed in Section 1.3.1(a) through 1.3.1(c); and
(e) Only those employee related obligations as expressly set forth in
Section 10.4.
1.3.2. Liabilities Not to be Assumed.
Buyer shall not assume and shall not be obligated to pay, discharge or
perform any obligations and liabilities of Seller or Seller's Affiliates
relating to the Business not listed in Section 1.3.1, including, without
limitation, the following (collectively, "Excluded Liabilities"):
(a) Any and all liabilities of Seller, Seller's Affiliates or any third
party (including, without limitation, PMAT), whether currently known or unknown,
with respect to claims or potential claims for medical malpractice or
professional liability with respect to the Business relating to periods prior to
the Closing in each case regardless of when the claim is asserted;
(b) Any and all liabilities of Seller, Seller's Affiliates or any third
party (including, without limitation, PMAT), whether currently known or unknown,
relating to litigation or claims of any kind or nature with respect to the
Business relating to periods prior to the Closing, in each case regardless of
when the claim is asserted;
(c) Liabilities relating to the Excluded Assets;
(d) Liabilities that do not relate to the Business;
(e) Liabilities to any of Seller's Affiliates;
(f) Liabilities which are not related to the Assets and Assumed
Liabilities;
(g) Seller's obligations relating to Seller's health and welfare benefit
plans, pension, and retirement plans with respect to the Terminated Employees
(as hereinafter defined) or any former employees of Seller;
(h) Liabilities of Seller or Seller's Affiliates that are not required to
be stated on a balance sheet by US GAAP (as herein defined); and
(i) Any liability relating to that certain subsidy agreement ("Subsidy
Agreement") among Seller, Buyer, PMAT, and Sierra Health Services, Inc., such
Subsidy Agreement to be delivered at Closing.
1.3.3. Property and Premium Taxes.
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<PAGE>
All annual or periodic ad valorem fees, taxes, assessments, licensing fees,
vehicle use fees, and similar charges imposed by taxing authorities on the
Assets (collectively, "Property Taxes") shall be borne and paid (a) by Seller
for all full tax years or periods ending before the Closing and for that portion
of any tax year or period ending on or after the Closing from the date of
commencement of such year or period to the date immediately preceding the
Closing, and (b) by Buyer for all full tax years or periods beginning on or
after the Closing and for that portion of any tax year or period ending on or
after the Closing from and including the Closing to the final date of such year
or period, regardless of when or by which party such Property Taxes are actually
paid to the applicable taxing authority. Premium taxes shall be allocated
between Buyer and Seller pursuant to the terms of the Assumption Reinsurance
Agreement, except that premium taxes relating to Seller's contracts with OPM and
HCFA shall be allocated as provided in this Agreement.
1.3.4. Transfer Taxes; Recording Fees.
The Buyer and Seller shall share equally any and all sales, use, transfer
or other similar taxes imposed as a result of the consummation of the
transactions between Buyer and Seller contemplated by this Agreement.
1.4. Purchase Price.
1.4.1. Purchase Price.
The consideration for the transfer of the Assets from Seller and Seller's
Affiliates to Buyer shall be One Hundred Twenty Seven Million Two Hundred Twenty
Four Thousand Three Hundred Nine Dollars ($127,224,309.00), as adjusted as
provided in this Section 1.4 ("Purchase Price"). Ninety Seven Million Two
Hundred Twenty Four Thousand Three Hundred Nine Dollars ($97,224,309.00) of the
Purchase Price shall be paid by Buyer to Seller by Federal Reserve Bank wire
transfer of good funds at Closing, as adjusted as provided in this Section 1.4.
The remaining Thirty Million Dollars ($30,000,000.00) of the Purchase Price
shall be paid in accordance with the earn-outs set forth in Sections 1.4.4 and
1.4.5 below. The parties acknowledge that the amount of Two Hundred Seventy Five
Thousand Six Hundred Ninety One Dollars ($275,691.00) is the purchase price
associated with the Insurance Assumption Reinsurance Agreement and that such
amount is not included in the term Purchase Price for purposes of this
Agreement.
1.4.2. Certain Balance Sheet Adjustments to Purchase Price.
(a) The Opening Balance Sheet (and related worksheets, working papers,
notes and schedules thereto, if applicable), attached hereto as Exhibit
1.4.2(a), sets forth, at March 31, 1998, the book value of the assets and
liabilities of Seller. Except as expressly provided by the rules set forth in
Exhibit 1.4.2(a)-1 ("Rules"), the Opening Balance Sheet (i) fairly presents the
financial position of Seller at March 31, 1998, in conformity with US GAAP,
applied on a consistent basis, and (ii) reflects all write-offs or
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<PAGE>
revaluations of assets (except as specified therein). The reserves recorded
in the Opening Balance Sheet were prepared in accordance with US GAAP and are
consistent with the statutory or other accounting practices prescribed or
permitted by the insurance regulatory authorities of the State of Texas and of
all the jurisdictions in which Seller is licensed to transact insurance business
and make good and sufficient provision for all insurance obligations of Seller.
If there is a conflict between US GAAP and the Rules, the Rules shall take
precedence.
(b) Not less than five business days prior to the Closing Date, Seller
shall deliver to Buyer a balance sheet ("Interim Balance Sheet") for the most
recent month end prior to the Closing Date, prepared in accordance with US GAAP,
the Rules, and other standards applicable to the Closing Balance Sheet. Not more
than 15 days after the Closing Date, Seller shall deliver to Buyer the closing
balance sheet ("Closing Balance Sheet") pursuant to which the book value of the
current assets included in the Assets less the book value of the current
liabilities included in the Assumed Liabilities ("Closing Working Capital") will
be zero at the Closing Date. The Closing Balance Sheet will (i) fairly present
the financial position of Seller as at the Closing Date, in conformity with US
GAAP, applied on a consistent basis, and (ii) will reflect all write-offs or
revaluation of assets. Seller will provide a list of all write-offs or partial
write-downs of assets from the Opening Balance Sheet in excess of $5,000.00. The
reserves recorded in the Closing Balance Sheet will be prepared in accordance
with US GAAP and will be consistent with the statutory or other accounting
practices prescribed or permitted by the insurance regulatory authorities of the
State of Texas and of all the jurisdictions in which Seller is licensed to
transact insurance business and make good and sufficient provisions for all
insurance obligations of Seller. If there is a conflict between US GAAP and the
Rules, the Rules shall take precedence. If the book value of the current assets
included in the Assets of Seller less the book value of the current liabilities
included in the Assumed Liabilities of Seller set forth on the Interim Balance
Sheet is less than zero, the Purchase Price payable at Closing shall be reduced
by the amount of such deficit, without prejudice to either party to assert any
adjustments pursuant to this Section 1.4.2. If the book value of the current
assets included in the Assets of Seller less the book value of the current
liabilities included in the Assumed Liabilities of Seller set forth on the
Interim Balance Sheet is more than zero, the Purchase Price payable at Closing
shall be increased by the amount of such excess, without prejudice to either
party to assert any adjustments pursuant to this Section 1.4.2. The parties may,
by mutual agreement, arrange for Seller to retain and discharge on or before
Closing certain liabilities set forth on the Closing Balance Sheet in the place
of all or part of any necessary adjustment to the Purchase Price payable at
Closing.
(c) Seller shall promptly pay to Buyer the amount of any payable of Seller
booked to the Closing Balance Sheet under Rule 9 on Exhibit 1.4.2(a)-1,
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<PAGE>
and Buyer shall promptly pay to Seller the amount of any payable of Buyer
booked to the Closing Balance Sheet under Rule 9 on Exhibit 1.4.2(a)-1. In
addition, if at any time, either party determines that the Closing Balance Sheet
is not in conformity with the standards set forth in Section 1.4.2(b), and the
Closing Working Capital was not zero, it shall promptly notify the other party
of such discrepancy in writing, setting forth in detail the basis for its belief
that a discrepancy exists, and the Purchase Price shall be adjusted as set forth
below; provided however, (i) no adjustments shall be made with respect to any
event that occurs subsequent to December 31, 1999; and (ii) no adjustments shall
be made with respect to any proposed adjustment not asserted in writing
containing a reasonable description of the proposed adjustment sent on or before
March 31, 2000.
(d) If, as a result of an adjustment to the Closing Balance Sheet, the
Closing Working Capital is less than zero, Seller shall promptly pay in full the
amount by which it is less than zero to Buyer. If, as a result of an adjustment
to the Closing Balance Sheet, the Closing Working Capital is more than zero,
Buyer shall promptly pay the amount by which it is more than zero to Seller. All
amounts due hereunder shall be paid within 30 days of receipt of notice from the
other party that an amount is due and owing unless, within such 30-day period,
the matter has been made the subject of a dispute resolution proceeding as set
forth in Section 1.4.2(e).
(e) If one party ("Notifying Party") has given the other ("Receiving
Party") written notice that it believes an adjustment to the Closing Balance
Sheet or the Closing Working Capital is appropriate, and the Receiving Party
does not agree that an adjustment is appropriate, or disputes the amount of the
adjustment, then the Receiving Party shall give the Notifying Party notice that
it is submitting the matter to the dispute resolution procedure set forth in
this Section 1.4.2(e). In that event, the parties shall seek, for a 30-day
period following the notice from the Receiving Party to the Notifying Party, to
come to an agreement on the amount, if any, of the appropriate adjustment.
During that 30-day period, (i) each party shall share with the other the
information in its possession that causes it to believe that an adjustment is
required, and (ii) representatives of each party who are authorized to settle
the dispute shall meet to discuss the resolution thereof. If the parties are
unable to reach resolution of the dispute within the 30-day period, they shall
promptly submit the matter to an independent "Big Six" accounting firm,
acceptable to both parties, and the determination of the independent accounting
firm as to the amount, if any, of the adjustment, shall be conclusive and not
subject to arbitration under this Agreement. Each party shall cooperate fully
with the independent accounting firm and provide to it such documents and work
papers as it may request in making its determination. The cost of the submission
of the adjustment to the independent accounting firm shall be borne by the party
whose position is most at variance with the final determination of the
independent accounting
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<PAGE>
firm. All amounts due from one party to the other shall be promptly paid in
full upon the resolution of the matter by the independent accounting firm.
(f) Either party may, through its own employees or through designated
representatives, review and audit the proposed adjustments asserted by the other
party. Each party shall fully cooperate with such review and audit and shall
share with the other party and its designated representatives, such working
papers and accounting records as they may reasonably request. Each party shall
use commercially reasonable efforts to conduct its review and audit in such a
manner as to not unreasonably interfere with the other party's conduct of its
business.
(g) The entries on the Opening Balance Sheet and the Closing Balance Sheet
that are the subject of the Post Closing Reconciliation and Report Procedures,
as defined and set forth in the Reinsurance Agreements, shall be adjusted in
accordance with the terms of the Reinsurance Agreements. Such adjustments under
the Assumption Reinsurance Agreement shall not be duplicated under this
Agreement and shall be netted against any adjustments or indemnification
payments hereunder made with respect to the same event or circumstance.
1.4.3. Collection of Receivables.
(a) Seller may, from time to time, review the collection efforts being made
by Buyer with respect to accounts receivable included on the Closing Balance
Sheet which are aged at least 90 days. If at any time, or from time to time,
Seller wishes to assume responsibility for collection of all or any part of such
receivables listed on the Closing Balance Sheet, Seller shall notify Buyer in
writing that it wishes to do so, and Buyer shall provide Seller with all
information necessary or appropriate to enable Seller to collect the amounts due
on the accounts so designated. Buyer shall not have any responsibility to take
any action with respect to accounts receivable following the transfer of
responsibility for their collection to Seller.
(b) Any amounts collected by Seller on national or multi-state accounts
with respect to Members under Subscription Agreements transferred pursuant to
this Agreement shall be paid to Buyer within 15 business days of receipt.
1.4.4. Purchase Price Earn-Out for Growth in Certain Member Accounts.
Buyer shall pay to Seller, in accordance with this Section 1.4.4, up to an
additional Twenty Seven Million Dollars ($27,000,000.00) on account of (i)
post-Closing increases in the membership count of employer groups identified by
Seller prior to Closing as national accounts ("Old National Accounts") over the
membership level of such accounts at the Closing, and (ii) new accounts written
by Buyer or Buyer's Affiliates in their Dallas, Houston, Las Vegas, and Reno
service areas after the Closing ("New Accounts") which Seller or Seller's
Affiliates has been primarily responsible for obtaining on Buyer's behalf.
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<PAGE>
The names and membership levels of the Old National Accounts ("Membership
Base") at March 31, 1998 is set forth in Schedule 1.4.4. This Schedule shall be
replaced by Seller within 60 days after Closing to reflect additions and
deletions to names and membership levels effective the Closing Date. The Old
National Accounts and the New Accounts are, collectively, the "Earn-Out
Accounts."
(a) If the number of Members in the Earn-Out Accounts at the first annual
anniversary of the Closing Date is equal to or in excess of the First Membership
Milestone percentages of the number of Members in the Earn- Out Accounts at the
Closing Date, Buyer shall pay Seller the amount opposite the percentage. The
amount paid to Seller shall be prorated between the First Membership Milestone
percentages. First Membership Milestones (1st Anniversary Compared to the
Closing Date) Earn-Out 107% $9 Million 100% $6.75 Million 90% $4.5 Million 80%
$2.25 Million Less than 80% - 0 -
(b) If the number of Members in the Earn-Out Accounts at the second annual
anniversary of the Closing is equal to or in excess of the following Second
Membership Milestone percentages of the number of Members in the Earn- Out
Accounts at the Closing Date plus 7%, Buyer shall pay Seller the amount opposite
such percentage, less any amount already paid to Seller at the first annual
anniversary of the Closing. The amount paid to Seller shall be prorated between
the Second Membership Milestone percentages. If the amount owed Seller is less
than the amount paid Seller at the first anniversary, Seller shall return to
Buyer the difference. Second Membership Milestones (2nd Anniversary Compared to
the Closing Date) Earn-Out 114% $18 Million 107% $13.5 Million 96% $9 Million
86% $4.5 Million Less than 86% - 0 -
(c) If the number of Members in the Earn-Out Accounts at the third annual
anniversary of the Closing Date is equal to or in excess of the Third Membership
Milestone percentages of the number of Members in the Earn- Out Accounts at the
Closing Date plus 14%, Buyer shall pay Seller the amount opposite such
percentage, less any amount already paid to Seller at the first and second
annual anniversaries of the Closing. The amount paid to Seller shall be prorated
between the Third Membership Milestone percentages. If the amount owed Seller is
less than the amount paid Seller at the first and second anniversaries (net of
any payments from Seller to
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<PAGE>
Buyer at the first and second anniversaries) Seller shall return to Buyer
the difference. Third Membership Milestones (3rd Anniversary Compared to the
Closing Date) Earn-Out 122% $27 Million 114% $20.25 Million 103% $13.5 Million
91% $6.75 Million Less than 91% - 0 -
(d) Buyer agrees to make available to the Earn-Out Accounts benefit designs
and rates consistent with prudent business practices. Such benefit designs shall
also be materially consistent with the Old National Accounts existing as of the
Closing Date.
(e) Calculations and audits thereof shall be undertaken by Seller and Buyer
within 90 days of each annual anniversary, with any payment owed by one party to
the other paid within 120 days of each annual anniversary. Seller and Buyer
shall each have the right to inspect and photocopy those books and records of
the other necessary to verify any amounts that may be owed by one party to the
other under this Section.
1.4.5. Purchase Price Earn-Out for NCQA Accreditation.
Buyer shall pay Seller Three Million Dollars ($3,000,000.00) if Seller
achieves for the HMO Business a full one-year or better non-provisional National
Committee on Quality Assurance ("NCQA") accreditation certificate for the NCQA
survey currently scheduled on or about July of 1998. Buyer shall pay Seller such
amount within five business days of receipt of proof of such certification from
NCQA. Buyer agrees not to take any action other than entering into this
Agreement which might delay the July, 1998 NCQA site visit.
1.4.6. Purchase Price Decrease for Decrease in Certain Member Accounts.
If at Closing, the total number of Seller's Commercial HMO Members (as
herein defined) plus Medicare risk HMO Members is less than 114,000, Buyer shall
be entitled to reduce the Purchase Price by an amount equal to Seven Hundred
Forty Five Dollars ($745.00) multiplied by the difference between the total
number of Seller's Commercial HMO Members plus Medicare risk HMO Members and
114,000; provided, however, that if Buyer declines to accept the assignment,
reinsurance, novation or other transfer of certain Commercial HMO Members or
Medicare risk HMO Members from Seller to Buyer, including, without limitation,
Group 3000, such Commercial HMO Members or Medicare risk HMO Members shall not
be included in this difference. Calculation and audits of Seller's actual
Commercial HMO Members plus Medicare risk HMO Members as of Closing shall be
undertaken by Seller and Buyer within 90 days of the Closing. Such calculation
and audit shall be completed within 180 days following the Closing. For purposes
of such calculation, an individual shall not be considered a Commercial HMO
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<PAGE>
or Medicare risk HMO Member if there is an account receivable for premiums
associated with such individual in excess of 120 days. Buyer shall apply such
reduction first to offset any amounts owed by Buyer to Seller under Sections
1.4.4 and 1.4.5. If such offset proves to be inadequate, Seller shall be
required to refund to Buyer the remaining amount owed within 15 business days.
The term "Commercial HMO Members" shall mean those persons enrolled with Seller
for HMO and point-of-service benefits under group and individual Subscriber
Agreements, including, without limitation, through the Old National Accounts and
OPM and other governmental groups, but excluding any Medicare cost enrollees,
fee-for-service patients and preferred provider organization beneficiaries.
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<PAGE>
1.4.7. Purchase Price Adjustment for Premium Yield Attributable to Certain
Members.
Seller's estimated commercial HMO Premium Yield (as hereinafter defined)
for the first quarter of 1998 is $123.12 as illustrated by the table below.
<TABLE>
<CAPTION>
Account Dues Member Premium
Number Revenue Months Yield
<S> <C> <C> <C> <C> <C>
Group 4100 & 4110 $40,166,169 331,298 $121.24
Member Dues Allowance & Adj 4060 (470,543) ---- ---
Direct Pay 4150,4151,4152 2,952,240 16,770 $176.04
POS Note 1 1,685,221 12,003 $140.40
------------ ------ --------
Net Commercial Revenue
w/Gross POS Revenue Note 2 44,333,087 360,071 $123.12
==========================================
</TABLE>
Note 1: POS revenue shall be calculated as follows: account number 4020
less account number 4920; gross up net balance by 40%.
Note 2: Account number 4950, other regions' members dues is not included in this
calculation.
If, for the first calendar quarter of 1998, the actual Premium Yield for
all Commercial HMO Members is not $123.12, (i) Seller shall (up to a maximum of
Three Million Five Hundred Thousand Dollars ($3,500,000.00)) pay to Buyer if the
Premium Yield is lower than $123.12, or (ii) Buyer shall (up to a maximum of
Three Million Five Hundred Thousand Dollars ($3,500,000.00)) pay to Seller if
the Premium Yield is higher than $123.12, the difference between the actual
Premium Yield and $123.12 multiplied by the actual number of Commercial HMO
Member months for the same quarter times four. "Premium Yield" shall mean gross
billed premiums (including 100% of premium revenue due Seller and Seller's
Affiliates for point-of-service Members, without offset for the indemnity
component of the point-of-service plan), less cancellations, returned premiums,
and bad debt but shall not include deductions for commissions, premium taxes or
Texas Health Insurance Risk Pool Assessments. The calculation required by this
Section shall be made by Seller and Buyer within 60 days of Closing with any
payment owed due within 90 days of Closing. Such calculation shall be performed
using the identical methodology as the calculations set forth above, subject to
such methodology being consistent with Seller's past practice as it relates to
payment of commissions.
1.4.8. Allocation.
Prior to the Closing Date, the parties shall agree to an allocation of the
Purchase Price among the Assets in accordance with the Code; provided, however,
the parties' agreement on such allocation shall not be a condition to Closing.
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1.5. Closing and Closing Date.
The actions contemplated to consummate the transactions under this
Agreement shall take place on the date ("Closing Date") which, unless otherwise
agreed by Buyer and Seller, shall be effective the last day of the month during
the calendar month after all conditions precedent of Buyer and Seller which are
set forth in this Agreement have been fully satisfied or have been waived in
writing; provided, however, that notwithstanding the actual time of the day on
the Closing Date at which the actions contemplated to consummate this Agreement
shall occur, and unless otherwise agreed to by the parties, the closing
("Closing") shall be deemed to be effective as of and to occur, and the risk of
loss shall pass Seller to Buyer, at 12:01:01 a.m. (Central Standard Time,
adjusted for daylight savings time, if applicable) on the Closing Date. Closing
shall commence on the Closing Date at the offices of Seller's counsel, the law
firm of Jenkens & Gilchrist, A Professional Corporation, 1445 Ross Avenue, Suite
3200, Dallas Texas 75202, at 10:00 a.m. (Central Standard Time, adjusted for
daylight savings time, if applicable). Notwithstanding the foregoing, Buyer
shall not be obliged to close prior to October 31, 1998 if it has not received
approval of the HCFA Novation Agreement prior to that date.
1.6. Actions to be Taken at Closing.
Subject to the terms and conditions set forth in this Agreement, at the
Closing:
1.6.1. Buyer's Deliveries.
Buyer shall deliver to Seller:
(a) Ninety Seven Million Two Hundred Twenty Four Thousand Three Hundred
Nine Dollars ($97,224,309.00) of the Purchase Price (as may be adjusted pursuant
to this Agreement) by Federal Reserve Bank wire transfer of good funds;
(b) One or more Bill of Sale, Assignment and Assumption Agreements,
substantially in the form of Exhibit 1.6.1(b) relating to the Assets (except the
Subscriber Agreements) conveyed to the Buyer hereunder, and such other
instruments and agreements as may be reasonably necessary to effect Buyer's
assumption of the Assumed Liabilities (except those relating to the Subscriber
Agreements);
(c) An assumption reinsurance agreement ("Assumption Reinsurance
Agreement"), substantially in the form of Exhibit 1.6.1(c), relating to the
Subscriber Agreements conveyed to Buyer hereunder, and such other instruments
and agreements as may be reasonably necessary to effect Buyer's assumption of
the Subscriber Agreements;
(d) The Insurance Assumption Reinsurance Agreement, substantially in the
form as set forth in Exhibit 1.6.1(d), executed by Sierra Health and Life
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<PAGE>
Insurance Company, Inc. and KPIC, together with confirmation of Federal
Reserve Bank wire transfer of good funds of the purchase price thereunder to
KPIC in the amount specified in such agreement, and delivery of all documents
required under that agreement;
(e) The sublease agreements relating to the certain leased real property
("Leased Real Property"), executed by Buyer, Seller and the applicable lessor,
and the documents and transfer of funds required by the Master Purchase and Sale
Agreement ("Master Purchase and Sale Agreement") of even date herewith between
Seller and Southwest Realty, Inc., a Nevada corporation;
(f) The opinion of Buyer's counsel in the form described in Section 6.1;
(g) All necessary consents, approvals or authorizations of third parties
required to be obtained by Buyer under the terms of this Agreement, it being
expressly agreed by the parties that failure by Buyer to obtain or provide such
consents, estoppels, approvals or authorizations shall not be a condition to
Seller's obligations to close the transactions contemplated hereby;
(h) Good standing certificates for Buyer, dated no earlier than 30 days
before the Closing Date, from its state of incorporation;
(i) Copies of the resolutions duly adopted by the Board of Directors or
Executive Committees of Buyer authorizing Buyer's execution, delivery and
performance of this Agreement and of all documents related hereto or
contemplated herein;
(j) Certificate of Buyer, dated as of the Closing Date, signed by an
authorized representative of Buyer and certifying that the covenants and
agreements to be performed and complied with by Buyer have been performed and
complied with in all material respects;
(k) Certificate of Buyer, dated as of the Closing Date, signed by
authorized representatives of Buyer and certifying that each of the respective
representations and warranties of Buyer set forth in this Agreement shall be
true and correct at and as of the Closing Date, as contemplated by Section 3.2;
(l) The Subsidy Agreement, in the form of Exhibit 1.6.1(l), executed by
Buyer and Buyer's Affiliates, as the case may be, and such other instruments and
agreements as specifically provided therein;
(m) That certain transition agreement ("Transition Agreement"),
substantially in the form of Exhibit 1.6.1(m), executed by Buyer and Buyer's
Affiliates, as
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<PAGE>
the case may be, and such other instruments and agreements as specifically
provided therein; and
(n) That certain medical services agreement ("Medical Services Agreement"),
substantially in the form of Exhibit 1.6.1(n), executed by Buyer and Buyer's
Affiliates, as the case may be, and such other instruments and agreements as
specifically provided therein.
1.6.2. Seller's Deliveries.
Seller, and Seller's Affiliates, as applicable, shall deliver to Buyer, or
to the extent any Assets are owned by Seller's Affiliates, shall cause Seller's
Affiliates to deliver to Buyer:
(a) Possession of the Assets to be conveyed to Buyer hereunder;
(b) One or more Bill of Sale, Assignment and Assumption Agreements,
substantially in the form of Exhibit 1.6.1(b), conveying all Assets to be
conveyed to Buyer hereunder, and such other instruments and agreements as may be
reasonably necessary to effect Seller's assignment of the Assumed Liabilities
(except those relating to the Subscriber Agreements);
(c) The Reinsurance Agreements, substantially in the form of Exhibits
1.6.1(c) and 1.6.1(d), and such other instruments and agreements as may be
reasonably necessary to effect Buyer's assumption of the Subscriber Agreements;
(d) The opinion of Seller's counsel in the form described in Section 5.1;
(e) All necessary consents, estoppels, approvals, authorizations or other
documents from third parties in a form reasonably satisfactory to Buyer required
to be obtained by Seller or Seller's Affiliates hereunder, it being expressly
agreed by the parties that failure by Seller to obtain or provide all such
consents, estoppels, approvals or authorizations shall not be a condition to
Buyer's obligation to close the transactions contemplated hereby;
(f) All necessary consents, estoppels, approvals, authorizations or other
documents executed by Seller's Affiliates in a form reasonably satisfactory to
Buyer which are necessary to convey to Buyer the Assets owned by Seller's
Affiliates;
(g) Good standing certificates for Seller dated no earlier than 30 days
before the Closing Date, from its state of incorporation;
(h) Copies of the resolutions duly adopted by the Board of Directors or
Executive Committee of Seller authorizing Seller's execution, delivery and
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<PAGE>
performance of this Agreement and of all documents related hereto or
contemplated herein;
(i) Certificate of Seller, dated as of the Closing Date, signed by
authorized representatives of Seller and certifying that the covenants and
agreements to be performed and complied with by Seller have been performed and
complied with in all material respects or have been waived by Buyer; it being
expressly agreed by the parties that, except as expressly provided in Section
5.4 and Section 5.6, Seller's compliance with the covenants and agreements
contained in this Agreement shall not be a condition to Buyer's obligation to
close the transactions contemplated hereby. Notwithstanding the above, if such
covenants and agreements have not been complied with in all material respects,
Seller shall provide a list describing in reasonable detail the extent of the
non-compliance;
(j) Certificate of Seller, dated as of the Closing Date, signed by
authorized representatives of Seller and certifying that each of the respective
representations and warranties of Seller set forth in this Agreement shall be
true and correct at and as of the Closing Date or has been waived by Buyer, as
contemplated by Section 2.2; it being expressly agreed by the parties that,
except as expressly provided in Section 5.4 and Section 5.6, Seller's
representations and warranties being accurate at Closing (other than the
representations in Section 2.1.1, 2.1.2, 2.1.5, 2.1.9 and 2.1.11) is not a
condition to Buyer's obligation to close the transactions contemplated hereby.
Notwithstanding the above, if such representations and warranties are not true
and correct on the Closing Date, Seller shall provide a list describing in
reasonable detail the extent of the discrepancies;
(k) Such other documents reasonably required by Buyer to transfer fully the
Assets to Buyer or to complete the transactions contemplated hereunder;
(l) The Subsidy Agreement, in the form of Exhibit 1.6.1(l), executed by
Seller and Seller's Affiliates, as the case may be, and such other instruments
and agreements as specifically provided therein; and
(m) The Transition Agreement, substantially in the form of Exhibit
1.6.1(m), executed by Seller and Seller's Affiliates, as the case may be, and
such other instruments and agreements as specifically provided therein.
1.6.3. Third Party Consents.
(a) To the extent that Seller's rights under any contracts (other than the
Subscriber Agreements) relating to the Business may not be assigned without the
consent of a third party, which consent has not been obtained prior to Closing,
this Agreement shall not constitute an agreement to assign the same if an
attempted assignment would constitute a breach thereof or be unlawful. Seller,
at its expense, shall use its commercially reasonable
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efforts to obtain any such required consents as promptly as possible after
Closing. If any such consents are not obtained or if any attempted assignment
would be ineffective or would impair Buyer's rights so that Buyer would not in
effect acquire the benefit of all such rights, Seller, to the maximum extent
permitted by law and by the terms of the applicable contract(s), at Seller's
expense, shall act for six months after the Closing as Buyer's agent in order to
obtain for Buyer the benefits thereunder, and shall cooperate, to the maximum
extent permitted by law and by the terms of the applicable contract(s), with
Buyer in any other reasonable arrangement designed to provide the benefits of
such contracts to Buyer. Alternatively, at Seller's option, Seller may
recharacterize any contract of Seller for which the required consent of a third
party could not be obtained at Closing or within six months after Closing Date
as an Excluded Asset (and not an Asset to be transferred to Buyer), and all
rights and obligations relating to such contract shall remain with Seller.
(b) Notwithstanding Section 1.6.3(a) above, should Seller be unable to
obtain the third party consents required to assign the hospital contract with
certain Columbia hospitals, dated January 1, 1995, as amended ("Columbia
Hospital Contract"), Seller shall attempt to substitute an adequate hospital
network for the existing service area of the HMO Business. Irrespective of
whether Seller or Buyer provides such substitute hospital network, Seller shall
pay to Buyer 75% of the excess (if any) of the amount that Buyer must pay for
hospital services with such substitute hospital delivery network over the amount
which Buyer would have enjoyed as an assignee of Seller pursuant to the Columbia
Hospital Contract, for the period from the Closing Date through December 31,
1999. The amount due hereunder shall be determined by repricing the services
actually used during the period in question as if they had been provided under
the Columbia Hospital Contract.
(c) All third party consent issues with respect to the Subscriber
Agreements shall be resolved pursuant to the terms of the Assumption Reinsurance
Agreement.
2. REPRESENTATIONS AND WARRANTIES OF SELLER.
The parties acknowledge that there are additional representations and
warranties relating to the Subscriber Agreements set forth in the Assumption
Reinsurance Agreement. "Material Adverse Effect" means, with respect to Seller,
an adverse effect on the Assets or the Assumed Liabilities which would
materially impair the ability of Buyer to operate the Business in substantially
the manner it has been heretofore conducted.
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2.1. Representations and Warranties of Seller.
As of the Execution Date, Seller represents and warrants to Buyer as
follows:
2.1.1. Organization and Good Standing.
Seller is a non-profit corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction if its organization, has all
requisite corporate power and corporate authority to own, lease and operate its
properties and to carry on the Business, as it is now being conducted, and is
duly qualified and in good standing to do business under the corporate laws of
each jurisdiction in which the nature of the Business or the ownership or
leasing of its properties makes such qualification necessary, except where the
failure to be so qualified would not have a Material Adverse Effect.
2.1.2. Seller's Authority and No Breach.
Seller has all requisite corporate power and corporate authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Seller and, as necessary, Seller's Affiliates.
This Agreement constitutes a valid and binding obligation of Seller, enforceable
against Seller in all material respects in accordance with its terms, except
insofar as enforcement may be limited by insolvency or similar laws affected the
enforcement of creditors' rights in general, and except as enforceability may be
limited by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
2.1.3. No Violations.
Except for consents of third parties required under contracts, the
execution and delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby will not, (i) conflict with, or result in, any
material violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any material obligation or the loss of a material benefit under,
or the creation of a material lien, material security interest or other material
encumbrance with respect to, any material portion of the Assets or Assumed
Liabilities (any such conflict, violation, default, right of termination,
cancellation or acceleration, loss or creation, a "Violation"), pursuant to any
provision of the Articles of Incorporation or By- laws of Seller, (ii) result in
any Violation of any material agreement which constitutes part of the Assets or
Assumed Liabilities, (iii) result in any Violation of any judgment, order or
decree entered with respect to Seller or to which the Assets or the Assumed
Liabilities are subject, or, (iv) to Seller's knowledge, result in any Violation
of any statute, law, ordinance, rule or regulation applicable to the Assets or
the Assumed Liabilities, except in each of clauses (i) through (iv), where such
Violations, individually or in the aggregate, would not have a Material Adverse
Effect.
2.1.4. No Consents.
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No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign
("Governmental Entity"), is required by or with respect to Seller in connection
with the execution and delivery of this Agreement by Seller, or the consummation
by Seller of the transactions contemplated hereby, except for (i) the filing of
a premerger notification report by Seller under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended ("HSR Act"), and (ii) such filings,
authorizations, orders and approvals as may be required by federal, state and
local Governmental Entities, including those in connection with Seller's
insurance business.
2.1.5. Seller's Financial Statements.
Seller has delivered (or if not yet available as of the Execution Date will
promptly deliver when available prior to the Closing Date) to Buyer, complete
and correct copies of (i) the audited balance sheets of Seller as at December
31, 1995, 1996 and 1997, and those related audited statements of income and cash
flows, for the fiscal years ended on those dates, together with all footnotes
and (ii) the unaudited interim balance sheet and statement of income for Seller
for the fiscal period ended on March 31, 1998 and subsequent quarters prior to
Closing. All of such financial statements fairly present, in all material
respects, as at and for the periods then ended, as the case may be (subject, in
the case of the unaudited balance sheet and income statement, to normal,
recurring adjustments and the absence of footnotes), the financial position and
results of operations of Seller in conformity with generally accepted accounting
principles prevailing in the United States ("US GAAP") or statutory or other
accounting practices prescribed or permitted by the insurance regulatory
authorities in the State of Texas, in each case applied on a basis consistent
throughout the reported periods. Such financial statements (i) do not contain or
when delivered will not contain, as the case may be, any item of extraordinary
or non-recurring income or expense (except as specified therein); and (ii)
reflects all write-offs or necessary revaluation of assets (except as specified
therein). The reserves recorded in the accounting records of Seller for
insurance or HMO policy benefits, losses, claims and expenses and any other
reserves were prepared in accordance with the statutory or other accounting
practices prescribed or permitted by the insurance regulatory authorities of the
State of Texas and make good and sufficient provisions for all insurance
obligations of Seller.
2.1.6. Litigation.
To Seller's knowledge, except as set forth on Schedule 2.1.6, there are no
actions, suits, proceedings, of any kind pending, or investigations of any kind
now pending or threatened in writing and involving Seller, the Assets or the
Assumed Liabilities, which may have a Material Adverse Effect.
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2.1.7. Compliance With Applicable Laws.
Except as set forth on Schedule 2.1.7, and except to the extent that
non-compliance would not have a Material Adverse Effect, the Business of Seller
is being conducted in compliance with all applicable laws, rules, ordinances,
regulations, licenses, or judgments, or orders, rules, regulations, licenses,
judgments, or decrees of Governmental Entities. Seller holds all certificates of
authority, permits, licenses, consents, certificates, orders and approvals from
all Governmental Entities (collectively, "Seller's Permits") which are necessary
to own, lease and operate the Assets in the manner heretofore conducted, except
to the extent that failure to hold same does not result in a Material Adverse
Effect. Seller has filed all material statements and reports with insurance
regulatory authorities required by the law, regulations, licensing requirements
and orders administered or issued by such regulatory authorities. To Seller's
knowledge, no event has occurred with respect to any of such Seller's Permits
which would cause revocation, termination or suspension of any of such Seller's
Permits if such revocation, termination, suspension or impairment would have a
Material Adverse Effect. Seller has not, and, to Seller's knowledge, none of its
executive officers, directors or employees (in their respective capacities as
such), has engaged in any activity constituting fraud or abuse under the laws
relating to health care or insurance.
2.1.8. Labor and Employment Matters.
Except as set forth on Schedule 2.1.8, (i) Seller has no employees who are
represented by a labor union or organization, no labor union or organization has
been certified or recognized as a representative of any such employees, and
Seller is not a party to and does not have any obligation under any collectively
bargaining agreement or other contract or agreement with any labor union or
organization; (ii) there are no pending or, to Seller's knowledge, threatened,
representation campaigns, elections or proceedings or questions concerning union
representation involving any employees of Seller; and (iii) Seller does not have
any knowledge of any activities or efforts of any labor union or organizations
(or representatives thereof) to organize any of its employees, any demands for
recognition for collective bargaining, any strikes, slowdowns, work stoppages or
lock-outs of any kind, or threats thereof, by or with respect to any employees
of Seller, and no such activities, efforts, demands, strikes, slowdowns, work
stoppages or lock-outs occurred during a three-year period preceding the
Execution Date.
2.1.9. Absence of Certain Changes.
Since March 31, 1998, except (i) as set forth on Schedule 2.1.9, (ii) for
the execution and delivery of this Agreement and changes in Seller's properties
or Business attributable to the transactions contemplated or necessitated by
this Agreement and the Related Agreements (as herein defined) (including,
without limitation, the spin-off of Consolidated Service Center assets,
employees and operations on or before Closing), and (iii) as disclosed in
Seller's financial statements as previously delivered or to be delivered to
Seller:
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(a) Seller has not made any material change in its accounting methods or
practices with respect to its condition, operations, the Business, the Assets,
or the Assumed Liabilities;
(b) Seller has not entered into or materially amended any contract
requiring payment by Seller, on an annualized basis, of more than $250,000,
which contract is not terminable without cause on 90 days notice or less;
(c) Seller has not permitted any lien, charge or encumbrance on the Assets,
to the extent such lien, charge or encumbrance would have a Material Adverse
Effect;
(d) Seller has not increased, or agreed to increase, the compensation of
any of the Terminated Employees, over the rate being paid to them on March 31,
1998, other than normal merit and cost-of-living increases pursuant to customary
arrangements consistently followed and any special retention bonuses relating to
the winding down of Seller's Business;
(e) Except for transactions that, individually or in the aggregate, would
not have a Material Adverse Effect, Seller has (i) conducted its Business in a
commercially prudent manner, as a going concern and in the ordinary course, and
consistent with such operation, complied in all material respects with
applicable legal and contractual obligations, consistent with past practice;
(ii) used commercially reasonable efforts, consistent with past practice, to
preserve the goodwill of its Members and its employees, including without
limitation, issuing rate quotes and taking such other action as may be
necessary; and (iii) not intentionally taken any action outside of the ordinary
course of business which would tend to cause employer groups, suppliers or
Members to cease their respective affiliations with Seller.
2.1.10. Material Contracts.
Each material contract constituting part of the Assets or the Assumed
Liabilities is in full force and effect and is valid and enforceable by Seller
in accordance with its terms, except insofar as enforcement may be limited by
bankruptcy, insolvency or similar laws affecting the enforcement of creditors'
rights in general, and except as enforceability may be limited by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law). Seller is not in material default in the
observance or the performance of any term or obligation to be performed by its
under any such Agreement to the extent that such default would cause a Material
Adverse effect. To Seller's knowledge, no other person is in material default in
the observance or the performance of any term or obligation to be performed by
it under any such contract to the extent that such a default would cause a
Material Adverse Effect. There is currently no outstanding bid or contract
proposal by Seller which, if accepted or entered into, might reasonably be
expected to result in a Material Adverse Effect. Seller has provided, or will
provide before 60 days after the Execution Date, originals or true and correct
copies of
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all contracts constituting part of the Assets or Assumed Liabilities
requiring payment by Seller, on an annualized basis, of more than $250,000 and
which contracts are not terminable on 90 days notice or less.
2.1.11. Title to and Condition of Assets.
Except as set forth on Schedule 2.1.11 or reflected on the Opening Balance
Sheet, Seller has good title to the Assets, whether owned or leased, in each
case subject to no mortgage, pledge, conditional sales contract lien, security
interest, right of possession in favor of any third party, claim or other
encumbrance (collectively, "Liens"), and except with respect to leased property,
the provisions of the applicable leases. No representation or warranty is being
made with respect to the physical condition of the Assets, and Buyer shall
receive the Assets in their "AS-IS" condition.
2.1.12. Patents, Copyrights, Service Marks and Trademarks.
Seller is not transferring to Buyer any patents, copyrights, service marks,
trademarks, or other intellectual property other than its rights, as a licensee,
to use certain software, as described elsewhere in this Agreement.
2.1.13. No Broker or Finders.
No broker or finder is involved on behalf of Seller or an Affiliate of
Seller in connection with the sale of the Assets, nor may any broker or finder
involved on behalf of Seller claim any commission on account of the sale of the
Assets. The parties acknowledge that Wasserstein Perella & Co. has been engaged
by Seller as a financial advisor to Seller, and the fees of Wasserstein Perella
& Co. shall be paid for by Seller.
2.1.14. Tax Returns and Tax Liabilities.
To Seller's knowledge, Seller has made and is current with respect to all
reports, returns and other filings (collectively, "Returns") required to be
furnished from time to time to all federal, state, local or other governmental
tax or fiscal authorities (including, without limitation, all real and personal
property, informational, franchise and withholding taxes and other Returns); all
such Returns so furnished were correct in all material respects; and based on
the applicable measure of Seller's operations or Assets during the period in
question; each such Return correctly stated and reported the amount due in all
material respects; true and correct copies of all such Returns are included in
Seller's files; and all amounts reflected as due and payable on the Returns have
been paid.
2.1.15. No Untrue Representation or Warranty.
To Seller's knowledge, no representation or warranty by Seller in this
Agreement, nor any statement or certificate furnished or to be furnished to
Buyer pursuant hereto or in connection with the transactions contemplated hereby
contains or will contain any untrue statement of a material fact.
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2.2. Representations and Warranties True and Correct at Closing; Breaches.
Seller shall execute and deliver to Buyer a certificate signed by an
authorized representative of Seller, dated as of the Closing Date, stating that
each of the representations and warranties of Seller made herein are true and
correct in all respects as of the Closing Date, or describing the manner in
which such representations and warranties are not true and correct. With the
exception of Sections 2.1.1, 2.1.2, 2.1.5, 2.1.9 and 2.1.11, if any of the
representations and warranties of Seller are not true and correct as of the
Closing Date, then Buyer shall be entitled to indemnification for any and all
losses as provided in Section 11, but shall nevertheless be obligated to
conclude the transactions contemplated hereby. The consummation of the
transactions under this Agreement by Buyer shall not constitute a waiver of
Buyer's rights to indemnification for a breach of a representation or warranty
provided for in this Section.
3. REPRESENTATIONS AND WARRANTIES OF BUYER.
The parties acknowledge that there are additional representations and
warranties relating to the Subscriber Agreements set forth in the Assumption
Reinsurance Agreement. "Material Adverse Effect" means, with respect to Buyer, a
material adverse effect on Buyer's ability to consummate the transactions set
forth herein.
3.1. Representations and Warranties of Buyer.
As of the Execution Date, Buyer represents and warrants to Seller as
follows:
3.1.1. Organization and Good Standing.
Buyer is a limited liability company duly organized, validly existing and
in good standing under the laws of the jurisdiction of its organization, has all
requisite corporate power and corporate authority to own, lease and operate its
properties and to carry on its business, as it is now being conducted, and is
duly qualified and in good standing to do business under the corporate laws of
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification necessary, except where the
failure to be so qualified would not have a Material Adverse Effect.
3.1.2. Buyer's Authority and No Breach.
Buyer has all requisite corporate power and corporate authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Buyer, and, as necessary, Buyer's Affiliates.
This Agreement constitutes a valid and binding obligation of Buyer, enforceable
against Buyer in all material respects in accordance with its terms, except
insofar as enforcement may be limited by insolvency or similar laws affected the
enforcement of creditors' rights in general, and except as enforceability may be
limited by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
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3.1.3. No Brokers or Finders.
No broker or finder is involved on behalf of Buyer in connection with the
sale of the Assets, nor may any broker or finder involved on behalf of Buyer
claim any commission on account of the sale of the Assets. The parties
acknowledge that Bear Stearns has been engaged by Buyer as a financial advisor
to Buyer, and the fees of Bear Stearns shall be paid for by Buyer.
3.1.4. Buyer's Consents.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Buyer in connection with the execution and delivery of this Agreement
by Buyer, or the consummation by Buyer of the transactions contemplated hereby,
except for (i) the filing of a premerger notification report by Seller under the
HSR Act, and (ii) such filings, authorizations, orders and approvals as may be
required by foreign, state and local Governmental Entities, including those in
connection with Buyer's insurance business.
3.1.5. No Untrue Representation or Warranty.
To Buyer's knowledge, no representation or warranty by Buyer in this
Agreement, nor any statement or certificate furnished or to be furnished to
Seller pursuant hereto or in connection with the transactions contemplated
hereby, contains or will contain any untrue statement of a material fact.
3.2. Representations and Warranties True and Correct at Closing; Breaches.
Buyer shall execute and deliver to Seller a certificate signed by an
authorized representative of Buyer, dated as of the Closing Date, stating that
each of the representations and warranties of Buyer made herein are true and
correct in all respects as of the Closing Date, or describing the manner in
which such representations and warranties are not true and correct. If any of
the representations and warranties of Buyer are not true and correct as of the
Closing Date, then Seller shall be entitled to indemnification for any and all
losses as provided in Section 11. The consummation of the transactions under
this Agreement by Seller shall not constitute a waiver of Seller's rights to
indemnification for a breach of a representation or warranty provided for in
this Section.
4. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Buyer and Seller contained in
Sections 2 and 3 of this Agreement shall survive for a period of 18 months
following the Closing.
5. BUYER'S CONDITIONS PRECEDENT TO CLOSING.
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Buyer's agreement to purchase and to pay for the Assets hereunder is
subject to compliance with and the occurrence of each of the following
conditions on or before Closing, except as any thereof may be waived in writing
by Buyer:
5.1. Opinion of Counsel.
Seller shall have furnished Buyer with an opinion of its counsel, Jenkens &
Gilchrist, A Professional Corporation, dated the Closing Date, substantially in
the form and substance attached hereto as Exhibit 5.1.
5.2. Agreements.
Seller shall have executed and delivered to Buyer all agreements,
instruments, certificates and other documents to be delivered by Seller or, as
necessary, Seller's Affiliates, as required by Section 1.6.2(a) through (j) and
(l)-(m). Seller shall have executed and delivered to Buyer all other agreements,
instruments, certificates, and other documents to be delivered by Seller, or, as
necessary, Seller's Affiliates (including, without limitation, to those items
contemplated by Section 1.6.2(k)); provided, however, that Buyer shall be
obligated to consummate this transaction if Seller has substantially performed
its obligations and is proceeding in good faith and with due diligence to obtain
these particular documents not delivered at Closing with respect to deliveries
required by Section 1.6.2(k).
5.3. Corporate Resolutions.
Seller shall provide Buyer with appropriate resolutions from its Board of
Directors, authorizing Seller to effectuate the actions required by Seller to
consummate the transactions contemplated by this Agreement.
5.4. Seller's Representations and Warranties True and Correct.
The representations and warranties of Seller set forth in Section 2.1.1,
2.1.2, 2.1.5, 2.1.9 and 2.1.11 shall be true and correct in all material
respects as of the Execution Date and as of the Closing Date as though made on
and as of the Closing Date. Buyer shall have received a certificate signed on
behalf of Seller by an authorized officer of Seller to the effect that the
representations and warranties of Seller set forth in those Sections (as amended
through disclosure submitted to Buyer on or before the Closing regarding events
arising since the Execution Date) shall be true and correct in all material
respects as of the Execution Date and as of the Closing Date as though made on
and as of the Closing Date, except as otherwise contemplated by this Agreement.
5.5. Litigation.
No order has been issued in any action, suit or proceeding before any court
or administrative authority in any domestic or foreign jurisdiction of any kind,
that enjoins the consummation of this Agreement or any Related Agreements.
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5.6. Certain Covenants.
Seller shall have complied with its obligations in Sections 8.1(a) and
8.1(b), and 8.2 in all material respects.
6. SELLER'S CONDITIONS PRECEDENT TO CLOSING.
Seller's agreement to sell and to deliver the Assets to be sold hereunder
is subject to the payment at Closing of the Purchase Price payable at Closing
and compliance with and the occurrence of each of the following conditions on or
before Closing, except as any thereof may be waived in writing by Seller.
6.1. Opinion of Counsel.
Buyer shall have furnished Seller with one or more opinions of its counsel,
dated the Closing Date, substantially in the form and substance attached hereto
as Exhibit 6.1.
6.2. Corporate Resolutions.
Buyer shall provide Seller with appropriate resolutions from its Board of
Directors (which resolutions were obtained prior to the execution of this
Agreement), authorizing Buyer to effectuate the actions required by Buyer to
consummate the transactions contemplated by this Agreement.
6.3. Agreements.
Buyer shall have executed and delivered to Seller all agreements,
instruments, certificates and other documents to be delivered by Buyer or
Buyer's Affiliates.
6.4. Buyer's Representations and Warranties True and Correct.
The representations and warranties of Buyer set forth in Section 3.1.1 and
3.1.2 shall be true and correct in all material respects as of the Execution
Date and as of the Closing Date as though made on and as of the Closing Date.
Seller shall have received a certificate signed on behalf of Buyer by the chief
executive officer and the chief financial officer of Buyer to the effect that
the representations and warranties of Buyer set forth in those Sections (as
amended through disclosure submitted to Seller on or before the Closing
regarding events arising since the Execution Date) shall be true and correct in
all material respects as of the Execution Date and as of the Closing Date as
though made on and as of the Closing Date, except as otherwise contemplated by
this Agreement.
6.5. Litigation.
No order has been issued in any action, suit or proceeding before any court
or administrative authority in any domestic or foreign jurisdiction of any kind,
that enjoins the consummation of this Agreement or Related Agreements.
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7. JOINT CONDITIONS PRECEDENT TO CLOSING.
In addition to the matters set forth in Sections 5 and 6, Seller's and
Buyer's agreement hereunder are subject to the occurrence of the following
conditions:
7.1. Medical Services Agreement.
Buyer or its Affiliate shall have executed the Medical Services Agreement
relating to the provision of professional physician services to the Members, in
substantially the form attached as Exhibit 1.6.1(n)..
7.2. Governmental Consents and Approvals.
Buyer and Seller shall have obtained from any and all local, state and
federal Governmental Entities all appropriate and necessary approvals or
consents required, or exemptions thereof (but which shall not include OPM or
HCFA), to effect the transactions set forth in this Agreement and to enable
Buyer to operate the Business; provided, however, each of the parties shall have
used its best efforts to obtain such approvals, consents or exemptions.
7.3. Hart-Scott-Rodino.
Buyer and Seller shall have made the required filings under the HSR Act
with respect to the transactions contemplated by this Agreement, and all
additional submissions required to be made thereunder, and the waiting periods
under the HSR Act shall have terminated; provided, however, each of the parties
shall have used its best efforts to obtain such approvals, consents or
exemptions.
7.4. Closing of Transactions Under Related Agreements.
The transactions contemplated by the Master Purchase and Sale Agreement,
the Reinsurance Agreements, and the Asset Sale and Purchase Agreement between
Permanente Medical Association of Texas and Buyer, shall have closed
concurrently with the transactions contemplated by this Agreement. The Medical
Services Agreement described in Section 1.6.1(n), the Transition Agreement
described in Section 1.6.1(m), the Subsidy Agreement described in Section
1.6.1(l), and the agreements described in this Section, together with their
schedules and exhibits, shall be known as the "Related Agreements."
8. ADDITIONAL AGREEMENTS OF SELLER.
8.1. Conduct of Business Pending Closing.
From the Execution Date until the Closing, Seller agrees that, with respect
to the operation and maintenance of the Business, except as otherwise consented
to by Buyer in writing, Seller will:
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(a) Conduct the Business in a commercially prudent manner, as a going
concern and in the ordinary course, and consistent with such operation, comply
in all material respects with applicable legal and contractual obligations,
consistent with past practice;
(b) Use commercially reasonable efforts, consistent with past practice, to
preserve the goodwill of its Members and its employees including without
limitation, issuing rate quotes and taking such other action as may be
necessary;
(c) Not intentionally take any action outside of the ordinary course of
business which would tend to cause employer groups, suppliers or Members to
cease their respective affiliations with Seller;
(d) Not enter into or materially amend any contract requiring payment, on
an annualized basis, of more than $250,000.00 which contract is not terminable
without cause on 90 days notice or less;
(e) Not permit any lien, charge or encumbrance on the Assets, to the extent
such lien, charge or encumbrance would have a Material Adverse Effect; or
(f) Not take any action (or omit to take any action), which action or
omission would cause any representation or warranty contained herein to be
untrue in any material respect at any time through the Closing Date, as if such
representation or warranty were made at and as of such time.
8.2. Access to Documents and Premises.
8.2.1. Inspection of Books and Records.
From the Execution Date through the Closing Date, Buyer, its counsel,
accountants, and other representatives shall, subject to confidentiality
covenants made by Seller to third parties and state and federal antitrust laws,
have the right to inspect the books and records of Seller relating to the
Business and the Assets, including inspection (without photocopying) by Buyer's
counsel to the extent possible without waiving any privileges with respect to
information regarding all actions, suits, proceedings or investigations of any
kind, now pending or threatened in writing, involving Seller or Seller's
Affiliates with respect to the Business. Any such inspection shall occur during
normal business hours and shall be scheduled by Buyer and Seller following
request for inspection made to Seller. All inspections shall be conducted by
Buyer and Seller in such a manner as to maximize all applicable privileges.
Buyer and its representatives shall use their best efforts to conduct their
inspection in such a manner as not to be disruptive to Seller's employees or
business operations. Buyer shall reimburse Seller for any damage, whether to the
Assets or otherwise, caused by Buyer or Buyer's representatives during the
inspection process.
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8.2.2. Request for Access.
All requests of Buyer, its counsel and such other representatives for
books, records, or interviews with Seller's officers, directors, or employees
shall be coordinated through Peter Hohl, Director of Acquisitions/Alliance
Services for Seller, or his designee.
8.3. Breach by Seller.
Except as provided in Section 5.6, Seller's compliance with the covenants
of Sections 8.1 and 8.2 shall not be a condition to Closing, but, rather, breach
of such covenants shall entitle Buyer to recover their actual damages resulting
therefrom in accordance with Section 11.
8.4. Noncompetition and Nonsolicitation.
(a) Seller agrees that for a period of five years after the Closing Date,
neither Seller nor Seller's Affiliates will, directly or indirectly, through an
entity controlled by them or their Affiliates, (i) own, manage, operate,
develop, join, control or participate in the ownership, management, operation,
development or control of, any Competitive Business (as defined below) whether
in corporate, proprietorship, professional association or partnership form or
otherwise located in the greater metropolitan areas of Houston, Texas, or
Dallas-Fort Worth, Texas, or any other area within the State of Texas where
Seller or its Affiliates conducted business as of the Closing Date, or (ii) make
any federal, state or local regulatory filing with the purpose of being granted
a permit, license or any other authorization, or otherwise qualifying to
participate in the State of Texas in any Competitive Business. "Competitive
Business" shall mean any health insurance, medical group practice, health care
provider or hospital business, including, without limitation, any health
maintenance organization, health care preferred provider organization, multiple
employer trust program or traditional indemnity program offered by Seller or any
other Affiliate of Seller. The parties specifically acknowledge and agree that
the remedy at law for breach of the foregoing will be inadequate and that Buyer,
in addition to any other relief available to it, shall be enticed to temporary
and permanent injunctive relief without the necessity of proving actual damage.
If the provisions of this Section should ever be deemed to violate, exceed or
otherwise contravene the provisions of applicable law, then the parties agree
that such provisions shall be reformed to set forth the maximum permissible
limitations or provisions allowable by law.
(b) The foregoing covenant not to compete shall not apply to fulfillment by
Seller of its obligations under Seller's existing contracts with HCFA or OPM,
existing accounts that are reinsured instead of assigned, or ownership of less
than 5% of the issued and outstanding shares of stock in publicly traded
corporations.
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9. ADDITIONAL AGREEMENTS OF BUYER.
9.1. Maintenance of Records.
Buyer shall retain all business and other records and documents relating to
the Business and the Assets which are transferred to Buyer pursuant to this
Agreement in accordance with Buyer's own record retention policies for the
longer of six years or the time required by applicable law. Buyer shall make
such records available for Seller's review and copying upon request of Seller or
its agents, in a prompt manner, at a reasonable time and place, and Buyer shall
be entitled to its actual costs of such cooperation; provided, however, that
Seller shall keep all such records confidential to the extent required by law.
Buyer shall be responsible for obtaining any and all consents required to
release records to Seller. Buyer shall provide the records requested by Seller
in the format requested by Seller, including, without limitation, on paper, on
computer disk, or by direct electronic transmission, in a form compatible with
Buyer's then existing systems. Buyer shall permit Seller to have access to and
to copy such records during normal business hours with prior notice to Buyer of
the time that such access shall be needed. Seller's employees, representatives,
and agents shall conduct themselves in such a manner that Buyer's normal
business activities shall not be unduly or unnecessarily disrupted. The
provisions of this Section 9.1 shall survive for a period of six years after the
Closing Date, or longer if required by applicable law.
9.2. Communications.
Between the Execution Date and the Closing Date, and unless otherwise
specifically authorized in this Agreement or the Assumption Reinsurance
Agreement, Buyer may not communicate, orally or in writing, with Members,
service providers of Seller, employees of Seller, vendors of Seller, suppliers
of Seller, or other third party contractors of Seller, concerning this
transaction, without the prior written consent of Seller (which shall not be
unreasonably withheld) except for Peter Hohl, Director of Acquisitions/Alliance
Services for Seller, and George Tomberlin, Senior Counsel for Seller, or their
designees. Nothing in this Section shall preclude either Buyer or Seller from
communicating as it deems advisable with its own subscribers, government
regulators, service providers, employees, vendors, shareholders, suppliers, and
third party contractors required by law or in the ordinary course of business.
In no event shall either party cause any oral or written communication to be
issued relating to this transaction which disparages any other party or its
Affiliates, unless otherwise required by law. Communications with the media
shall be subject to the joint work plan to be developed by Buyer and Seller
pursuant to Section 10.6.
10. ADDITIONAL AGREEMENTS OF BUYER AND SELLER.
10.1. Regulatory Milestones Prior to Closing.
Seller and Buyer shall diligently and timely prepare and file the
applications and submissions as may be required with respect to the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby,
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including, without limitation, the filings set forth below. Buyer and
Seller agree to take all reasonable actions required or requested by such
authorities for the expeditious consideration and rendering of all such
approvals, consents and authorizations. Seller and Buyer shall diligently and
timely cooperate with each other and with all other parties in the submission of
applications and of any and all such additional information or documentation
requested by any such regulatory authorities.
10.1.1. HSR Filing.
Seller and Buyer shall submit all notifications, report forms and other
submissions to the Federal Trade Commission and the Antitrust Division of the
Department of Justice sufficient to trigger the HSR Act waiting period within 14
calendar days of the Execution Date. Buyer shall provide Seller with
time-stamped copies of all correspondence with the Federal Trade Commission and
the Antitrust Division of the Department of Justice as proof of compliance with
this Section.
10.1.2. Texas Department of Insurance.
Buyer shall use its best efforts file all submissions required by the Texas
Department of Insurance to approve the transactions contemplated hereby,
including, without limitation, the Assumption Reinsurance Agreement, the
application for Certificate of Authority or service area expansion, as
necessary, and such other submissions as may be required by the Texas Department
of Insurance, as soon as practicable after the Execution Date. Buyer shall make
its initial filing with the Texas Department of Insurance pursuant to this
Section within 14 calendar days of the Execution Date. Buyer shall provide
Seller with time-stamped copies of all correspondence with the Texas Department
of Insurance as proof of compliance with this Section.
10.2. Health Care Financing Administration.
Buyer and Seller acknowledge and agree that Seller's contracts with HCFA
are not assignable without the written consent or approval of HCFA, and
assignment of such contracts shall require the preparation and execution of a
novation or other agreement and the submission of any and all applications or
other documentation necessary to effectuate the novation ("HCFA Novation
Agreement") among Seller, Buyer, and HCFA. Seller shall transfer and assign to
Buyer as of the Closing the contracts with HCFA, or, at Buyer's election, Seller
shall take all actions reasonably necessary to terminate the contracts with HCFA
and Seller's obligations to provide services under the contracts with HCFA
effective as of a date after the Closing that is acceptable to Buyer and HCFA,
or to take any other actions reasonably required by Buyer or HCFA to transfer
beneficiaries under the HCFA contracts to Buyer (each of which actions is
referred to as the "Transfer"). If Seller has any obligations under the HCFA
contracts to provide services to Medicare beneficiaries during the period
commencing on the Closing Date to termination of the HCFA contracts, Buyer shall
arrange or provide all such services to such beneficiaries. All amounts paid in
respect of coverage or services during such period will be paid by Seller to and
become the property of Buyer. Seller shall prepare a cost report for 1998 as
required by HCFA and shall be responsible for, or entitled to the
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return of, any amounts due to, or from (as the case may be) HCFA with
respect to contract periods prior to the Closing.
Buyer shall make the initial filing required to be made by Buyer to effect
the HCFA Novation Agreement within 14 calendar days of the Execution Date,
unless a later date is requested by Seller. Buyer shall provide Seller with
time-stamped copies of all correspondence with HCFA as proof of compliance with
this Section. Buyer's and HCFA's entering into the HCFA Novation Agreement is
not a condition to Buyer's obligation to close the transactions contemplated
hereby.
10.3. Office of Personnel Management.
(a) Buyer and Seller acknowledge and agree that Seller's contract with OPM
is not assignable without the written consent or approval of OPM, and assignment
of such contract shall require the preparation and execution of a novation or
other agreement ("OPM Novation Agreement") by and among Buyer, Seller and OPM.
Seller shall cooperate in all commercially reasonable respects with Buyer in the
preparation of the OPM Novation Agreement. Any documents which must be executed
or prepared by Seller after the Closing shall be transmitted by Seller to OPM
within a reasonable period of time after the Closing. Seller and Buyer shall
cooperate reasonably to effect the transfer of the contingency reserve fund
("CRF") to Buyer's federal contract for the benefit of Buyer.
(b) Subject to Sections 10.3(c) and 11.5 below, but not Sections 11.1
through 11.4, Seller hereby agrees to indemnify and hold harmless Buyer from and
against any and all losses, damages, costs and expenses (including reasonable
attorneys' fees) arising out of or sustained as a result of any negative
adjustment made by the government under Seller's contract with OPM (such losses,
damages, costs and expenses are hereinafter referred to as the "Indemnification
Liability") with respect to contract periods prior to contract year 1999.
(c) With respect to contract year 1999, Seller's indemnification obligation
shall be limited to 75% of any Indemnification Liability up to a maximum amount
of $2,000,000. Provided, however, that Seller shall have no liability under this
Section to the extent that any rate adjustment required by OPM is (i) the result
of rates quoted by Buyer which are lower than the current rates for existing
groups of Seller as long as standard rating methodology was employed for rating
similarly sized groups; and/or (ii) the result of rates quoted by Buyer for new
groups. Seller further agrees that the rate charged OPM for contract year 1999
shall not be less than the rate charged OPM for 1998.
(d) The CRF is and will be properly funded in accordance with OPM
regulations and applicable laws. Only those amounts which OPM deems are in
excess of what is required and OPM allows to be removed by a contractor under
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applicable laws and regulations as a lump sum payment will be considered an
excess. Buyer shall, upon receipt from OPM of any lump sum payment resulting
from any positive adjustment made by OPM for contract periods prior to contract
year 1999, remit such amount to Seller. For contract year 1999, Buyer shall
retain 25% of any lump sum payment resulting from any positive adjustment made
by the OPM for that year and the balance shall be remitted to Seller. Payments
to be made hereunder shall be by wire transfer within five business days of time
of receipt of Buyer's payment from OPM. Buyer retains the right to offset any
amounts otherwise due Seller under Section 10.3(b) from any such payment. Such
payment shall be accompanied by a statement identifying the amount of the
payment from OPM and the specific time period covered by the payment.
(e) Buyer shall make all filings required to be made by Buyer to effect the
OPM Novation Agreement within 14 calendar days of the Execution Date, unless a
later date is requested by Seller. Buyer shall provide Seller with time- stamped
copies of all correspondence with OPM as proof of compliance with this Section.
Buyer's and OPM's entering into the OPM Novation Agreement is not a condition to
Buyer's obligation to close the transactions contemplated hereby.
10.4. Employment Matters.
10.4.1. Severance Payments.
(a) Seller shall terminate all of Seller's employees relating to the
Business (except Consolidated Service Center employees, who shall be transferred
to a Seller's Affiliate on or before Closing) whether such employees are at-will
or are subject to employment agreements, as of the Closing (collectively,
"Terminated Employees").
(b) Buyer shall reimburse Seller for all severance payments arising under
Seller's severance policy in effect on the date of execution of this Agreement
due to those Terminated Employees to whom Buyer does not offer comparable
employment with comparable pay following their termination from their employment
with Seller ("Severance Payments"). Buyer shall also assume the obligation to
provide or pay for all accrued but unused vacation to Terminated Employees, but
only to the extent such benefits would be owed under Seller's policies and to
the extent adequate reserves have been made in the Closing Balance Sheet. Seller
shall retain the responsibility to pay any transition bonuses to the Terminated
Employees pursuant to Seller's policies. If any Terminated Employee is hired by
Buyer pursuant to this Section 10.4.1 and such Terminated Employee's employment
is severed by Buyer within 60 days of the Closing without cause, Buyer shall
reimburse Seller for such Terminated Employee severance in an amount which would
have been due the Terminated Employee under Seller's severance policies in
effect on the date of
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execution of this Agreement as if Buyer had not offered comparable
employment at comparable pay.
(c) Promptly following the Execution Date, Buyer (i) will provide
information regarding its employment application process to the Terminated
Employees, and (ii) will actively begin to interview and consider for
employment, to be effective as of the Closing, any Terminated Employee who
submits an application for employment in accordance with Buyer's customary
application process requirements and who are qualified for employment with Buyer
(each individually, an "Applicant," or collectively, "Applicants").
(d) On or before July 15, 1998, Buyer shall provide Seller with a list of
the Terminated Employees that Buyer has elected to hire effective as of the
Closing Date, as provided in Section 10.4.2. Seller shall provide WARN notices
to all employees on or before 60 days prior to Closing. Buyer shall provide
Seller, at the same time Buyer provides Seller with a list of Terminated
Employees that Buyer has elected to hire, with an offer of employment for each
such employee so that Seller may enclose such offer in the WARN notice.
(e) All Terminated Employees who are hired by Buyer shall be given credit
for the time that they were employed by Seller for purposes of calculating such
Terminated Employees' rights under each of Buyer's employee benefits plans,
including without limitation, vacation pay, sick pay, and vesting for purposes
of deferred compensation and retirement plans.
(f) After the Execution Date, Seller agrees to cooperate with Buyer and to
release information to Buyer regarding Terminated Employees which Buyer
considers for employment prior to Closing. All information regarding the
Terminated Employees shall be provided subject to (i) all applicable laws and
regulations regarding protection of the confidentiality of employment
information, (ii) Buyer's obtaining the written consent of such employees, and
(iii) Buyer's adherence to any policies of Seller with respect to the protection
of the confidentiality of employee information, as if such policies were Buyer's
own. Buyer shall respect and protect the confidentiality of all such employee
information.
10.4.2. WARN, COBRA and HIPAA Notices.
To the extent required of Seller by law, Seller shall provide all notices
relating to the termination of the Terminated Employees, including, without
limitation, the notice obligations arising under the Workers Adjustment and
Retraining Notification Act ("WARN"), the Consolidated Omnibus Budget and
Reconciliation Act of 1985 ("COBRA"), or the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). WARN- related liabilities to the
Terminated Employees which result from any delay in providing WARN notices to
the Terminated Employees shall be paid by the party causing the delay.
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10.4.3. Health Care Coverage for Terminated Employees.
Buyer shall offer health care coverage to all Terminated Employees which
shall be at least substantially equivalent to the health care coverage they
would be entitled to receive under COBRA if Seller remained in existence after
the Closing, effective as of the date of Closing, for a period of up to 36
months after the Closing Date or such shorter period as permitted by law. To the
extent that any Terminated Employee becomes employed by Buyer, and the
Terminated Employee does not meet the eligibility requirements for Buyer's own
COBRA health care coverage prior to the Buyer's termination of the Terminated
Employee, Buyer agrees to offer the health care coverage set forth in this
Section to such Terminated Employee, effective as of his date of termination
from Buyer, until the expiration of the 36th month after the Closing Date. Each
Terminated Employee shall be responsible for payment of his own premiums
relating to health care coverage provided pursuant to this Section.
10.4.4. Health Care Coverage for Seller's Board of Directors.
Seller shall prepay through December 31, 1998 the premiums for whatever
health care coverage a member of the Board of Directors of Seller maintains
under Seller's Subscriber Agreements (be it individual, spouse, family, or other
health coverage) provided Buyer accepts the assignment, reinsurance, or other
transfer of such Subscriber Agreement under this Agreement. Buyer shall offer
renewal of such coverage, without medical underwriting, for the calendar year
1999, or until Medicare eligibility. Buyer and such individual shall agree on
the premium payment amount, if any, as Buyer and the individual may agree.
10.5. Transition Issues.
10.5.1. Use of Materials.
Buyer shall have the right to use all existing stock of any and all
advertising brochures, marketing materials, literature, form contracts, form
certificates of coverage, membership handbooks and other pre-printed material
relating to the Business, as authorized by law, until the later of one year
after the Closing Date or (with respect to any particular Subscriber Agreement),
the renewal date for the Member, or for some other shorter time limitation as
may be required by law. Buyer shall make a commercially reasonable effort to
sticker such materials with Buyer's name to avoid confusion.
10.5.2. Transition Agreement.
On or before the Closing Seller and Buyer shall enter into the Transition
Agreement, in substantially the form attached hereto as Exhibit 1.6.1(m),
pursuant to which certain of Seller's Affiliates will provide Buyer, for a fee
measured by the direct cost of providing such services, with certain transition
assistance, including membership accounting, claims processing, information
systems training and other administrative support.
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10.6. Public Information Releases.
Between the Execution Date and the Closing, and for a period of six months
following the Closing Date, Seller and Buyer agree to use reasonable efforts to
consult with each other prior to any press release, public announcement or
publicly disseminated communication concerning this transaction, to discuss the
content of any such announcement, and to refrain from making any such press
releases or public announcements without first receiving the other's prior
written consent, which shall not be unreasonably withheld. The parties shall
develop and implement a joint work plan for this transaction regarding
communications with the media. In no event shall either party cause any oral or
written communication to be issued relating to this transaction which disparages
any other party or its Affiliates, unless required by law. The provisions of
this Section shall survive the termination of this Agreement.
10.7. Cooperation.
Buyer and Seller agree to cooperate reasonably with each other, from the
Execution Date up through and following the Closing Date, and use their
respective best efforts in good faith, to satisfy all conditions, undertakings
and agreements contained in this Agreement.
10.8. Group 3000.
(a) Seller currently provides or arranges to provide health care services
to certain enrollees in Texas ("Texas Group 3000 Members") who are employed by
employers that have subscriber agreements with various Seller's Affiliates.
Buyer agrees to continue Seller's current practice of providing, or arranging
for one of Buyer's Affiliates to provide, health care services to the Texas
Group 3000 Members through the end of the term of each of the subscriber
agreements covering the Texas Group 3000 Members, in exchange for which Buyer or
Buyer's Affiliate shall be entitled to charge, and Seller's Affiliates shall
pay, Seller's standard Group 3000 rates through December 31, 1998. Thereafter,
Seller's Affiliates agree to pay Buyer a rate actuarially sufficient to provide
the benefits required by the Subscriber Agreement. A copy of Seller's standard
Group 3000 rates is set forth as Exhibit 10.8(a).
(b) Seller's Affiliates currently provide or arrange health care services
to certain enrollees outside Texas ("Non-Texas Group 3000 Members") who are
employed by Texas employers that have subscriber agreements with Seller, which
Subscriber Agreements will be assigned to Buyer pursuant to this Agreement.
Seller agrees to cause Seller's Affiliates to continue their current practice of
providing, or arranging for one of Seller's Affiliates to provide, health care
services to the Non-Texas Group 3000 Members through the end of the term of each
of the subscriber agreements covering the Non-Texas Group 3000 Members, in
exchange for which Seller's Affiliates shall be entitled to charge, and Buyer
shall pay Seller's Affiliates'
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standard Group 3000 rates through December 31, 1998. Thereafter, Buyer
agrees to pay Seller's Affiliates a rate actuarially sufficient to provide the
benefits required by the Subscriber Agreement. A copy of Seller's Affiliates'
Standard Group 3000 rates is set forth in Exhibit 10.8(b).
(c) Following the Closing Date, Seller shall cause Seller's Affiliates to
make commercially reasonable efforts not to offer any new or renewal subscriber
agreements providing for services for Members located in Texas which services
would be required to be provided by Buyer absent a separate agreement providing
for same. In addition, Buyer shall make commercially reasonable efforts not to
offer any new or renewal agreements covering services for Members located
outside of Texas which would be required to be provided by Seller's Affiliates
absent a separate agreement providing for same.
10.9. Reciprocity Agreement.
Buyer and Seller shall cause their Affiliates to endeavor in good faith to
enter into reciprocity agreements regarding the provision or arrangement of
health care in various states. Failure to enter into such arrangements before or
after the Closing shall not be a condition, covenant, representation, warranty,
obligation or otherwise give any party any right or remedy with respect to this
Agreement.
11. INDEMNIFICATION.
11.1. Indemnification by Seller.
Subject to the limitations of Section 11.3, Seller shall indemnify and
hold harmless Buyer and its respective officers, directors, employees, agents
and affiliates against any and all actual damages resulting from claims, losses,
costs, expenses, fees, liabilities and damages, including interest, penalties
and reasonable attorneys' fees and disbursements (each individually a "Loss,"
and collectively, "Losses"), arising out of, in connection with or otherwise
relating to:
(a) The Excluded Assets;
(b) The Excluded Liabilities;
(c) The material breach by Seller of any representation, warranty, covenant
or agreement made by Seller in this Agreement, or in any other agreement
executed in connection herewith;
(d) Any claim, obligation or other liability arising from the Business with
respect to any period prior to the Closing Date other than to the extent such
claims, obligations or liabilities constitute part of the Assumed Liabilities;
and
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(e) Any action or litigation which challenges, seeks damages arising from
or seeks to enjoin any of the transactions contemplated by this Agreement or
Related Agreements, other than any actions commenced by shareholders of Buyer or
Buyer's Affiliates or primarily involving the operations of Buyer's or Buyer's
Affiliates' businesses.
11.2. Indemnification by Buyer.
Subject to the limitations of Section 11.3, Buyer shall indemnify and hold
harmless Seller and its respective officers, directors, employees, agents and
affiliates, against any and all Losses, arising out of, in connection with or
otherwise relating to:
(a) The Assets;
(b) The Assumed Liabilities;
(c) The material breach by Buyer of any representation, warranty, covenant
or agreement made by Buyer in this Agreement, or in any other agreement executed
in connection herewith;
(d) Any claim, obligation or other liability arising from Buyer's operation
of the Assets or the Assumed Liabilities as part of an HMO in Texas with respect
to any period after the Closing Date;
(e) Any action or litigation commenced by members or shareholders (as the
case may be) of Buyer or Buyer's Affiliates or primarily involving the
operations of Buyer's or Buyer's Affiliates' businesses which challenges, seeks
damages arising from or seeks to enjoin any of the transactions contemplated by
this Agreement or Related Agreements.
11.3. Limitations.
The indemnification rights and obligations set forth in this Section 11
shall survive the Closing and shall expire 18 months after Closing; provided,
however, that (i) with respect to claims notified in good faith to the
indemnifying party prior to the expiration of the indemnity rights, the parties'
obligations with respect to its indemnity rights and obligations shall continue
in effect until payment or other resolution of such claims; and (ii) with
respect to liabilities under Section 1.3.2, the indemnification rights and
obligations shall continue until the expiration of the statute of limitations
applicable thereto. Each party's liability hereunder shall be limited to actual
damages and no party shall be liable to any other party hereunder for special,
consequential, incidental, punitive or other damages. Any indemnified claim
under Article VII of the Assumption Reinsurance Agreement and Article X of the
Insurance Assumption Reinsurance Agreement shall apply towards the maximums and
minimums set forth in this Section 11.3.
11.3.1. Minimum.
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No party to this Agreement shall have any liability, whether pursuant to
Section 11 or otherwise, for breach of any covenant or warranty, for
misrepresentation, or otherwise, unless the aggregate amount of all claims for
which such party would, but for this Section 11, be liable, exceeds
$1,000,000.00 on a cumulative basis. Each claim making up the $1,000,000.00
cumulative amount shall be a claim of $5,000.00 or more. If such party's
aggregate liability for such claims exceeds $1,000,000.00 on a cumulative basis,
then such party shall be liable for all claims, including claims which are part
of the $1,000,000.00 minimum. Excluded Liabilities and reconciliations under
Section 3.3 of the Assumption Reinsurance Agreement and Section 3.3 of Schedule
2.5 of the Assumption Reinsurance Agreement or this Agreement are not subject to
and do not count towards these minimum limitations.
11.3.2. Maximum.
In no event shall the aggregate liability of any party to this Agreement
(whether for breach of covenant or warranty, misrepresentation pursuant to
Section 11, or otherwise) exceed 50% of the Purchase Price, net of any
adjustments provided by this Agreement. Excluded Liabilities and reconciliations
under Section 3.3 of the Assumption Reinsurance Agreement and Section 3.3 of
Schedule 2.5 of the Assumption Reinsurance Agreement or this Agreement are not
subject to and do not count towards this maximum limitation.
11.4. Notice and Right to Defend.
(a) Should any claim or action by a third party arise after the Closing
Date for which Buyer or Seller may be liable to the other under the indemnity
provisions of this Agreement, the indemnitee shall notify the indemnitor in
writing and in reasonable detail as soon as practicable after the indemnitee
receives notice of such claim or action in the manner provided for the giving of
notices under this Agreement. The expenses of all proceedings, contests,
lawsuits, or investigations of claims with respect to such claims or actions,
shall be borne by the indemnitor. If an indemnitor wishes to assume the defense
of such claim or action, it shall give written notice to the indemnitee within
10 days after notice from the indemnitee of such claim or action of its
intention to assume the defense, and the indemnitor shall thereafter assume the
defense of any such claim or liability through counsel reasonably satisfactory
to the indemnitee, provided that the indemnitee may also participate in such
defense at its own expense;
(b) If the indemnitor shall not assume the defense of, or if after so
assuming it shall fail to defend, any such claim or action, the indemnitee may
defend against any such claim or action in such manner as it may reasonably deem
appropriate and the indemnitee may settle such claim or litigation on such terms
as it may reasonably deem appropriate, and the indemnitor shall promptly
reimburse the indemnitee for the amount of all reasonable expenses, legal and
otherwise, incurred by the indemnitee in connection with the defense and/or
settlement of such claim or action. If no settlement
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of such claim or action is made, the indemnitor shall satisfy any judgment
rendered with respect to such claim or in such action before indemnitee is
required to do so, and pay all expenses, legal or otherwise, incurred by the
indemnitee in the defense against such claim or litigation.
11.5. Exclusive Remedy.
If a party is entitled to indemnification under this Agreement with respect
to a particular claim, then such indemnification shall be such party's sole and
exclusive remedy.
11.6. Failure to Provide Records Cooperation.
If Buyer materially breaches its obligations under Section 9.1 that Seller
can establish were actually transferred by Seller to Buyer under this Agreement,
and Seller establishes that such breach resulted in the loss or destruction of
documents material to the defense of Buyer by Seller of an action or claim by a
third party pursuant to Seller's indemnification obligations under this
Agreement, Seller shall be entitled to recover from Buyer its actual losses
incurred in the matter directly resulting from Buyer's breach. The amount of the
losses recoverable from Buyer shall in no event exceed the amount of the third
party claim, and shall not include special, consequential, incidental, punitive
or other damages.
12. TERMINATION.
12.1. Termination.
This Agreement and the transactions contemplated hereby may be terminated
or abandoned at any time prior to the Closing Date:
(a) By the mutual consent of Buyer and Seller; or
(b) By Seller or Buyer if the Closing shall not have occurred on or before
October 31, 1998.
Termination of this Agreement shall terminate the Related Agreements. Where
a Related Agreement is only between Buyer and Seller, no further action or
notice shall be required for such termination to take effect. Where an Affiliate
or a third party is involved in a Related Agreement, Buyer and Seller (as may be
the case) shall cause termination of such Related Agreement.
12.2. Liability for Termination.
If this Agreement is terminated pursuant to this Section 12, all further
obligations of the parties under this Agreement shall be terminated without
further liability of any party to the other, provided that nothing shall relieve
either party from any liability it may have for any breach hereof.
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<PAGE>
13. ARBITRATION.
13.1. Conciliation and Mediation.
If a dispute between Buyer and Seller relating to this Agreement, or under
any other agreement executed and delivered in connection herewith, is not
resolved within 15 days from the date that either party has notified the other
that such dispute exists, then such dispute shall be submitted jointly for
conciliation to the president or his designee of each party. If such senior
executive officers are unable to resolve the dispute within 30 days from the
date that it is first presented to them, either party may give notice to the
other party that the dispute shall be submitted to non-binding mediation with a
mediator acceptable to both parties, and the parties shall, for a 60-day period
from the receipt of such notice, seek in good faith to resolve such dispute in
mediation. If the parties are not able to resolve the dispute in mediation, then
such dispute shall be referred to binding arbitration.
13.2. Arbitration.
Any dispute submitted to arbitration pursuant to this Section shall be
determined by the decision of a board of arbitration consisting of three members
("Board of Arbitration") selected as hereinafter provided. Buyer shall select an
arbitrator and Seller shall select an arbitrator, each of whom shall be a member
of the Board of Arbitration who is independent of the parties. A third Board of
Arbitration member, independent of the parties, shall be selected by mutual
agreement of the other two Board of Arbitration members. If the other two Board
of Arbitration members fail to reach agreement on such third member within 20
days after their selection, such third member shall thereafter be selected by
the American Arbitration Association upon application made to it for such
purpose by any party to the arbitration. The Board of Arbitration shall meet in
Dallas, Texas, or such other place as a majority of the members of the Board of
Arbitration determines more appropriate, and shall reach and render a decision
in writing (which shall state the reasons for its decisions in writing and shall
make such decisions entirely on the basis of the substantive law governing the
Agreement and which shall be concurred in by a majority of the members of the
Board of Arbitration) with respect to the items in dispute. In connection with
rendering its decisions, the Board of Arbitration shall adopt and follow the
Commercial Rules of Arbitration of the American Arbitration Association in
effect as of the date of the arbitration, except as provided in Exhibit 13.2. To
the extent practical, decisions of the Board of Arbitration shall be rendered no
more than 30 calendar days following commencement of proceedings with respect
thereto. The Board of Arbitration shall cause its written decision to be
delivered to Buyer and Seller. Any decision made by the Board of Arbitration
(either prior to or after the expiration of such 30 calendar day period) shall
be final, binding and conclusive on Buyer and Seller (except as may be provided
in Exhibit 13.2) and each party to the arbitration shall be entitled to enforce
such decision to the fullest extent permitted by law and entered in any court of
competent jurisdiction. The fees and expenses of the Board of Arbitration and
the reasonable fees and expenses of legal counsel and consultants of the parties
shall be allocated among the parties as the Board of Arbitration deems
appropriate.
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<PAGE>
13.3. Equitable Relief.
Notwithstanding any other provision of this Agreement, any party shall have
the right to seek equitable relief, in a court of competent jurisdiction, to the
extent that equitable relief is available to a party hereto. If a party chooses
to pursue equitable relief, such conduct shall not constitute a waiver of or be
deemed inconsistent with the arbitration provisions set forth in this Section
13. The Board of Arbitration may consider the findings of, rulings of, and any
evidence submitted in every legal proceeding for equitable relief as the Board
of Arbitration deems proper; however, any such findings, rulings and evidence
shall not necessarily be binding on the Board of Arbitration in connection with
any arbitration proceedings conducted by such Board of Arbitration.
13.4. No Applicability.
This Section is not applicable to disputes required by the terms of this
Agreement to be resolved pursuant to the procedures set forth in Section
1.4.1(e).
14. GUARANTEES.
14.1. Seller's Guarantor.
KFH hereby irrevocably and unconditionally agrees to cause Seller to fully
perform its obligations under this Agreement and the Reinsurance Agreements in a
timely manner, and further irrevocably and unconditionally guarantees the full
and timely performance of this Agreement and the Reinsurance Agreements by
Seller in accordance with its terms. The foregoing guarantee includes a
guarantee of the immediate payment when due of all amounts for which Seller may
at any time be liable on account of this Agreement or the Reinsurance
Agreements. Buyer may, at its option, proceed directly against KFH for the
performance of any obligation of Seller hereunder or for any amounts which may
be recoverable as a result of any misrepresentation, breach of warranty, breach
of covenant or other cause of Seller's liability under this Agreement or the
Reinsurance Agreements, without any requirement to proceed against Seller either
prior to or concurrently with proceeding against KFH. KFH further agrees that
its guarantee shall continue in effect notwithstanding any modification,
extension, waiver or other change in or under this Agreement or the Reinsurance
Agreements or any guaranteed obligation or any other act or thing which might
otherwise operate as a legal or equitable discharge of a guarantor. KFH hereby
waives all special suretyship defenses and notice requirements. Any claim under
this Section shall be resolved in accordance with Section 13.
14.2. Buyer's Guarantor.
Sierra Health Services, Inc. ("Buyer's Parent") hereby irrevocably and
unconditionally agrees to cause Buyer to fully perform its obligations under
this Agreement and the Reinsurance Agreements in a timely manner, and further
irrevocably and unconditionally guarantees the full and timely performance of
this Agreement and the Reinsurance Agreements by Buyer in accordance with its
terms. The foregoing guarantee includes a guarantee of the immediate payment
when due of all amounts for
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<PAGE>
which Buyer may at any time be liable on account of this Agreement and the
Reinsurance Agreements, including but not limited to the promissory note which
will shall be payment for the real property transferred to Buyer simultaneous
with the closing of this transaction. Seller may, at its option, proceed
directly against Buyer's Parent for the performance of any obligation of Buyer
hereunder or for any amounts which may be recoverable as a result of any
misrepresentation, breach of warranty, breach of covenant or other cause of
Buyer's liability under this Agreement and the Reinsurance Agreements, without
any requirement to proceed against Buyer either prior to or concurrently with
proceeding against Buyer's Parent. Buyer's Parent further agrees that its
guarantee shall continue in effect notwithstanding any modification, extension,
waiver or other change in or under this Agreement and the Reinsurance Agreements
or any guaranteed obligation or any other act or thing which might otherwise
operate as a legal or equitable discharge of a guarantor. Buyer's Parent hereby
waive all special suretyship defenses and notice requirements. Any claim under
this Section shall be resolved in accordance with Section 13.
15. MISCELLANEOUS.
15.1. Notices.
All notices and other communications hereunder shall be in writing and
shall be either (i) be deposited in first class United States mail, certified,
with postage prepaid, (ii) delivered by messenger, (iii) sent by overnight
courier, or (iv) sent by fully completed and confirmed facsimile transmission
(with a written confirmation simultaneously sent in first class United States
mail), as follows:
If to Seller or Seller's Affiliate Copy to:
(as the case may be):
Kaiser Foundation Health Plan of Texas Jenkens & Gilchrist,
or Kaiser Foundation Health Plan, Inc. A Professional Corporation
or Kaiser Foundation Hospitals 1100 Louisiana Street, Suite 1800
c/o Kaiser Foundation Health Plan, Inc. Houston, Texas 77002
One Kaiser Plaza Attention: Lawrence L. Foust
Oakland, California 94612 Fax: (713) 951-3314
Attention: Peter Hohl, Director of
Acquisitions/Alliance Services
Fax: (510) 271-2309
If to Buyer or Buyer's Parent: Copy to:
HMO Texas, L.C. Morgan, Lewis & Bockius, LLP
c/o Sierra Health Services, Inc. 300 South Grand Avenue
2724 N. Tenaya Way (for FedEx) Twenty-Second Floor
Las Vegas, Nevada 89128 Los Angeles, California 90071-3132
P.O. Box 15645 (for U.S. Mail) Attention: Richard J. Maire, Jr.
Las Vegas, Nevada 89114-5645 Fax: (213) 612-2554
45
<PAGE>
Attn: Paul Palmer, Vice President
of Finance and CFO
Fax: (702) 240-7148
or such other address or fax number as any party may request by notice
given as aforesaid. Notices sent as provided herein shall be deemed given on the
date received by the recipient. If a recipient rejects or refuses to accept a
notice given pursuant to this Section, or if a notice is not deliverable because
of a changed address or fax number of which no notice was given in accordance
with the provisions hereof, such notice shall be deemed to be received two days
after such notice was mailed (whether as the actual notice or as the
confirmation of a faxed notice) in accordance with the terms hereof. The
foregoing shall not preclude the effectiveness of actual written notice given to
a party at any address or by any means.
15.2. Waiver.
No waiver by either Buyer or Seller hereto of its rights under any
provision of this Agreement shall constitute a waiver of such party's rights
under such provision at any other time or a waiver of such party's rights under
any other provision of this Agreement.
15.3. Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument. An executed faxed copy of this Agreement shall be deemed an
original executed copy of this Agreement.
15.4. Headings.
The headings contained in this Agreement have been inserted for convenience
of reference only and shall in no way restrict or modify any of the terms or
provisions hereof.
15.5. Severability.
If any provision of this Agreement is held by final judgment of a court of
competent jurisdiction to be invalid, illegal or unenforceable, such invalid,
illegal or unenforceable provision shall be severed from the remainder of this
Agreement, and the remainder of this Agreement shall be enforced. In addition,
the invalid, illegal or unenforceable provision shall be deemed to be
automatically modified, and, as so modified, to be included in this Agreement,
such modification being made to the minimum extent necessary to render the
provision valid, legal and enforceable. Notwithstanding the foregoing, however,
if the severed or modified provision concerns all or a portion of the essential
consideration to be delivered under this Agreement by one party to the other,
the remaining provisions of this Agreement shall also be modified to the extent
necessary to adjust equitably the parties' respective rights and obligations
hereunder.
46
<PAGE>
15.6. Entire Agreement.
This Agreement (including the Exhibits and Schedules), the Related
Agreements, and the other agreements, certificates and documents of Seller and
Buyer contemplated herein constitute the entire agreement between the parties
hereto with respect to the matter hereof, and supersedes all prior agreements or
understandings between the parties, except the Confidentiality Agreement, which
will continue in effect until terminated pursuant to the terms set forth
therein. No amendment, alteration, or modification of this Agreement shall be
valid unless in each instance such amendment, alteration, or modification is
expressed in a written instrument duly executed by the parties hereto.
15.7. Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto.
Notwithstanding the foregoing, this Agreement shall not be assignable by any
party without the prior written consent of the other, and any attempt at an
assignment in violation of this Section shall be void ab initio.
15.8. Governing Law.
This Agreement is to be governed by and interpreted under the laws of the
State of Texas, without resort to choice of law or conflict of law principles
which direct the application of the laws of a different state.
15.9. Cost of Transaction.
Whether or not the transactions contemplated hereby are consummated:
(a) Buyer shall pay the fees, expenses, and disbursements of Buyer and its
agents, representatives, accountants, and counsel; and
(b) Seller shall pay the fees, expenses and disbursements of Seller and its
agents, representatives, accountants and counsel.
15.10. Further Assurances.
Each party hereto agrees for the benefit of the other parties hereto to
execute and deliver any necessary documents, instruments or agreements, and to
take any and all necessary actions, in order to (i) fully vest in Buyer all
right, title and interest to the Assets, and (ii) carry out the terms of this
Agreement and the transactions contemplated by this Agreement.
15.11. Construction.
Whenever the context of this Agreement requires, the gender of all words
herein shall include the masculine, feminine, and neuter, and the number of all
words herein
47
<PAGE>
shall include the singular and plural. All parties to this Agreement have
been represented by counsel and, accordingly, this Agreement shall not be
construed strictly for or against any party hereto. The Schedules and Exhibits
attached hereto are incorporated herein for all purposes and made a part of this
Agreement as if set out in full in this Agreement. All references to section
numbers in this Agreement shall be references to sections in this Agreement,
unless otherwise specifically indicated.
15.12. Third Parties.
None of the provisions of this Agreement shall confer rights or benefits as
third party beneficiaries or otherwise upon any third party that is not
expressly a party to this Agreement including, without limitation, the
Terminated Employees or the Members, and the provisions of this Agreement shall
not be enforceable by any such third party.
15.13. Time is of the Essence.
Time is of the essence with regard to all of the provisions of this
Agreement. The parties acknowledge and agree that strict compliance with all of
the deadlines set forth in this Agreement, including, without limitation, the
deadlines for filings pursuant to Section 10.
15.14. Confidentiality.
The parties acknowledge and agree that this Agreement and the Related
Agreements are part of the "Confidential Information" of the Confidentiality
Agreement. Notwithstanding the Confidentiality Agreement, which shall survive
the execution of this Agreement, or any confidentiality, proprietary, or similar
clause in any Related Agreement, the parties may disclose any terms or
conditions of this Agreement to any third parties to comply with securities laws
or HMO or insurance laws, and as needed to meet prudent business requirements of
shareholders, investors, bondholders, members and other creditors.
15.15. Offsets.
Either party may offset any amount owed the other by amounts owed by the
other to the party.
15.16. No Duplication.
The intent of the parties is that the Reinsurance Agreements and this
Agreement are different memorializations of substantially similar agreements
between the parties, and that the claims, offsets, adjustments,
indemnifications, reconciliations, liabilities, rights, and remedies under the
Reinsurance Agreements and this Agreement shall not be duplicative. If any
particular event or circumstances gives rise to any claim, offset, adjustment,
indemnification, reconciliation, liability, right, or remedy under this
Agreement and under one or both of the Reinsurance Agreements, Buyer or Seller
must elect to exercise its rights either under this Agreement or any one of the
Reinsurance
48
<PAGE>
Agreements, and may not exercise duplicative rights with respect to the
same event or circumstances.
*****
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Execution Date.
BUYER:
HMO TEXAS, L.C.
By: /s/ Larry S. Howard
Name: Larry S. Howard
Title: President
SELLER:
KAISER FOUNDATION HEALTH PLAN OF TEXAS
By: /s/ Deborah Stokes
Name: Deborah Stokes
Title: President
Sierra Health Services, Inc. and Kaiser Foundation Hospitals have executed
this Agreement below solely with respect to their respective guarantee
obligations set forth in Section 14.
SIERRA HEALTH SERVICES, INC.
By: /s/ Anthony M. Marlon
Name: Anthony M. Marlon, M.D.
Title: Chairman and CEO
KAISER FOUNDATION HOSPITALS
By: /s/ Deborah Stokes
Name: Deborah Stokes
Title:___President_____
<PAGE>
EXHIBIT 10.3
ASSET SALE AND PURCHASE AGREEMENT
Between
PERMANENTE MEDICAL ASSOCIATION OF TEXAS,
A TEXAS PROFESSIONAL ASSOCIATION
("SELLER")
AND
HMO TEXAS, L.C.
A TEXAS LIMITED LIABILITY COMPANY
("BUYER")
June 5, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
1. SALE OF ASSETS...........................................................................................1
<S> <C> <C>
1.1. Sale and Purchase of Assets.....................................................................1
1.2. Excluded Assets.................................................................................2
1.3. Liabilities.....................................................................................2
1.3.1 Assumed Liabilities...........................................................2
1.3.2 Liabilities Not to be Assumed.................................................2
1.3.3 Property Taxes................................................................3
1.3.4 Transfer Taxes; Recording Fees................................................3
1.4. Purchase Price..................................................................................3
1.4.1 Purchase Price. ...............................................................3
1.4.2 Allocation....................................................................3
1.5. Closing.........................................................................................3
1.6. Actions to be Taken at Closing..................................................................3
1.6.1. Buyer's Deliveries............................................................4
1.6.2. Seller's Deliveries...........................................................4
1.6.3 Third Party Consents..........................................................6
2. REPRESENTATIONS AND WARRANTIES OF SELLER.................................................................6
2.1. Representations and Warranties of Seller........................................................6
2.1.1. Organization and Good Standing................................................6
2.1.2. Seller's Authority and No Breach..............................................6
2.1.3. No Violations.................................................................7
2.1.4. Litigation....................................................................7
2.1.5. Seller's Financial Statements.................................................7
2.1.6. No Brokers or Finders.........................................................7
2.1.7. Compliance with Applicable Laws...............................................8
2.1.8. No Consents...................................................................8
2.1.9. Material Contracts............................................................8
2.1.10.Title to and Condition of Properties and Assets. ..............................8
2.1.11.No Untrue Representation or Warranty............................................9
2.2. Representations and Warranties True and Correct at Closing; Breaches............................9
3. REPRESENTATIONS AND WARRANTIES OF BUYER..................................................................9
3.1. Representations and Warranties of Buyer.........................................................9
3.1.1. Organization and Good Standing................................................9
3.1.2. Buyer's Authority and No Breach...............................................9
3.1.3. No Brokers or Finders........................................................10
3.1.4. Buyer's Consents.............................................................10
3.1.5. No Untrue Representation or Warranty.........................................10
3.2. Representations and Warranties True and Correct at Closing; Breaches...........................10
4. SURVIVAL OF REPRESENTATIONS AND WARRANTIES..............................................................10
5. BUYER'S CONDITIONS PRECEDENT TO CLOSING.................................................................11
5.1. Agreements.....................................................................................11
<PAGE>
5.2. Corporate Resolutions..........................................................................11
5.3. Seller's Representations and Warranties........................................................11
5.4. Litigation.....................................................................................11
5.5. Certain Covenants..............................................................................11
6. SELLER'S CONDITIONS PRECEDENT TO CLOSING................................................................11
6.1. Agreements.....................................................................................12
6.2. Corporate Resolutions..........................................................................12
6.3. Litigation.....................................................................................12
6.4. Buyer's Representations and Warranties True and Correct........................................12
7. JOINT CONDITIONS PRECEDENT TO CLOSING...................................................................12
7.1. Governmental Consents, and Approvals, and Licenses.............................................12
7.2. Termination of PMAT/KFHPTx Contract............................................................12
7.3. Closing of Transactions Under Related Agreements...............................................13
8. ADDITIONAL AGREEMENTS OF SELLER.........................................................................13
8.1. Conduct of Business Pending Closing............................................................13
8.2. Access to Documents and Premises...............................................................13
8.2.1. Inspection of Books and Records..............................................14
8.2.2. Request for Access...........................................................14
8.3. Breach by Seller...............................................................................14
9. ADDITIONAL AGREEMENTS OF BUYER..........................................................................14
9.1. Formation of New P.A...........................................................................14
9.2. Maintenance of Records.........................................................................14
10. ADDITIONAL AGREEMENTS OF BUYER AND SELLER...............................................................15
10.1. Regulatory Milestones Prior to Closing.........................................................15
10.2. Employment Matters.............................................................................15
10.2.1. Severance Payments...........................................................15
10.2.2. WARN, COBRA and HIPAA Notices................................................16
10.2.3. Healthcare Coverage for Terminated Employees.................................16
10.3. Cooperation....................................................................................17
10.4. Health Care Coverage for Certain Unitholders...................................................17
11. INDEMNIFICATION.........................................................................................17
11.1. Indemnification by Seller......................................................................17
11.2. Indemnification by Buyer.......................................................................18
11.3. Limitations....................................................................................18
11.3.1. Minimum......................................................................18
11.3.2. Maximum......................................................................19
11.4. Notice and Right to Defend.....................................................................19
11.5. Exclusive Remedy...............................................................................19
11.6. Failure to Provide Records Cooperation.........................................................20
12. TERMINATION.............................................................................................20
12.1. Termination....................................................................................20
<PAGE>
12.2. Liability for Termination.............................................................20
13. ARBITRATION.............................................................................................20
13.1. Conciliation and Mediation.....................................................................20
13.2. Arbitration....................................................................................21
13.3. Equitable Relief...............................................................................21
14. MISCELLANEOUS...........................................................................................22
14.1. Notices........................................................................................22
14.2. Confidentiality................................................................................22
14.3. Waiver.........................................................................................23
14.4. Counterparts...................................................................................23
14.5. Headings.......................................................................................23
14.6. Severability...................................................................................23
14.7. Entire Agreement...............................................................................24
14.8. Successors and Assigns.........................................................................24
14.9. Governing Law..................................................................................24
14.10. Cost of Transaction.............................................................................24
14.11. Further Assurances..............................................................................24
14.12. Construction....................................................................................25
14.13. Third Parties...................................................................................25
14.14. Time is of the Essence..........................................................................25
</TABLE>
<PAGE>
LIST OF EXHIBITS
Exhibit 1.1 Assets
Exhibit 1.2 Excluded Assets
Exhibit 1.6.1(b) Bill of Sale, Assignment and Assumption Agreement
Exhibit 13.2 Exceptions to AAA Arbitration Rules
LIST OF DEFINITIONS
"Agreement" can be found on page 1 "Applicant" can be found in Section 10.2.1(c)
"Assets" can be found in Section 1.1 "Assumed Liabilities" can be found in
Section 1.3.1 "Board of Arbitration" can be found in Section 13.2 "Buyer" can be
found on page 1 "Closing" can be found in Section 1.5 "Closing Date" can be
found in Section 1.5 "COBRA" can be found in Section 10.2.2 "Code" can be found
in Section 1.4.2 "Confidential Information" can be found in Section 14.2
"Excluded Assets" can be found in Section 1.2 "Excluded Liabilities" can be
found in Section 1.3.2 "Execution Date" can be found on page 1 "Governmental
Entity" can be found in Section 2.1.6 "HIPAA" can be found in Section 10.2.2
"KFHPTx" can be found in Recital C "Loss" or "Losses" can be found Section 11.1
"Material Adverse Effect" re Buyer can be found in Section 3 "Material Adverse
Effect" re Seller can be found in Section 2 "Medical Services Contract" can be
found in Recital G "New P.A." can be found in Recital E "Property Taxes" can be
found in Section 1.3.3 "Purchase Agreement" can be found in Recital C "Purchase
Price" can be found in Section 1.4 "Related Agreements" can be found in Section
7.3 "Seller" can be found on page 1 "Severance Payments" can be found in Section
10.2.1(b) "Subsidy Agreement" can be found in Section 1.3.2(f) "Terminated
Employees" can be found in Section 10.2.1(a) "Violation" can be found in Section
2.1.3 "WARN" can be found in Section 10.2.2
<PAGE>
ASSET SALE AND PURCHASE AGREEMENT
THIS ASSET SALE AND PURCHASE AGREEMENT ("Agreement") is made and entered
into as of this ________ day of June, 1998 ("Execution Date"), by and between
HMO Texas, L.C., a Texas limited liability company ("Buyer"), and Permanente
Medical Association of Texas, a Texas professional association ("Seller").
RECITALS:
A. Each member of Seller is a doctor of medicine, osteopathy or podiatry
duly licensed under the laws of the State of Texas.
B. The purposes for which Seller was formed include the practice of
medicine and surgery and the provisions of medical services of all types within
the State of Texas.
C. Buyer has entered into an "Asset Sale and Purchase Agreement" with
Kaiser Foundation Health Plan of Texas ("KFHPTx") dated of even date with this
Agreement (the "Purchase Agreement") whereby Buyer will acquire assets from
KFHPTx as set forth in the Purchase Agreement for the purpose of operating the
"Business" as defined in the Purchase Agreement.
D. In connection with the consummation of the Purchase Agreement, Seller
desires to sell, assign, and deliver to Buyer, and Buyer desires to purchase
from Seller certain assets as set forth in this Agreement.
E. Buyer will cause the creation of a Texas professional association ("New
P.A.").
F. Some of the assets acquired by Buyer from KFHPTx under the Purchase
Agreement and from Seller under this Agreement will be contributed to New P.A.
effective the "Closing Date", as hereinafter defined.
G. Buyer and New P.A. will enter into a medical services agreement
substantially similar to the form attached as Exhibit 7.1 to the Purchase
Agreement (the "Medical Services Contract") effective the Closing Date.
NOW, THEREFORE, for and in consideration of the above recitals and the
representations, warranties, mutual covenants, and agreements herein expressed,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby expressly acknowledged, the parties hereby agree as follows:
1. SALE OF ASSETS.
1.1. Sale and Purchase of Assets.
HLTHDAL:19130.4 40072-00002
<PAGE>
On the basis of the representations and warranties and subject to the terms
and conditions set forth in this Agreement, Seller hereby agrees to sell and
assign to Buyer, and Buyer hereby agrees to purchase, and to accept or to cause
acceptance of assignment of, for payment of the Purchase Price specified in
Section 1.4, on the Closing Date referred to in Section 1.5, all of the assets
of every kind and description that are owned and used by Seller in the operation
of its business ("ASSETS"), including without limitation the assets set forth
specifically on Exhibit 1.1 attached to this Agreement except as provided in
Section 1.2.
1.2. Excluded Assets.
The assets of Seller listed on Exhibit 1.2 are not included in the defined
term "Assets" and are not being transferred or assigned to Buyer under this
Agreement. All assets retained by Seller are referred to as "Excluded Assets".
1.3. Liabilities.
1.3.1 Assumed Liabilities.
As of the Closing Date, Buyer shall assume and agrees to pay, discharge,
and perform as appropriate, only those obligations of Seller relating to the
Assets accruing or arising with respect to periods on or after the Closing Date
and no others (collectively, the "Assumed Liabilities").
1.3.2 Liabilities Not to be Assumed.
Buyer shall not assume and shall not be obligated to pay, discharge or
perform any obligations and liabilities of Seller not assumed above, including,
without limitation, the following (collectively, "Excluded Liabilities"):
(a) Any and all liabilities of Seller, Seller's affiliates, or third
parties (including without limitation KFHPTx), whether currently known or
unknown, with respect to claims or potential claims for medical malpractice or
professional liability with respect to the business of Seller relating to
periods prior to the Closing in each case regardless of when the claim is
asserted;
(b) Any and all liabilities of Seller, Seller's affiliates, or third
parties (including without limitation KFHPTx), whether currently known or
unknown, relating to litigation or claims of any kind or nature with respect to
the business of Seller relating to periods prior to the Closing, in each case
regardless of when the claim is asserted;
(c) Liabilities relating to the Excluded Assets;
HLTHDAL:19130.4 40072-00002
<PAGE>
(d) Liabilities which are not related to the Assets and Assumed
Liabilities;
(e) Seller's obligations relating to Seller's health and welfare benefit
plans, pension, and retirement plans with respect to the Terminated Employees
(as hereinafter defined) or any former employees of Seller; and
(f) Any liability of Seller relating to that certain Subsidy Agreement (the
"Subsidy Agreement") among Seller, Buyer, KFHPTx, and Sierra Health Services,
Inc., to be delivered at Closing.
1.3.3 Property Taxes.
All annual or periodic ad valorem fees, taxes, assessments, licensing fees,
vehicle use fees, and similar charges imposed by taxing authorities on the
Assets (collectively, "Property Taxes") shall be borne and paid (a) by Seller
for all full tax years or periods ending before the Closing and for that portion
of any tax year or period ending on or after the Closing from the date of
commencement of such year or period to the date immediately preceding the
Closing, and (b) by Buyer for all full tax years or periods beginning on or
after the Closing and for that portion of any tax year or period ending on or
after the Closing from and including the Closing to the final date of such year
or period, regardless of when or by which party such Property Taxes are actually
paid to the applicable taxing authority.
1.3.4 Transfer Taxes; Recording Fees.
The Buyer and Seller shall share equally any and all sales, use, transfer
of other similar taxes imposed as a result of the consummation of the
transactions between Buyer and Seller contemplated by this Agreement.
1.4. Purchase Price.
1.4.1 Purchase Price. The consideration for the transfer of the Assets from
Seller to Buyer shall be Seven Million Five Hundred Thousand and no/100 Dollars
($7,500,000) ("Purchase Price"). The Purchase Price shall be paid by Buyer to
Seller by Federal Reserve Bank wire transfer of good funds at Closing.
1.4.2 Allocation.
Prior to the Closing Date, the parties shall agree to an allocation of the
Purchase Price among the Assets in accordance with Section 1060 of the Internal
Revenue Code of 1986 (the "Code") provided, however, the parties' agreement on
such allocation shall not be a condition to Closing.
1.5. Closing.
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The actions contemplated to consummate the transactions under this
Agreement shall take place on the date ("Closing Date") which, unless otherwise
agreed by Buyer and Seller, is the "Closing Date" for the Purchase Agreement;
provided, however, that notwithstanding the actual time of the day on the
Closing Date at which the actions contemplated to consummate this Agreement
shall occur, and unless otherwise agreed to by the parties, the closing
("Closing") shall be deemed to be effective as of and to occur, and the risk of
loss shall pass Seller to Buyer, at 12:01:01a.m. (Central Time) on the Closing
Date. Closing shall commence on the Closing Date at the offices of the law firm
of Jenkens & Gilchrist, A Professional Corporation, 1445 Ross Avenue, Suite
3200, Dallas Texas 75202, at 10:00 a.m. (Central Time) on the Closing Date.
1.6. Actions to be Taken at Closing.
Subject to the terms and conditions set forth in this Agreement, at the
Closing:
1.6.1. Buyer's Deliveries.
Buyer shall deliver to Seller:
(a) The Purchase Price by Federal Reserve Bank wire transfer of good funds;
(b) A Bill of Sale, Assignment and Assumption Agreement, substantially in
the form of Exhibit 1.6.1(b) relating to the Assets conveyed to the Buyer
hereunder, and such other instruments and agreements as may be reasonably
necessary to effect Buyer's assumption of the Assumed Liabilities;
(c) All necessary consents, approvals or authorizations of third parties
required to be obtained by Buyer under the terms of this Agreement, it being
expressly agreed by the parties that failure by Buyer to obtain or provide such
consents, estoppels, approvals or authorizations shall not be a condition to
Seller's obligations to close the transactions contemplated hereby;
(d) Good standing certificates for Buyer, dated no earlier than 30 days
before the Closing Date, from its state of incorporation;
(e) Copies of the resolutions duly adopted by the Board of Directors or
Executive Committee of Buyer authorizing Buyer's execution, delivery and
performance of this Agreement and of all documents related hereto or
contemplated herein;
(f) Certificate of Buyer, dated as of the Closing Date, signed by an
authorized representative of Buyer and certifying that the covenants and
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agreements to be performed and complied with by Buyer have been performed
and complied with in all material respects;
(g) Certificate of Buyer, dated as of the Closing Date, signed by
authorized representatives of Buyer and certifying that each of the respective
representations and warranties of Buyer set forth in this Agreement shall be
true and correct at and as of the Closing Date; and
(h) Subsidy Agreement executed by Buyer in the form attached to the
Purchase Agreement.
1.6.2. Seller's Deliveries.
Seller shall deliver to Buyer:
(a) Possession of the Assets to be conveyed to Buyer hereunder;
(b) A Bill of Sale, Assignment and Assumption Agreement, substantially in
the form of Exhibit 1.6.1(b), conveying all Assets to be conveyed to Buyer
hereunder, and such other instruments and agreements as may be reasonably
necessary to effect Seller's assignment of the Assumed Liabilities;
(c) All consents, estoppels, approvals, authorizations or other documents
from third parties in a form reasonably satisfactory to Buyer obtained by Seller
hereunder, it being expressly agreed by the parties that failure by Seller to
obtain all such consents, estoppels, approvals or authorizations shall not be a
condition to Buyer's obligation to close the transactions contemplated hereby;
(d) Good standing certificate for Seller dated no earlier than 30 days
before the Closing Date, from its state of incorporation;
(e) Copies of the resolutions duly adopted by the Board of Directors or
Executive Committee of Seller and any requisite Unitholder approvals authorizing
Seller's execution, delivery and performance of this Agreement and of all
documents related hereto or contemplated herein;
(f) Certificate of Seller, dated as of the Closing Date, signed by
authorized representatives of Seller and certifying that the covenants and
agreements to be performed and complied with by Seller have been performed and
complied with in all material respects or have been waived by Buyer; it being
expressly agreed by the parties that, except as expressly provided in Section
5.3 and Section 5.5, Seller's compliance with the covenants and agreements
contained in this Agreement shall not be a condition to
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Buyer's obligation to close the transactions contemplated hereby.
Notwithstanding the above, if such covenants and agreements have not been
complied with in all material respects, Seller shall provide a list describing
in reasonable detail the extent of the non-compliance;
(g) Certificate of Seller, dated as of the Closing Date, signed by
authorized representatives of Seller and certifying that each of the respective
representations and warranties of Seller set forth in this Agreement shall be
true and correct at and as of the Closing Date or has been waived by Buyer, as
contemplated by Section 2.2, it being expressly agreed by the parties that
except as expressly provided in Section 5.3 and 5.5, Seller's representations
and warranties being accurate at Closing (other than the representations in
Section 2.1.1, 2.1.2, 2.1.5, and 2.1.10) is not a condition to Buyer's
obligation to close the transactions contemplated hereby. Notwithstanding the
above, if such representations and warranties are not true and correct on the
Closing Date, Seller shall provide a list describing in reasonable detail the
extent of the discrepancies;
(h) Subsidy Agreement executed by Seller in the form attached to the
Purchase Agreement; and
(i) Such other documents reasonably required by Buyer to transfer fully the
Assets to Buyer or to complete the transactions contemplated hereunder.
1.6.3 Third Party Consents.
To the extent that Seller's rights under any contracts to be transferred
pursuant to this Agreement may not be assigned without the consent of a third
party, which consent has not been obtained prior to Closing, this Agreement
shall not constitute an agreement to assign the same if an attempted assignment
would constitute a breach thereof or be unlawful. Seller, at its expense, shall
use its commercially reasonable efforts to obtain any such required consents as
promptly as possible after Closing.
2. REPRESENTATIONS AND WARRANTIES OF SELLER.
"Material Adverse Effect" means, with respect to Seller, an adverse effect
on the Assets or the Assumed Liabilities which would materially impair the
ability of Seller to operate its business in substantially the manner it has
been heretofore conducted.
2.1. Representations and Warranties of Seller.
As of the Execution Date, Seller represents and warrants to Buyer as
follows:
2.1.1. Organization and Good Standing.
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Seller is a professional association duly organized, validly existing and
in good standing under the laws of the jurisdiction of its organization, has all
requisite corporate power and corporate authority to own lease and operate its
properties and to carry on its business, as now being conducted, and is duly
qualified and in good standing to do business under the corporate laws of each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification necessary, except when the failure to be
so qualified would not have a Material Adverse Effect.
2.1.2. Seller's Authority and No Breach.
Seller has all requisite corporate power and corporate authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action of Seller other than the approval of Seller's Unitholders,
which approval shall be obtained prior to Closing. This Agreement constitutes a
valid and binding obligation of Seller, enforceable against Seller in all
material respects in accordance with its terms except insofar as enforcement may
be limited by insolvency or similar laws affecting the enforcement of creditors'
rights in general, and except as enforceability may be limited by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
2.1.3. No Violations
Except for consents of third parties required under contracts set forth on
Part A of Exhibit 1.1, the execution and delivery of this Agreement does not,
and the consummation of the transactions contemplated hereby will not, (i)
conflict with, or result in any material violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any material obligation or the loss
of a material benefit under, or the creation of a material lien, security
interest or other encumbrance with respect to, any material portion of the
Assets or Assumed Liabilities (any such conflict, violation, default, right of
termination, cancellation or acceleration, loss or creation, a "Violation"),
pursuant to any provision of the Articles of Association or By- laws of Seller,
(ii) result in any Violation of any material agreement which constitutes part of
the Assets or Assumed Liabilities, (iii) result in any Violation of any
judgment, order or decree entered with respect to Seller or to which the Assets
or the Assumed Liabilities are subject, or, (iv) to Seller's knowledge, result
in any Violation of any statute, law, ordinance, rule or regulation applicable
to the Assets or the Assumed Liabilities, except, in each of subparagraphs (i)
through (iv), where such Violations, individually or in the aggregate, would not
have a Material Adverse Effect.
2.1.4. Litigation.
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To Seller's knowledge, there are no actions, suits, proceedings or
investigations of any kind now pending or threatened in writing and involving
Seller, the Assets or the Assumed Liabilities, which may have a Material Adverse
Effect.
2.1.5. Seller's Financial Statements.
Seller has delivered to Buyer complete and correct copies of (i) the
audited balance sheet of Seller as at December 31, 1996 and the related audited
statements of income and cash flows for the fiscal year then ended, together
with all footnotes, and (ii) a draft copy of the audited balance sheet of Seller
as at December 31, 1997 and the related draft audited statements of income and
cash flows for the fiscal year then ended, together with drafts of all
footnotes, which financial statements and draft financial statements fairly
present in all material respects, as at and for the periods then ended the
financial position and results of operations of Seller in conformity with
generally accepted accounting principles prevailing in the United States, in
each case applied on a basis consistent throughout the reported periods. Seller
has also delivered to Buyer an unaudited interim balance sheet and statement of
income of Seller for the fiscal period ended on March 31, 1998, which have been
prepared in a manner consistent with prior practices for Seller's unaudited
statements and on which all transactions that are material are recorded in a
manner that is consistent with the recordation of such transactions in the past.
Such financial statements (i) do not contain any item of extraordinary or
non-recurring income or expense (except as specified therein) and (ii) do not
reflect any write- off or revaluation of assets (except as specified therein),
other than year-end adjustments which individually, or in the aggregate, would
not be material.
2.1.6. No Brokers or Finders.
No broker or finder is involved on behalf of Seller in connection with the
sale of the Assets, nor may any broker or finder involved on behalf of Seller
claim any commission on account of the sale of the Assets. The parties
acknowledge that Wasserstein Perella & Co. has been engaged by Seller as a
financial advisor to Seller, and the fees of Wasserstein Perella & Co. shall be
paid for by Seller.
2.1.7. Compliance with Applicable Laws.
Except to the extent that non-compliance would not have a Material Adverse
Effect, the business of Seller is being conducted in compliance with all
applicable laws, rules, ordinances, regulations, licenses, or judgments, or
orders, rules, regulations, licenses, judgments, or decrees of Governmental
Entities. Seller has not, and, to Seller's knowledge, none of its executive
officers, directors or employees (in their respective capacities as such), has
engaged in any activity constituting fraud or abuse under the laws relating to
health care or insurance.
2.1.8. No Consents.
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No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign (a
"Governmental Entity"), is required by or with respect to Seller in connection
with the execution and delivery of this Agreement by Seller, or the consummation
by Seller of the transactions contemplated hereby, except for such filings,
authorizations, orders and approvals as may be required by federal, state and
local Governmental Entities.
2.1.9. Material Contracts.
Each material contract constituting part of the Assets or the Assumed
Liabilities is in full force and effect and is valid and enforceable by Seller
in accordance with its terms, except insofar as enforcement may be limited by
bankruptcy, insolvency or similar laws affecting the enforcement of creditors'
rights in general, and except as enforceability may be limited by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law). Seller is not in material default in the
observance or the performance of any term or obligation to be performed by it
under any such agreement to the extent that such default would cause a Material
Adverse Effect. To the knowledge of Seller, no other person is in material
default in the observance or the performance of any term or obligation to be
performed by it under any such contract to the extent that such a default would
cause a Material Adverse Effect. Seller has provided, or will provide before 60
days after the Execution Date, originals or true and correct copies of all
contracts constituting part of the Assets or Assumed Liabilities which are not
terminable on 90 days notice or less.
2.1.10. Title to and Condition of Properties and Assets.
Seller has good title to the Assets set forth on Parts B, D, and E of
Exhibit 1.1, whether owned or leased, in each case subject to no mortgage,
pledge, conditional sales contract, lien, security interest, right of possession
in favor of any third party, claim or other encumbrance (collectively "Liens"),
and except with respect to leased property, the provisions of such leases. No
representation or warranty is being made with respect to the physical condition
of the Assets. Seller makes no representation or warranty with respect to title
to the intellectual property set forth in Part C of Exhibit 1.1.
2.1.11. No Untrue Representation or Warranty.
To Seller's Knowledge, no representation or warranty by Seller in this
Agreement, nor any statement or certificate furnished or to be furnished to
Buyer pursuant hereto or in connection with the transactions contemplated hereby
by Seller contains or will contain any untrue statement of a material fact.
2.2. Representations and Warranties True and Correct at Closing; Breaches.
HLTHDAL:19130.4 40072-00002
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Each of the representations and warranties of Seller set forth in this
Agreement shall be true and correct in all respects on the Closing Date as
though made on the Closing Date; and Seller shall have executed and delivered to
Buyer a certificate signed by an authorized representative of Seller and dated
as of the Closing Date to such effect. With the exception of Sections 2.1.1,
2.1.2, 2.1.5, and 2.1.10, if any of the representations and warranties of Seller
are not true and correct in all respects as of the Closing Date, then Buyer
shall be entitled to indemnification for any and all losses as provided in
Section 11 hereof, but shall nevertheless be obligated to conclude the
transactions contemplated hereby. The consummation of the transactions under
this Agreement by Buyer shall not constitute a waiver of Buyer's rights to
indemnification for a breach of a representation or warranty provided for in
this Section.
3. REPRESENTATIONS AND WARRANTIES OF BUYER.
"Material Adverse Effect" means, with respect to Buyer, a material adverse
effect on Buyer's ability to consummate the transactions set forth herein.
3.1. Representations and Warranties of Buyer.
As of the Execution Date, Buyer represents and warrants to Seller as
follows:
3.1.1. Organization and Good Standing.
Buyer is a limited liability company duly organized, validly existing and
in good standing under the laws of the jurisdiction of its organization, has all
requisite corporate power and corporate authority to own, lease and operate its
properties and to carry on its business, as it is now being conducted, and is
duly qualified and in good standing to do business under the corporate laws of
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification necessary, except where the
failure to be so qualified would not have a Material Adverse Effect.
3.1.2. Buyer's Authority and No Breach.
Buyer has all requisite corporate power and corporate authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Buyer. This Agreement constitutes a valid and
binding obligation of Buyer, enforceable against Buyer in all material respects
in accordance with its terms, except insofar as enforcement may be limited by
insolvency, or similar laws affected the enforcement of creditors' rights in
general, and except as enforceability may be limited by general principles of
equity (regardless of whether such enforceability is considered in proceeding in
equity or at law).
3.1.3. No Brokers or Finders.
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No broker or finder is involved on behalf of Buyer in connection with the
sale of the Assets, nor may any broker or finder involved on behalf of Buyer
claim any commission on account of the sale of the Assets. The parties
acknowledge that Bear Stearns has been engaged by Buyer as a financial advisor
to Buyer, and the fees of Bear Stearns shall be paid for by Buyer.
3.1.4. Buyer's Consents.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Buyer in connection with the execution and delivery of this Agreement
by Buyer, or the consummation by Buyer of the transactions contemplated hereby,
except for such filings, authorizations, orders and approvals as may be required
by state and local Governmental Entities, including those in connection with
Buyer's insurance business.
3.1.5. No Untrue Representation or Warranty.
To Buyer's knowledge, no representation or warranty by Buyer in this
Agreement, nor any statement or certificate furnished or to be furnished to
Seller pursuant hereto or in connection with the transactions contemplated
hereby, contains or will contain any untrue statement of a material fact.
3.2. Representations and Warranties True and Correct at Closing; Breaches.
Buyer shall execute and deliver to Seller a certificate signed by an
authorized representative of Buyer, dated as of the Closing Date, stating that
each of the representations and warranties of Buyer made herein are true and
correct in all respects, or describing the manner in which such representations
and warranties are not true and correct. If any of the representations and
warranties of Buyer are not true and correct as of the Closing Date, then Seller
shall be entitled to indemnification for any and all losses as provided in
Section 11. The consummation of the transactions under this Agreement by Seller
shall not constitute a waiver of Seller's rights to indemnification for a breach
of a representation or warranty provided for in this Section.
4. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Buyer and Seller contained in
Sections 2 and 3 of this Agreement shall survive for a period of eighteen (18)
months following the Closing.
5. BUYER'S CONDITIONS PRECEDENT TO CLOSING.
Buyer's agreement to purchase and to pay for the Assets hereunder is
subject to compliance with and the occurrence of each of the following
conditions on or before Closing, except as any thereof may be waived in writing
by Buyer:
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5.1. Agreements.
Seller shall have executed and delivered to Buyer all agreements,
instruments, certificates and other documents to be delivered by Seller, except
that Buyer shall be obligated to consummate this transaction, provided that
Seller has substantially performed and is proceeding in good faith and with due
diligence to obtain any remaining documents not delivered at Closing.
5.2. Corporate Resolutions.
Seller shall provide Buyer with the resolutions described in Section
1.6.2(e).
5.3. Seller's Representations and Warranties.
The representations and warranties of Seller set forth in Sections 2.1.1,
2.1.2, 2.1.5, and 2.1.10 shall be true and correct in all material respects as
of the date of this Agreement and as of the Closing Date as though made on and
as of the Closing Date. Buyer shall have received a certificate signed on behalf
of Seller by an authorized officer of Seller to the effect that the
representations and warranties of Seller set forth in those Sections (as amended
through disclosure submitted to Buyer on or before the Closing regarding events
arising since the Execution Date) shall be true and correct in all material
respects as of the Execution Date and as of the Closing Date as though made on
and as of the Closing Date, except as otherwise contemplated by this Agreement.
5.4. Litigation.
No order has been issued in any action, suit or proceeding before any court
or administrative authority in any domestic or foreign jurisdiction of any kind,
that enjoins the consummation of this Agreement or any related agreements.
5.5. Certain Covenants.
Seller shall have complied with its obligations in Sections 8.1(a) and
8.1(b) and Section 8.2 in all material respects.
6. SELLER'S CONDITIONS PRECEDENT TO CLOSING.
Seller's agreement to sell and to deliver the Assets to be sold hereunder
is subject to the payment at Closing of the Purchase Price and compliance with
and the occurrence of each of the following conditions on or before Closing,
except as any thereof may be waived in writing by Seller:
6.1. Agreements.
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Buyer shall have executed and delivered to Seller all agreements,
instruments, certificates and other documents to be delivered by Buyer.
6.2. Corporate Resolutions.
Buyer shall provide Seller with the resolutions described in Section
1.6.1(e).
6.3. Litigation.
No order has been issued in any action, suit or proceeding before any court
or administrative authority in any domestic or foreign jurisdiction of any kind,
that enjoins the consummation of this Agreement or related agreements.
6.4. Buyer's Representations and Warranties True and Correct.
The representations and warranties of Buyer set forth in Section 3.1.1 and
3.1.2 shall be true and correct in all material respects as of the Execution
Date and as of the Closing Date as though made on and as of the Closing Date.
Seller shall have received a certificate signed on behalf of Buyer by the chief
executive officer and the chief financial officer of Buyer to the effect that
the representations and warranties of Buyer set forth in those Sections (as
amended through disclosure submitted to Seller on or before the Closing
regarding events arising since the Execution Date) shall be true and correct in
all material respects as of the Execution Date and as of the Closing Date as
though made on and as of the Closing Date, except as otherwise contemplated by
this Agreement.
7. JOINT CONDITIONS PRECEDENT TO CLOSING.
In addition to the matters set forth in Sections 5 and 6, Seller's and
Buyer's agreement hereunder are subject to the occurrence of the following
conditions on or before the Closing, except as any thereof may be waived by both
Seller and Buyer:
7.1. Governmental Consents, and Approvals, and Licenses.
Buyer and Seller shall have obtained all appropriate and necessary
approvals, consents, licenses, certifications, or exemptions required to effect
this Agreement from any and all state, local, and federal Governmental Entities
for which approval is required; provided, however, that each of the parties
shall have used its best efforts to obtain such approvals, consents, or
exemptions.
7.2. Termination of PMAT/KFHPTx Contract.
Seller shall have terminated the Medical Service Agreement between Seller
and Kaiser Foundation Health Plan of Texas, effective January 1, 1990, as
amended, as of Closing.
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7.3. Closing of Transactions Under Related Agreements.
The transactions contemplated by the Purchase Agreement, the Master
Purchase and Sale Agreement (as defined in the Purchase Agreement) and the
Reinsurance Agreements (as defined in the Purchase Agreement) shall have closed
concurrently with the transactions contemplated by this Agreement. The Medical
Services Agreement, the Transition Agreement described in Section 10.5.2 of the
Purchase Agreement, and the agreements described in this Section, together with
their schedules and exhibits, shall be known as the "Related Agreements."
8. ADDITIONAL AGREEMENTS OF SELLER.
8.1. Conduct of Business Pending Closing.
From the Execution Date until the Closing, Seller agrees that except as
otherwise consented to by Buyer in writing, Seller will:
(a) Conduct the business of Seller in a commercially prudent manner, as a
going concern and in the ordinary course, and consistent with such operation,
comply in all material respects with applicable legal and contractual
obligations, consistent with past practice;
(b) Use commercially reasonable efforts, consistent with past practice, to
preserve the goodwill of its patients and its employees;
(c) Not intentionally take any action outside of the ordinary course of
business which would tend to cause suppliers or patients to cease their
respective affiliations with Seller;
(d) Not enter into or materially amend any contract requiring payment, on
an annualized basis, of more than $100,000.00 which contract is not terminable
without cause on 90 days notice or less;
(e) Not permit any lien, charge or encumbrance on the Assets, to the extent
such lien, charge or encumbrance would have a Material Adverse Effect; or
(f) Not take any action (or omit to take any action), which action or
omission would cause any representation or warranty contained herein to be
untrue in any material respect at any time through the Closing Date, as if such
representation or warranty were made at and as of such time.
8.2. Access to Documents and Premises.
8.2.1. Inspection of Books and Records.
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From the Execution Date through the Closing Date, Buyer, its counsel,
accountants, and other representatives shall, subject to confidentiality
covenants made by Seller to third parties and state and federal antitrust laws,
have the right to inspect the books and records of Seller relating to Seller's
business and the Assets, including inspections (without copying) by Buyer's
counsel to the extent possible without waiving any privilege with respect to
information regarding all actions, suits, proceedings or investigations of any
kind, now pending or threatened in writing, involving Seller with respect to
Seller's business. Any such inspection shall occur during normal business hours
and shall be scheduled by Buyer and Seller following request for inspection made
to Seller. All inspections shall be conducted by Buyer and Seller in such a
manner as to maximize all applicable privileges. Buyer and its representatives
shall use their best efforts to conduct their inspection in such a manner as not
to be disruptive to Seller's employees or business operations. Buyer shall
reimburse Seller for any damage, whether to the Assets or otherwise, caused by
Buyer or Buyer's representatives during the inspection process.
8.2.2. Request for Access.
All requests of Buyer, its counsel and such other representatives for
books, records or interviews with Seller's officers, directors, or employees
shall be coordinated through Nancy Mecodangelo, Medical Group Administration of
Seller, or her designee.
8.3. Breach by Seller.
Except as provided in Section 5.5, Seller's compliance with the covenants
of Section 8.1 and 8.2 shall not be a condition to Closing, but, rather, breach
of such covenants shall entitle Buyer to recover its actual damages resulting
therefrom in accordance with Section 11.
9. ADDITIONAL AGREEMENTS OF BUYER.
9.1. Formation of New P.A..
Prior to the Closing, Buyer shall cause New P.A. to be formed and at the
Closing New P.A. shall be duly organized, validly existing, and in good
standing.
9.2. Maintenance of Records.
Buyer shall retain all business and other records and documents relating to
the Assets in accordance with Buyer's own record retention policies for the
longer of six years or the time required by applicable law. Buyer shall make
such records as are retained by Buyer pursuant hereto available for Seller's
review and copying upon request of Seller or its agents, in a prompt manner, at
a reasonable time and place, and Buyer shall be entitled to the actual costs of
such cooperation; provided, however, that Seller shall agree
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to hold all such information confidential as required by law. Buyer shall
be responsible for obtaining any and all consents required to release records to
Seller. Buyer shall provide the records requested by Seller in the format
requested by Seller, including, without limitation, on paper, on computer disk,
or by direct electronic transmission in a form compatible with Buyer's then
existing systems. Buyer shall permit Seller to have access and to copy to such
records during normal business hours with prior notice to Buyer of the time that
such access shall be needed. Seller's employees, representatives, and agents
shall conduct themselves in such a manner that Buyer's normal business
activities shall not be unduly or unnecessarily disrupted. The provisions of
this Section 9.2 shall survive the Closing for a period of six years after the
Closing Date or longer if required by applicable law.
10. ADDITIONAL AGREEMENTS OF BUYER AND SELLER.
10.1. Regulatory Milestones Prior to Closing.
Seller and Buyer shall prepare and file the applications as may be required
with respect to the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby. Buyer and Seller agree
to take all reasonable actions required or requested by such authorities for the
expeditious consideration and rendering of all appropriate approvals, consents
and authorizations. Seller and Buyer shall diligently and timely cooperate with
each other and with all other parties in the submission of applications and of
any and all such additional information or documentation requested by any such
regulatory authorities.
10.2. Employment Matters.
10.2.1. Severance Payments.
(a) Seller shall terminate all of Seller's employees relating to the
Business, whether such employees are at-will or are subject to employment
agreements, as of the Closing (collectively, "Terminated Employees").
(b) Buyer shall reimburse Seller for all severance payments arising under
Seller's severance policy in effect on the date of execution of this Agreement
due to those Terminated Employees to whom Buyer does not offer comparable
employment with comparable pay following their termination from their employment
with Seller ("Severance Payments"). Buyer shall also assume the obligation to
provide or pay for all accrued but unused vacation to Terminated Employees, but
only to the extent such benefits would be owed under Seller's policies. Seller
shall retain the responsibility to pay any transition bonuses to the Terminated
Employees pursuant to Seller's policies. If any Terminated Employee is hired by
Buyer pursuant to this Section 10.2.1 and such Terminated Employee's employment
is severed by Buyer within 60 days of the Closing without
HLTHDAL:19130.4 40072-00002
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cause, Buyer shall reimburse Seller for such Terminated Employee severance
in an amount which would have been due the Terminated Employee under Seller's
severance policies in effect on the date of execution of this Agreement as if
Buyer had not offered comparable employment at comparable pay.
(c) Promptly following the Execution Date, Buyer (i) will provide
information regarding its employment application process to the Terminated
Employees, and (ii) will actively begin to interview and consider for
employment, to be effective as of the Closing, any Terminated Employee who
submits an application for employment in accordance with Buyer's customary
application process requirements and who are qualified for employment with Buyer
(each individually, an "Applicant," or collectively, "Applicants").
(d) On or before July 15, 1998, Buyer shall provide Seller with a list of
the Terminated Employees that Buyer has elected to hire effective as of the
Closing Date, as provided in Section 10.2.2. Seller shall provide WARN notices
to all employees on or before 60 days prior to Closing. Buyer shall provide
Seller, at the same time Buyer provides Seller with a list of Terminated
Employees that Buyer has elected to hire, with an offer of employment for each
such employee so that Seller may enclose such offer in the WARN notice.
(e) All Terminated Employees who are hired by Buyer shall be given credit
for the time that they were employed by Seller for purposes of calculating such
Terminated Employees' rights under each of Buyer's employee benefits plans,
including without limitation, vacation pay, sick pay, and vesting for purposes
of deferred compensation and retirement plans.
(f) After the Execution Date, Seller agrees to cooperate with Buyer and to
release information to Buyer regarding Terminated Employees who Buyer is
considering for employment prior to Closing. All information regarding the
Terminated Employees shall be provided subject to (i) all applicable laws and
regulations regarding protection of the confidentiality of employment
information, (ii) Buyer's obtaining the written consent of such employees, and
(iii) Buyer's adherence to any policies of Seller with respect to the protection
of the confidentiality of employee information, as if such policies were Buyer's
own. Buyer shall respect and protect the confidentiality of all such employee
information. Information to be released hereunder does not include quality
management and peer review documents, including but not limited to any and all
credentialing files, utilization review information, peer evaluations, medical
record reviews, and member complaints, except as may be permitted by law so as
not to waive the privilege with respect to such documents.
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10.2.2. WARN, COBRA and HIPAA Notices.
To the extent required of Seller by law, Seller shall provide all notices
relating to the termination of the Terminated Employees, including, without
limitation, the notice obligations arising under the Workers Adjustment and
Retraining Notification Act ("WARN"), the Consolidated Omnibus Budget and
Reconciliation Act of 1985 ("COBRA"), or the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). WARN- related liabilities to the
Terminated Employees which result from any delay in providing WARN notices to
the Terminated Employees shall be paid by the party causing the delay.
10.2.3. Healthcare Coverage for Terminated Employees.
Buyer shall offer healthcare coverage to all Terminated Employees, which
shall be at least substantially equivalent to the healthcare coverage they would
be entitled to receive under COBRA if Seller remained in existence after the
Closing, effective as of the date of Closing, for a period of up to 36 months
after the Closing Date or such shorter period as permitted by law. To the extent
that any Terminated Employee becomes employed by Buyer, and the Terminated
Employee does not meet the eligibility requirements for Buyer's own COBRA
healthcare coverage prior to the Buyer's termination of the Terminated Employee,
Buyer agrees to offer the healthcare coverage set forth in this Section to such
Terminated Employee, effective as of his date of termination from Buyer, until
the expiration of the thirty-sixth month after the Closing Date. Each Terminated
Employee shall be responsible for payment of his own premiums relating to
healthcare coverage provided pursuant to this Section.
10.3. Cooperation.
Buyer and Seller agree to cooperate reasonably with each other, from the
Execution Date up through and following the Closing Date, in good faith, in an
effort to satisfy all conditions, undertakings and agreements contained in this
Agreement.
10.4. Health Care Coverage for Certain Unitholders.
Seller shall prepay through December 31, 1999 the premiums for whatever
health care coverage certain Unitholders of Seller maintain under KFHPTx's
Subscriber Agreements, as defined in the Purchase Agreement (be it individual,
spouse, family, or other health coverage) provided Buyer accepts the assignment,
reinsurance, or other transfer of such Subscriber Agreements under this
Agreement and provided further the Unitholders pay such premiums to Seller.
11. INDEMNIFICATION.
11.1. Indemnification by Seller.
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Subject to the limitations of Section 11.3, Seller shall indemnify and hold
harmless Buyer and its respective officers, directors, unitholders, employees,
agents and affiliates against any and all actual damages resulting from claims,
losses, costs, expenses, fees, liabilities and damages, including interest,
penalties and reasonable attorneys' fees and disbursements (each individually a
"LOSS," and collectively, "LOSSES"), arising out of, in connection with or
otherwise relating to:
(a) The Excluded Assets;
(b) The Excluded Liabilities;
(c) The material breach by Seller of any representation, warranty, covenant
or agreement made by Seller in this Agreement, or in any other agreement
executed in connection herewith;
(d) Any claim, obligation or other liability arising from the business of
Seller with respect to any period prior to the Closing Date other than to the
extent such claims, obligations or liabilities constitute part of the Assumed
Liabilities; and
(e) Any action or litigation which challenges, seeks damages arising from
or seeks to enjoin any of the transactions contemplated by this Agreement, other
than any actions commenced by shareholders of Buyer or Buyer's Affiliates or
primarily involving the operations of Buyer's or Buyer's Affiliates' businesses.
11.2. Indemnification by Buyer.
Subject to the limitations of Section 11.3, Buyer shall indemnify and hold
harmless Seller and its respective officers, directors, employees, agents and
affiliates, against any and all Losses, arising out of, in connection with or
otherwise relating to:
(a) The Assets;
(b) The Assumed Liabilities;
(c) The material breach by Buyer of any representation, warranty, covenant
or agreement made by Buyer in this Agreement, or in any other agreement executed
in connection herewith;
(d) Any claim, obligation or other liability arising from Buyer's operation
of the Assets or the Assumed Liabilities as part of an HMO in Texas with respect
to any period after the Closing Date;
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<PAGE>
(e) Any action or litigation commenced by members or shareholders (as the
case may be) of Buyer or Buyer's Affiliates or primarily involving the
operations of Buyer's or Buyer's Affiliates' businesses which challenges, seeks
damages arising from or seeks to enjoin any of the transactions contemplated by
this Agreement or Related Agreements.
11.3. Limitations.
The indemnification rights and obligations set forth in this Section 11
shall survive the Closing and shall expire 18 months after Closing; provided,
however, that (i) with respect to claims notified in good faith to the
indemnifying party prior to the expiration of the indemnity rights, the parties'
obligations with respect to its indemnity rights and obligations shall continue
in effect until payment or other resolution of such claims; and (ii) with
respect to liabilities under Section 1.3.2, the indemnification rights and
obligations shall continue until the expiration of the statute of limitations
applicable thereto. Each party's liability hereunder shall be limited to actual
damages and no party shall be liable to any other party hereunder for special,
consequential, incidental, punitive or other damages.
11.3.1. Minimum.
No party to this Agreement shall have any liability, whether pursuant to
Section 11 or otherwise, for breach of any covenant or warranty, for
misrepresentation, or otherwise, unless the aggregate amount of all claims for
which such party would, but for this Section 11, be liable, exceeds $350,000 on
a cumulative basis. Each claim making up the $350,000 cumulative amount must be
a claim of $5,000 or more. If such party's aggregate liability for such claims
exceeds $350,000 on a cumulative basis, then such party shall be liable for all
such claims in excess of $350,000. Excluded Liabilities are not subject to and
do not count towards these minimum limitations.
11.3.2. Maximum.
In no event shall the aggregate liability of any party to this Agreement
(whether for breach of covenant or warranty, misrepresentation, pursuant to
Section 11 or otherwise) exceed 50% of the Purchase Price. Excluded Liabilities
are not subject to and do not count towards these maximum limitations.
HLTHDAL:19130.4 40072-00002
<PAGE>
11.4. Notice and Right to Defend.
(a) Should any claim or action by a third party arise after the Closing for
which Buyer or Seller may be liable to the other under the indemnity provisions
of this Agreement, the indemnitee shall notify the indemnitor in writing and in
reasonable detail as soon as practicable after the indemnitee receives notice of
such claim or action in the manner provided for the giving of notices under this
Agreement. The expenses of all proceedings, contests, lawsuits, or
investigations of claims with respect to such claims or actions, shall be borne
by the indemnitor. If an indemnitor wishes to assume the defense of such claim
or action, it shall give written notice to the indemnitee within ten (10) days
after notice from the indemnitee of such claim or action of its intention to
assume the defense, and the indemnitor shall thereafter assume the defense of
any such claim or liability through counsel reasonably satisfactory to the
indemnitee, provided that the indemnitee may also participate in such defense at
its own expense.
(b) If the indemnitor shall not assume the defense of, or if after so
assuming it shall fail to defend, any such claim or action, the indemnitee may
defend against any such claim or action in such manner as it may reasonably deem
appropriate and the indemnitee may settle such claim or litigation on such terms
as it may reasonably deem appropriate, and the indemnitor shall promptly
reimburse the indemnitee for the amount of all reasonable expenses, legal and
otherwise, incurred by the indemnitee in connection with the defense and/or
settlement of such claim or action. If no settlement of such claim or action is
made, the indemnitor shall satisfy any judgment rendered with respect to such
claim or in such action before indemnitee is required to do so, and pay all
expenses, legal or otherwise, incurred by the indemnitee in the defense against
such claim or litigation.
11.5. Exclusive Remedy.
If a party is entitled to indemnification under this Agreement with respect
to a particular claim, then such indemnification shall be such party's sole and
exclusive remedy.
11.6. Failure to Provide Records Cooperation.
If Buyer materially breaches its obligations under Section 9.2 that Seller
can establish were actually transferred by Seller to Buyer under this Agreement,
and Seller establishes that such breach resulted in the loss or destruction of
documents material to the defense of Buyer by Seller of an action or claim by a
third party pursuant to Seller's indemnification obligations under this
Agreement, Seller shall be entitled to recover from Buyer its actual losses
incurred in the matter directly resulting from Buyer's breach. The
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<PAGE>
amount of the losses recoverable from Buyer shall in no event exceed the
amount of the third party claim, and shall not include special, consequential,
incidental, punitive or other damages.
12. TERMINATION.
12.1. Termination.
This Agreement and the transactions contemplated hereby may be terminated or
abandoned at any time prior to the Closing Date:
(a) By the mutual consent of Buyer and Seller;
(b) By Seller or Buyer if the Closing shall not have occurred on or before
October 31, 1998 (or such later date as may be mutually agreed to by Buyer and
Seller);
Termination of this Agreement shall terminate the Related Agreements. Where
a Related Agreement is only between Buyer and Seller, no further action or
notice shall be required for such termination to take effect. Where an affiliate
or a third party is involved in a Related Agreement, Buyer and Seller (as may be
the case) shall cause termination of such Related Agreement.
12.2. Liability for Termination.
If this Agreement is terminated pursuant to this Section 12, all further
obligations of the parties under this Agreement shall be terminated without
further liability of any party to the other, provided that nothing shall relieve
either party from any liability it may have for any breach hereof.
13. ARBITRATION.
13.1. Conciliation and Mediation.
If a dispute between Buyer and Seller relating to this Agreement or under
any other agreement executed and delivered in connection with this Agreement is
not resolved within fifteen (15) days from the date that either party has
notified the other that such dispute exists, then such dispute shall be
submitted jointly for conciliation to the President or his designee of each
party. If such senior executive officers are unable to resolve the dispute
within thirty (30) days from the date that it is first presented to them, either
party may give notice to the other party that the dispute shall be submitted to
non- binding mediation with a mediator acceptable to both parties, and the
parties shall, for a sixty (60) day period from the receipt of such notice, seek
in good faith to resolve such dispute in mediation. If the parties are not able
to resolve the dispute in mediation, then such dispute shall be referred to
binding arbitration, except to the extent that injunctive relief is available to
a party hereto.
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<PAGE>
13.2. Arbitration.
Any dispute submitted to arbitration pursuant to this Section shall be
determined by the decision of a board of arbitration consisting of three (3)
members (ABoard of Arbitration") selected as hereinafter provided. Buyer shall
select an arbitrator and Seller shall select an arbitrator, each of whom shall
be a member of the Board of Arbitration who is independent of the parties. A
third Board of Arbitration member, independent of the parties, shall be selected
by mutual agreement of the other two Board of Arbitration members. If the other
two Board of Arbitration members fail to reach agreement on such third member
within twenty (20) days after their selection, such third member shall
thereafter be selected by the American Arbitration Association upon application
made to it for such purpose by any party to the arbitration. The Board of
Arbitration shall meet in Dallas, Texas, or such other place as a majority of
the members of the Board of Arbitration determines more appropriate, and shall
reach and render a decision in writing (which shall state the reasons for its
decisions in writing and shall make such decisions entirely on the basis of the
substantive law governing the Agreement and which shall be concurred in by a
majority of the members of the Board of Arbitration) with respect to the items
in dispute. In connection with rendering its decisions, the Board of Arbitration
shall adopt and follow the Commercial Rules of Arbitration of the American
Arbitration Association, except as provided in Exhibit 13.2. To the extent
practical, decisions of the Board of Arbitration shall be rendered no more than
thirty (30) calendar days following commencement of proceedings with respect
thereto. The Board of Arbitration shall cause its written decision to be
delivered to Buyer and Seller. Any decision made by the Board of Arbitration
(either prior to or after the expiration of such thirty (30) calendar day
period) shall be final, binding and conclusive on Buyer and Seller and each
party to the arbitration shall be entitled to enforce such decision to the
fullest extent permitted by law and entered in any court of competent
jurisdiction. The fees and expenses of the Board of Arbitration and the
reasonable fees and expenses of legal counsel and consultants of the parties
shall be allocated among the parties in the same proportion that the aggregate
amount of the disputed items so submitted to the Board of Arbitration that is
unsuccessfully submitted by each of them (as finally determined by the Board of
Arbitration) bears to the total amount of items so submitted.
13.3. Equitable Relief.
Notwithstanding any other provision of this Agreement, any party shall have
the right to seek equitable relief, in a court of competent jurisdiction, to the
extent that equitable relief is available to a party hereto. If a party chooses
to pursue equitable relief, such conduct shall not constitute a waiver of or be
deemed inconsistent with the arbitration provisions set forth in this Section
13. The Board of Arbitration may consider the findings of, rulings of, and any
evidence submitted in every legal proceeding for equitable relief as the Board
of Arbitration deems proper; however, any such findings, rulings and evidence
shall not necessarily be binding on the Board of Arbitration in connection with
any arbitration proceedings conducted by such Board of Arbitration.
14. MISCELLANEOUS.
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14.1. Notices.
All notices and other communications hereunder shall be in writing and
shall be either (i) deposited in first class United States mail, certified, with
postage prepaid, (ii) delivered by messenger, (iii) sent by overnight courier,
or (iv) sent by fully completed and confirmed facsimile transmission (with a
written confirmation simultaneously sent in first class United States mail), as
follows:
If to the Seller: Copy to:
Permanente Medical Association of McGlinchey Stafford, A Professional
Texas Limited Liability Company
12720 Hillcrest Road, Suite 600 643 Magazine Street
Dallas, TX 75230 New Orleans, LA 70130
Attention: William Gillespie, M.D. Attention: Donna G. Klein
FAX: 504-596-2800
If to the Buyer: Copy to:
HMO Texas, L.C. Morgan, Lewis & Bockius, LLP
c/o Sierra Health Services, Inc. 300 South Grand Avenue
2720 North Tenaya Way Twenty-Second Floor
Las Vegas, Nevada 89128 Los Angeles, California 90071-3132
Attention: Paul Palmer, Vice Attention: Richard J. Maire, Jr.
President and CFO Fax: (213) 612-2554
Fax: (702) 240-7148
or such other address or fax number as any party may request by notice
given as aforesaid. Notices sent as provided herein shall be deemed given on the
date received by the recipient. If a recipient rejects or refuses to accept a
notice given pursuant to this Section, or if a notice is not deliverable because
of a changed address or fax number of which no notice was given in accordance
with the provisions hereof, such notice shall be deemed to be received two (2)
days after such notice was mailed (whether as the actual notice or the
confirmation of a faxed notice) in accordance with the terms hereof. The
foregoing shall not preclude the effectiveness of actual written notice given to
a party at any address or by any means.
14.2. Confidentiality.
All information, instruments, documents and details concerning or with
respect to the business operations of Buyer and Seller ("Confidential
Information") are strictly confidential, and Seller and Buyer expressly covenant
and agree with each other that they
HLTHDAL:19130.4 40072-00002
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will not nor will they or any of them allow any of their respective
officers, directors, employees or agents to disclose the Confidential
Information or any matters relating to the business of the other or to this
Agreement, its negotiation, terms, provisions or conditions, including, but not
limited to, the Purchase Price, except as may be reasonably necessary to
effectuate the transactions contemplated hereby; provided, however, (i) neither
party shall be prohibited from disclosing any such information, without the
other party's consent, if such disclosure is required, in the reasonable opinion
of its legal counsel, by order of a court of competent jurisdiction or under
applicable law or regulatory action and the disclosing party has given notice of
such requirement to the other party promptly upon learning that such disclosure
may be required and (ii) Buyer shall not be prohibited from disclosing any
confidential information to its insurers, reinsurers, public and private
auditors, investors and bankers or otherwise to comply with applicable
securities laws and other governmental regulations.
If the transactions contemplated hereby are not completed for any reason,
upon the written request of the other party, each party shall destroy all
materials received from the other party hereto including, without limitation,
deletion of information in computer storage, along with any copies and any
worksheets or abstracts compiled or derived from such information, and provide
an officer's certification that such destruction has occurred. Notwithstanding
anything in this Agreement to the contrary, (i) the covenants of the parties
contained in this Section shall survive Closing or any termination of this
Agreement, (ii) Buyer and Seller each shall have the right to seek injunctive
relief to enjoin the other party from violating this Section, and (iii) Buyer
and Seller each shall have the right to seek specific performance of the other
party with respect to the obligations set forth in this Section.
14.3. Waiver.
No waiver by either Buyer or Seller hereto of its rights under any
provision of this Agreement shall constitute a waiver of such party's rights
under such provision at any other time or a waiver of such party's rights under
any other provision of this Agreement.
14.4. Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument. An executed faxed copy of this agreement shall be deemed an
original executed copy of this Agreement.
14.5. Headings.
The headings contained in this Agreement have been inserted for convenience
of reference only and shall in no way restrict or modify any of the terms or
provisions hereof.
14.6. Severability.
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If any provision of this Agreement is held by final judgment of a court of
competent jurisdiction to be invalid, illegal or unenforceable, such invalid,
illegal or unenforceable provision shall be severed from the remainder of this
Agreement, and the remainder of this Agreement shall be enforced. In addition,
the invalid, illegal or unenforceable provision shall be deemed to be
automatically modified, and, as so modified, to be included in this Agreement,
such modification being made to the minimum extent necessary to render the
provision valid, legal and enforceable. Notwithstanding the foregoing, however,
if the severed or modified provision concerns all or a portion of the essential
consideration to be delivered under this Agreement by one party to the other,
the remaining provisions of this Agreement shall also be modified to the extent
necessary to adjust equitably the parties' respective rights and obligations
hereunder.
14.7. Entire Agreement.
This Agreement (including the Exhibits and Schedules) and the other
agreements, certificates and documents of Seller and Buyer contemplated herein
constitute the entire agreement between the parties hereto with respect to the
matter hereof, superseding all prior agreements or understandings. No amendment,
alteration, or modification of this Agreement shall be valid unless in each
instance such amendment, alteration, or modification is expressed in a written
instrument duly executed by the parties hereto.
14.8. Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto.
Notwithstanding the foregoing, this Agreement shall not be assignable by any
party without the prior written consent of the other, and any attempt at an
assignment in violation of this Section shall be void ab initio.
14.9. Governing Law.
This Agreement is to be governed by and interpreted under the laws of the
State of Texas, without resort to choice of law or conflict of law principles
which direct the application of the laws of a different state.
14.10. Cost of Transaction.
Whether or not the transactions contemplated hereby are consummated:
(a) Buyer shall pay the fees, expenses, and disbursements of Buyer and its
agents, representatives, accountants, and counsel; and
(b) Seller shall pay the fees, expenses and disbursements of Seller and its
agents, representatives, accountants and counsel.
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14.11. Further Assurances.
Each party hereto agrees for the benefit of the other parties hereto to
execute and deliver any necessary documents, instruments or agreements, and to
take any and all necessary actions, in order to (i) fully vest in Buyer all
right, title and interest to the Assets, and (ii) carry out the terms of this
Agreement and the transactions contemplated by this Agreement.
14.12. Construction.
Whenever the context of this Agreement requires, the gender of all words
herein shall include the masculine, feminine, and neuter, and the number of all
words herein shall include the singular and plural. All parties to this
Agreement have been represented by counsel and, accordingly, this Agreement
shall not be construed strictly for or against any party hereto. The Schedules
and Exhibits attached hereto are incorporated herein for all purposes and made a
part of this Agreement as if set out in full in this Agreement. All references
to section numbers in this Agreement shall be references to sections in this
Agreement unless otherwise specifically indicated.
14.13. Third Parties.
None of the provisions of this Agreement shall confer rights or benefits as
third party beneficiaries or otherwise upon any third party that is not
expressly a party to this Agreement including, without limitation, the
Terminated Employees, and the provisions of this Agreement shall not be
enforceable by any such third party.
14.14. Time is of the Essence.
Time is of the essence with regard to all of the provisions of this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Execution Date.
BUYER:
HMO TEXAS, L.C.
By: /s/ Larry S. Howard
Title: President
SELLER:
PERMANENTE MEDICAL ASSOCIATION OF TEXAS
By: /s/ William A. Gillespie, M.D.
Title: President
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EXHIBIT 10.4
SIERRA HEALTH SERVICES, INC.
1995 LONG-TERM INCENTIVE PLAN,
As Amended and Restated through May 18, 1998
1. Purpose. The purpose of this 1995 Long-Term Incentive Plan, as amended
and restated (the "Plan"), of Sierra Health Services, Inc., a Nevada corporation
(the "Company"), is to advance the interests of the Company and its stockholders
by providing a means to attract, retain, and reward executive officers and other
key employees of, and consultants to, the Company and its subsidiaries, and
directors of subsidiaries, to link compensation to measures of the Company's
performance in order to provide additional incentives, including stock-based
incentives and cash-based annual incentives, to such persons for the creation of
stockholder value, and to enable such persons to acquire or increase a
proprietary interest in the Company in order to promote a closer identity of
interests between such persons and the Company's stockholders.
2. Definitions. The definitions of awards under the Plan, including
Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock
granted as a bonus or in lieu of other awards, and Other Stock-Based Awards, are
set forth in Section 6 of the Plan, and the definition of Performance Awards and
Annual Incentive Awards is set forth in Section 8 of the Plan. Such awards,
together with any other right or interest granted to a Participant under the
Plan, are termed "Awards." The definitions of terms relating to a Change of
Control of the Company are set forth in Section 9 of the Plan. In addition to
such terms and the terms defined in Section 1, the following terms shall be
defined as set forth below:
(a) "Award Agreement" means any written agreement, contract, notice to a
Participant, or other instrument or document evidencing an Award.
(b) "Beneficiary" means the person, persons, trust, or trusts which have
been designated by a Participant in his or her most recent written beneficiary
designation filed with the Committee to receive the benefits specified under
this Plan upon such Participant's death. If, upon a Participant's death, there
is no designated Beneficiary or surviving designated Beneficiary, then the term
Beneficiary means the person, persons, trust, or trusts entitled by will or the
laws of descent and distribution to receive such benefits.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended from time to
time. References to any provision of the Code include regulations thereunder and
successor provisions and regulations thereto.
Amended95LTIP071698
<PAGE>
(e) "Committee" means the Stock Plan Committee of the Board in the case of
Awards other than Annual Incentive Awards, the Compensation Committee of the
Board in the case of Annual Incentive Awards, or such other Board committee or
committees as may be designated by the Board to administer the Plan in respect
of any Award, and the term "Committee" shall refer to the full Board in any case
in which it is performing any function of the Committee under the Plan. In
appointing members of the Committee, the Board will consider whether each member
will qualify as a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3)
and as an "outside director" within the meaning of Treasury Regulation
1.162-27(e)(3) under Code Section 162(m), but the members are not required to so
qualify at the time of appointment or during their term of service on the
Committee.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time. References to any provision of the Exchange Act
include rules thereunder and successor provisions and rules thereto.
(g) "Fair Market Value" means, with respect to Stock, Awards, or other
property, the fair market value of such Stock, Awards, or other property
determined by such methods or procedures as shall be established from time to
time by the Committee. Unless otherwise determined by the Committee, the Fair
Market Value of Stock as of any given date means the closing sale price of a
share of common stock reported in the table entitled "New York Stock Exchange
Composite Transactions" contained in THE WALL STREET JOURNAL (or an equivalent
successor table) for such date or, if no such closing price was reported for
such date, for the most recent trading day prior to such date for which such
closing price was reported.
(h) "ISO" means any Option intended to be and designated as an incentive
stock option within the meaning of Section 422 of the Code.
(i) "Participant" means a person who, as an executive officer or key
employee of the Company or a subsidiary, has been granted an Award under the
Plan which remains outstanding.
(j) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(k) "Stock" means the Common Stock, $.005 par value, of the Company and
such other securities as may be substituted for Stock or such other securities
pursuant to Section 4.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the
Committee. The Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:
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(i) to select Participants to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to each
Participant;
(iii) to determine the number of Awards to be granted, the number of shares
of Stock to which an Award will relate, the cash amount payable in settlement of
an Annual Incentive Award and the performance conditions applicable thereto, all
other terms and conditions of any Award granted under the Plan (including, but
not limited to, any exercise price, grant price, or purchase price, any
restriction or condition, any schedule or performance conditions for the lapse
of restrictions or conditions relating to transferability, forfeiture,
exercisability, or settlement of an Award, and waivers, accelerations, or
modifications thereof, based in each case on such considerations as the
Committee shall determine), and all other matters to be determined in connection
with an Award;
(iv) to determine whether, to what extent, and under what circumstances an
Award may be settled, or the exercise price of an Award may be paid, in cash,
Stock, other Awards, or other property, or an Award may be cancelled, forfeited,
or surrendered;
(v) to determine whether, to what extent, and under what
circumstances cash, Stock, other Awards, or other property payable with respect
to an Award will be deferred either automatically, at the election of the
Committee, or at the election of the Participant;
(vi) to prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(vii) to adopt, amend, suspend, waive, and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
(viii) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any Award,
rules and regulations, Award Agreement, or other instrument hereunder; and
(ix) to make all other decisions and determinations as may be required
under the terms of the Plan or as the Committee may deem necessary or advisable
for the administration of the Plan.
(b) Manner of Exercise of Committee Authority. Any action of the Committee
with respect to the Plan shall be final, conclusive, and binding on all persons,
including the Company, subsidiaries of the Company, Participants, any person
claiming any rights under the Plan from or through any Participant, and
stockholders. The express grant of any specific power to the Committee, and the
taking of any action by the Committee, shall not be construed as limiting any
power or authority of the Committee. The Committee may delegate to officers or
managers of the Company or any subsidiary of the Company the authority, subject
to such terms as the Committee shall determine, to perform such functions as the
Committee may determine, to the extent that such delegation will not result in
the loss of an exemption under Rule 16b-3(d)(1) for Awards granted to
Participants
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subject to Section 16 of the Exchange Act in respect of the Company and
will not cause Awards intended to qualify as "performance-based" compensation
under Code Section 162(m) to fail to so qualify, and as otherwise limited by
applicable law. Other provisions of the Plan notwithstanding, the Board may
perform any function of the Committee under the Plan, in order to ensure that
transactions under the Plan are exempt under Rule 16b-3 or for any other reason;
provided, however, that authority specifically reserved to the Board under the
terms of the Plan, the Company's Certificate of Incorporation or By-laws, or
applicable law shall be exercised by the Board and not by the Committee.
(c) Limitation of Liability. Each member of the Committee shall be entitled
to, in good faith, rely or act upon any report or other information furnished to
him by any officer or other employee of the Company or any subsidiary, the
Company's independent certified public accountants, or any executive
compensation consultant, legal counsel, or other professional retained by the
Company to assist in the administration of the Plan. No member of the Committee,
nor any officer or employee of the Company acting on behalf of the Committee,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Committee and any officer or employee of the Company acting on behalf of the
Committee or members thereof shall, to the extent permitted by law, be fully
indemnified and protected by the Company with respect to any such action,
determination, or interpretation.
4. Stock Available Under the Plan; Per-Person Award Limitations;
Adjustments.
(a) Stock Reserved for Awards. Subject to adjustment as hereinafter
provided, the total number of shares of Stock reserved and available for
issuance to Participants in connection with Awards under the Plan shall be
3,150,000 plus the number of shares reserved for the grant of awards under the
Company's Second Amended and Restated 1986 Stock Option Plan and Second Restated
Capital Accumulation Plan but which have not been and will not be issued under
such plans (as determined at any time during the effectiveness of the Plan). No
Award may be granted if the number of shares to which such Award relates, when
added to the number of shares to which other then-outstanding Awards relate,
exceeds the number of shares then remaining available for issuance under this
Section 4. If all or any portion of an Award is forfeited, settled in cash, or
otherwise terminated without issuance of shares to the Participant, the shares
to which such Award or portion thereof related shall again be available for
Awards under the Plan; provided, however, that shares withheld in payment of the
exercise price of any Option or withholding taxes relating to Awards and shares
equal to the number of Shares surrendered in payment of the exercise price of
any Option or withholding taxes relating to Awards shall, for purposes of this
provision, be deemed not to have been issued to the Participant in connection
with such Awards under the Plan. The Committee may adopt procedures for the
counting of shares relating to any Award to ensure appropriate counting and
avoid double counting (in the case of tandem or substitute awards). Any shares
of Stock issued pursuant to an Award may consist, in whole or in part, of
authorized and unissued shares, treasury shares, or shares acquired in the
market for the account of the Participant (which treasury shares or acquired
shares will be deemed to have been "issued" pursuant to such Award).
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(b) Annual Individual Limitations. During any calendar year, no Participant
may be granted Options, SARs, and other Awards under the Plan with respect to
more than 300,000 shares of Stock, subject to adjustment as provided in Section
4(c). For purposes of this Section 4(b), unless more restrictive counting is
required in order for Awards to comply with the requirements of Code Section
162(m) and regulations thereunder, this provision will limit the maximum number
of shares that can be issued to a Participant under Awards (taking into
consideration the terms of the Awards, including tandem exercise provisions). In
addition, no Annual Incentive Award or Awards granted to a Participant in
respect of any one calendar year may be settled by payment of an amount that
exceeds four percent of the Company's pre-tax operating income (determined under
generally accepted accounting principles) for that year.
(c) Adjustments. In the event that the Committee shall determine that any
dividend or other distribution in the form of Stock or property other than cash,
other special, large, and non-recurring dividends or distributions,
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Participants under the Plan, then the Committee shall, in such manner
as it may deem equitable, adjust any or all of (i) the number and kind of shares
of Stock reserved and available for Awards under Section 4(a), (ii) the number
and kind of shares of outstanding Restricted Stock or relating to any other
outstanding Award in connection with which shares have been issued, (iii) the
number and kind of shares that may be issued in respect of other outstanding
Awards, (iv) the exercise price, grant price, or purchase price relating to any
Award (or, if deemed appropriate, the Committee may make provision for a cash
payment with respect to any outstanding Award), and (v) the number of shares
with respect to which Options, SARs, and other Awards may be granted to a
Participant in any calendar year, as set forth in Section 4(b). In addition, the
Committee is authorized to make adjustments in the terms and conditions of, and
the criteria included in, Awards (including Performance Awards and performance
goals, and Annual Incentive Awards and any performance goals relating thereto)
in recognition of unusual or nonrecurring events (including, without limitation,
events described in the preceding sentence) affecting the Company or any
subsidiary or the financial statements of the Company or any subsidiary, or in
response to changes in applicable laws, regulations, or accounting principles.
The foregoing notwithstanding, no adjustments shall be authorized under this
Section 4(c) with respect to ISOs or SARs in tandem therewith to the extent that
such authority would cause the Plan or such Awards to fail to comply with
Section 422 of the Code, and no such adjustment shall be authorized with respect
to Options, SARs, Annual Incentive Awards, or other Awards subject to Section 8
to the extent that such authority would cause such Awards intended to qualify as
"qualified performance-based compensation" under Section 162(m)(4)(C) of the
Code and regulations thereunder to fail to so qualify.
5. Eligibility. Executive officers and other key employees of the Company
and its subsidiaries (including any director of the Company who is also an
executive officer or key employee), and consultants to the Company and its
subsidiaries and directors of any subsidiary (excluding any
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director of the Company who would be eligible solely due to service as such
a consultant or subsidiary director), are eligible to be granted Awards under
the Plan. The foregoing notwithstanding, no member of the Committee shall be
eligible to be granted Awards under the Plan.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set forth in
this Section 6. In addition, the Committee may impose on any Award or the
exercise thereof, at the date of grant or thereafter (subject to Section 10(e)),
such additional terms and conditions, not inconsistent with the provisions of
the Plan, as the Committee shall determine, including terms requiring forfeiture
of Awards in the event of termination of employment or service by the
Participant or upon the occurrence of other events. Except as expressly provided
by the Committee (including for purposes of complying with requirements of the
Nevada General Corporation Law relating to lawful consideration for issuance of
shares), no consideration other than for services will be required for the grant
(but not the exercise) of any Award.
(b) Options. The Committee is authorized to grant Options to Participants
(including "reload" options automatically granted to offset specified exercises
of options) on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock purchasable under
an Option shall be determined by the Committee; provided, however, that, except
as provided in Section 7(a), such exercise price shall be not less than the Fair
Market Value of a share on the date of grant of such Option.
(ii) Time and Method of Exercise. The Committee shall determine the time or
times at which an Option may be exercised in whole or in part, the methods by
which such exercise price may be paid or deemed to be paid, the form of such
payment, including, without limitation, cash, Stock, other Awards or awards
granted under other Company plans, or other property (including notes or other
contractual obligations of Participants to make payment on a deferred basis,
such as through "cashless exercise" arrangements, to the extent permitted by
applicable law), and the methods by which Stock will be delivered or deemed to
be delivered to Participants.
(iii) ISOs. The terms of any ISO granted under the Plan shall comply in all
respects with the provisions of Section 422 of the Code, including but not
limited to the requirement that no ISO shall be granted more than ten years
after the effective date of the Plan. Anything in the Plan to the contrary
notwithstanding, no term of the Plan relating to ISOs shall be interpreted,
amended, or altered, nor shall any discretion or authority granted under the
Plan be exercised, so as to disqualify either the Plan or any ISO under Section
422 of the Code, unless the Participant has first requested such
disqualification.
(c) Stock Appreciation Rights. The Committee is authorized to grant SARs to
Participants on
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the following terms and conditions:
(i) Right to Payment. An SAR shall confer on the Participant to whom it is
granted a right to receive, upon exercise thereof, the excess of (A) the Fair
Market Value of one share of Stock on the date of exercise (or, if the Committee
shall so determine in the case of any such right other than one related to an
ISO, the Fair Market Value of one share at any time during a specified period
before or after the date of exercise), over (B) the grant price of the SAR as
determined by the Committee as of the date of grant of the SAR, which, except as
provided in Section 7(a), shall be not less than the Fair Market Value of one
share of Stock on the date of grant.
(ii) Other Terms. The Committee shall determine the time or times at which
an SAR may be exercised in whole or in part, the method of exercise, method of
settlement, form of consideration payable in settlement, method by which Stock
will be delivered or deemed to be delivered to Participants, whether or not an
SAR shall be in tandem with any other Award, and any other terms and conditions
of any SAR. Limited SARs that may only be exercised upon the occurrence of a
Change of Control (as such term is defined in Section 10(b) or as otherwise
defined by the Committee) may be granted on such terms, not inconsistent with
this Section 6(c), as the Committee may determine. Such Limited SARs may be
either freestanding or in tandem with other Awards.
(d) Restricted Stock. The Committee is authorized to grant Restricted Stock
to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to such
restrictions on transferability and other restrictions, if any, as the Committee
may impose, which restrictions may lapse separately or in combination at such
times, under such circumstances, in such installments, or otherwise as the
Committee may determine; provided, however, that Restricted Stock the grant of
which is not conditioned upon achievement of any performance objective shall be
subject to a restriction on transferability and a risk of forfeiture for a
period of not less than three years after the date of grant (except that the
Committee may accelerate the lapse of such restrictions in the event of the
Participant's termination of employment or service due to death, disability,
normal or approved early retirement, or involuntary termination by the Company
or a subsidiary without "cause," as defined by the Committee). Except to the
extent restricted under the terms of the Plan and any Award Agreement relating
to the Restricted Stock, a Participant granted Restricted Stock shall have all
of the rights of a stockholder including, without limitation, the right to vote
Restricted Stock or the right to receive dividends thereon.
(ii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment or service during the applicable restriction period,
Restricted Stock that is at that time subject to restrictions shall be forfeited
and reacquired by the Company; provided, however, that the Committee may
provide, by rule or regulation or in any Award Agreement, or may determine in
any individual case, that restrictions or forfeiture conditions relating to
Restricted Stock will be waived in whole or in part in the event of terminations
resulting from specified causes, except as otherwise
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provided in Section 6(d)(i).
(iii) Certificates for stock. Restricted Stock granted under the Plan may
be evidenced in such manner as the Committee shall determine. If certificates
representing Restricted Stock are registered in the name of the Participant,
such certificates shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such Restricted Stock, the Company
shall retain physical possession of the certificate, and the Participant shall
have delivered a stock power to the Company, endorsed in blank, relating to the
Restricted Stock.
(iv) Dividends and Distributions. Dividends paid on Restricted Stock shall
be either paid at the dividend payment date in cash or in shares of unrestricted
Stock having a Fair Market Value equal to the amount of such dividends, or the
payment of such dividends shall be deferred and/or the amount or value thereof
automatically reinvested in additional Restricted Stock, other Awards, or other
investment vehicles, as the Committee shall determine or permit the Participant
to elect. Stock distributed in connection with a Stock split or Stock dividend,
and other property distributed as a dividend, shall be subject to restrictions
and a risk of forfeiture to the same extent as the Restricted Stock with respect
to which such Stock or other property is distributed.
(e) Deferred Stock. The Committee is authorized to grant Deferred Stock to
Participants, subject to the following terms and conditions:
(i) Award and Restrictions. Issuance of Stock will occur upon expiration of
the deferral period specified for an Award of Deferred Stock by the Committee
(or, if permitted by the Committee, as elected by the Participant). In addition,
Deferred Stock shall be subject to such restrictions as the Committee may
impose, if any, which restrictions may lapse at the expiration of the deferral
period or at earlier specified times, separately or in combination, under such
circumstances, in such installments, or otherwise as the Committee may
determine.
(ii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment or service during the applicable deferral period or
portion thereof to which forfeiture conditions apply (as provided in the Award
Agreement evidencing the Deferred Stock), all Deferred Stock that is at that
time subject to such risk of forfeiture shall be forfeited; provided, however,
that the Committee may provide, by rule or regulation or in any Award Agreement,
or may determine in any individual case, that restrictions or forfeiture
conditions relating to Deferred Stock will be waived in whole or in part in the
event of terminations resulting from specified causes.
(iii) Dividend Equivalents. The Committee may provide that payments in the
form of dividend equivalents will be credited in respect of Deferred Stock,
which amounts may be paid or distributed when accrued or deemed reinvested in
additional Deferred Stock.
(f) Bonus Stock and Awards in Lieu of Cash Obligations. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu
of Company obligations to pay cash
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under other plans or compensatory arrangements. Stock or Awards granted
hereunder shall be subject to such other terms as shall be determined by the
Committee.
(g) Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other Awards
that may be denominated or payable in, valued in whole or in part by reference
to, or otherwise based on, or related to, Stock and factors that may influence
the value of Stock, as deemed by the Committee to be consistent with the
purposes of the Plan, including, without limitation, convertible or exchangeable
debt securities, other rights convertible or exchangeable into Stock, purchase
rights for Stock, Awards with value and payment contingent upon performance of
the Company or any other factors designated by the Committee, and Awards valued
by reference to the book value of Stock or the value of securities of or the
performance of specified subsidiaries. The Committee shall determine the terms
and conditions of such Awards. Stock issued pursuant to an Award in the nature
of a purchase right granted under this Section 6(g) shall be purchased for such
consideration, paid for at such times, by such methods, and in such forms,
including, without limitation, cash, Stock, other Awards, or other property, as
the Committee shall determine. Cash awards, as an element of or supplement to
any other Award under the Plan, may be granted pursuant to this Section 6(g).
7. Certain Provisions Applicable to Awards.
(a) Stand-alone, Additional, Tandem, and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with, or in substitution for, any other Award
granted under the Plan or any award granted under any other plan of the Company,
any subsidiary, or any business entity to be acquired by the Company or a
subsidiary, or any other right of a Participant to receive payment from the
Company or any subsidiary. Awards granted in addition to or in tandem with other
Awards or awards may be granted either as of the same time as or a different
time from the grant of such other Awards or awards. The per share exercise price
of any Option, grant price of any SAR, or purchase price of any other Award
conferring a right to purchase Stock granted in substitution for an outstanding
Award or award may be adjusted to reflect the in-the-money value of the
surrendered Award or award.
(b) Term of Awards. The term of each Award shall be for such period as may
be determined by the Committee; provided, however, that in no event shall the
term of any ISO or an SAR granted in tandem therewith exceed a period of ten
years from the date of its grant (or such shorter period as may be applicable
under Section 422 of the Code).
(c) Form of Payment Under Awards. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company or a subsidiary
upon the grant or exercise of an Award may be made in such forms as the
Committee shall determine, including, without limitation, cash, Stock, other
Awards, or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. Such payments may include, without
limitation, provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant or
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crediting of dividend equivalents in respect of installment or deferred
payments denominated in Stock.
(d) Rule 16b-3 Compliance.
(i) Six-Month Holding Period. Unless a Participant could otherwise dispose
of equity securities (including derivative securities) acquired under the Plan
without incurring liability under Section 16(b) of the Exchange Act, equity
securities acquired under the Plan must be held for a period of six months
following the date of such acquisition, provided that this condition shall be
satisfied with respect to a derivative security if at least six months elapse
from the date of acquisition of the derivative security to the date of
disposition of the derivative security (other than upon exercise or conversion)
or its underlying equity security.
(ii) Compliance Generally. With respect to a Participant who is then
subject to the reporting requirements of Section 16(a) of the Exchange Act in
respect of the Company, the Committee shall implement transactions under the
Plan and administer the Plan in a manner that will ensure that each transaction
by such a Participant is exempt from liability under Rule 16b-3, except that
this provision shall not limit sales by such a Participant, and such a
Participant may engage in other non-exempt transactions under the Plan if
written notice is given to the Participant regarding the non-exempt nature of
such transaction. The Committee may authorize the Company to repurchase any
Award or shares of Stock resulting from any Award in order to prevent a
Participant who is subject to Section 16 of the Exchange Act from incurring
liability under Section 16(b). Unless otherwise specified by the Participant,
equity securities or derivative securities acquired under the Plan which are
disposed of by a Participant shall be deemed to be disposed of in the order
acquired by the Participant.
(e) Loan Provisions. With the consent of the Committee, and subject at all
times to, and only to the extent, if any, permitted under and in accordance
with, laws and regulations and other binding obligations or provisions
applicable to the Company, the Company may make, guarantee, or arrange for a
loan or loans to a Participant with respect to the exercise of any Option or
other payment in connection with any Award, including the payment by a
Participant of any or all federal, state, or local income or other taxes due in
connection with any Award. Subject to such limitations, the Committee shall have
full authority to decide whether to make a loan or loans hereunder and to
determine the amount, terms, and provisions of any such loan or loans, including
the interest rate to be charged in respect of any such loan or loans, whether
the loan or loans are to be with or without recourse against the borrower, the
terms on which the loan is to be repaid and conditions, if any, under which the
loan or loans may be forgiven.
8. Performance and Annual Incentive Awards.
(a) Performance Conditions. The right of a Participant to exercise or
receive a grant or settlement of any Award, and the timing thereof, may be
subject to such performance conditions as
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may be specified by the Committee. The Committee may use such business
criteria and other measures of performance as it may deem appropriate in
establishing any performance conditions, and may exercise its discretion to
reduce or increase the amounts payable under any Award subject to performance
conditions, except as limited under Sections 8(b) and 8(c) hereof in the case of
a Performance Award or Annual Incentive Award intended to qualify under Code
Section 162(m).
(b) Performance Awards Granted to Designated Employees. If the Committee
determines that a Performance Award to be granted to an eligible person who is
designated by the Committee as likely to be a "covered employee" (as such term
is used in the regulations under Section 162(m)) with respect to a specified
fiscal year (a "Covered Employee") should qualify as "performance-based
compensation" for purposes of Code Section 162(m), the grant, exercise, and/or
settlement of such Performance Award shall be contingent upon achievement of
preestablished performance goals and other terms set forth in this Section 8(b).
(i) Performance Goals Generally. The performance goals for such Performance
Awards shall consist of one or more business criteria and a targeted level or
levels of performance with respect to each of such criteria, as specified by the
Committee consistent with this Section 8(b). Performance goals shall be
objective and shall otherwise meet the requirements of Code Section 162(m) and
regulations thereunder (including Regulation 1.162-27 and successor regulations
thereto), including the requirement that the level or levels of performance
targeted by the Committee result in the achievement of performance goals being
"substantially uncertain." The Committee may determine that such Performance
Awards shall be granted, exercised, and/or settled upon achievement of any one
performance goal or that two or more of the performance goals must be achieved
as a condition to the grant, exercise, and/or settlement of such Performance
Awards. Performance goals may differ for Performance Awards granted to any one
Participant or to different Participants.
(ii) Business Criteria. One or more of the following business criteria for
the Company, on a consolidated basis, and/or for specified subsidiaries or
business units of the Company (except with respect to the annual earnings or
earnings per share and total stockholder return criteria), shall be used by the
Committee in establishing performance goals for such Performance Awards: (1)
annual return on equity; (2) annual earnings per share; (3) changes in annual
revenues; (4) operating income; (5) total stockholder return; and/or (6)
strategic business criteria, consisting of one or more objectives based on
meeting specified revenue, market penetration, geographic business expansion
goals, cost targets, and goals relating to acquisitions or divestitures. The
targeted level or levels of performance with respect to such business criteria
may be established at such levels and in such terms as the Committee may
determine, in its discretion, including in absolute terms, as a goal relative to
performance in prior periods, or as a goal compared to the performance of one or
more comparable companies or an index covering multiple companies.
(iii) Performance Period; Timing for Establishing Performance Goals.
Achievement of performance goals in respect of such Performance Awards shall be
measured over a performance
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period specified by the Committee. Performance goals shall be established
not later than 90 days after the beginning of any performance period applicable
to such Performance Awards, or at such other date as may be required or
permitted for "performance-based compensation" under Code Section 162(m).
(iv)
Settlement of Performance Awards; Other Terms. Settlement of such Performance
Awards shall be in Stock, other Awards, or other property, in the discretion of
the Committee. The Committee may, in its discretion, reduce the amount of a
settlement otherwise to be made in connection with such Performance Awards, but
may not exercise discretion to increase any such amount payable to a Covered
Employee in respect of a Performance Award subject to this Section 8(b). The
Committee shall specify the circumstances in which such Performance Awards shall
be paid or forfeited in the event of termination of employment by the
Participant or other event (including a Change of Control) prior to the end of a
performance period or settlement of Performance Awards.
(c) Annual Incentive Awards Granted to Designated Covered Employees. The
Committee may grant an Annual Incentive Award under the Plan to a person who is
designated by the Committee as a Covered Employee. Such Annual Incentive Award
will be intended to qualify as "performance-based compensation" for purposes of
Code Section 162(m), and therefore its grant, exercise, and/or settlement shall
be contingent upon achievement of preestablished performance goals and other
terms set forth in this Section 8(c).
(i) Grant of Annual Incentive Awards. Not later than the end of the 90th
day of each fiscal year, or at such other date as may be required or permitted
in the case of Awards intended to be "performance-based compensation" under Code
Section 162(m), the Committee shall determine the Covered Employees who will
potentially receive Annual Incentive Awards, and the amount(s) potentially
payable thereunder, for that fiscal year. The amount(s) potentially payable
shall be based upon the achievement of a performance goal or goals based on one
or more of the business criteria set forth in Section 8(b)(ii) hereof in the
given performance year, as specified by the Committee. The Committee may
designate an annual incentive award pool as the means by which Annual Incentive
Awards will be measured, provided that the portion of such pool potentially
payable to the Covered Employee shall be preestablished. In all cases, the
maximum Annual Incentive Award of any Participant shall be subject to the
limitation set forth in Section 5 hereof.
(ii) Payout of Annual Incentive Awards. After the end of each fiscal year,
the Committee shall determine the amount, if any, of the Annual Incentive Award
for that fiscal year payable to each Participant. The Committee may, in its
discretion, determine that the amount payable to any Participant as a final
Annual Incentive Award shall be reduced from the amount of his or her potential
Annual Incentive Award, including a determination to make no final Award
whatsoever, but may not exercise discretion to increase any such amount. The
Committee shall specify the circumstances in which an Annual Incentive Award
shall be paid or forfeited in the event of termination of employment by the
Participant or other event (including a Change of Control) prior to the end of a
fiscal year or settlement of such Annual Incentive Award.
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(d) Written Determinations. Determinations by the Committee as to the
establishment of performance goals, the amount potentially payable in respect of
Performance Awards and Annual Incentive Awards, the achievement of performance
goals relating to Performance Awards and Annual Incentive Awards, and the amount
of any final Performance Award and Annual Incentive Award shall be recorded in
writing, except in the case of Performance Awards not intended to qualify under
Section 162(m). Specifically, the Committee shall certify in writing, in a
manner conforming to applicable regulations under Section 162(m), prior to
settlement of each such Award granted to a Covered Employee, that the
performance objective relating to operating profits and other material terms of
the Award upon which settlement of the Award was conditioned have been
satisfied. The Committee may not delegate any responsibility relating to such
Performance Awards or Annual Incentive Awards, and the Board shall not perform
such functions at any time that the Committee is composed solely of members who
qualify as "outside directors" under the Section 162(m) regulations.
9. Change of Control Provisions.
(a) Effect of Change of Control. In the event of a "Change of Control," as
defined in this Section, the following acceleration provisions shall apply:
(i) any outstanding Award carrying a right to exercise which Award was not
previously exercisable and vested, shall become fully exercisable and vested,
subject only to the restrictions set forth in Sections 7(d)(i) and 10(a); and
(ii) The restrictions, deferral of settlement, and forfeiture conditions
applicable to any other outstanding Award, other than an Annual Incentive Award,
granted six months or more before the date of the Change of Control shall lapse
and such Award shall be deemed fully vested, subject to the restrictions set
forth in Sections 7(d)(i) and 10(a).
(b) Definition of Change of Control. For purposes of the Plan, a "Change of
Control" means a transaction or event in which, after the effective date of the
Plan, (i) the Company shall merge or consolidate with any other corporation and
shall not be the surviving corporation; (ii) the Company shall transfer all or
substantially all of its assets to any other person; or (iii) any person shall
have become the beneficial owner of more than 50% of the voting power of
outstanding voting securities of the Company.
10. General Provisions.
(a) Compliance with Laws and Obligations. The Company shall not be
obligated to issue or deliver Stock in connection with any Award or take any
other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended, or any other federal or
state securities law, any requirement under any listing agreement between the
Company and any national securities exchange or automated quotation system, or
any other law, regulation,
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or contractual obligation of the Company, until the Company is satisfied
that such laws, regulations, and other obligations of the Company have been
complied with in full. Certificates representing shares of Stock issued under
the Plan will be subject to such stop-transfer orders and other restrictions as
may be applicable under such laws, regulations, and other obligations of the
Company, including any requirement that a legend or legends be placed thereon.
(b) Limitations on Transferability. Awards and other rights under the Plan
will not be transferable by a Participant except by will or the laws of descent
and distribution (or to a designated Beneficiary in the event of the
Participant's death), and, if exercisable, shall be exercisable during the
lifetime of a Participant only by such Participant or his guardian or legal
representative; provided, however, that such Awards and other rights (other than
ISOs and SARs in tandem therewith) may be transferred during the lifetime of the
Participant, for purposes of the Participant's estate planning or other purposes
consistent with the purposes of the Plan (as determined by the Committee), and
may be exercised by such transferees in accordance with the terms of such Award,
but only if and to the extent then consistent with the registration of the offer
and sale of Stock on Form S-8 or Form S-3 or such other registration form of the
Securities and Exchange Commission as may then be filed and effective with
respect to the Plan, and permitted by the Committee. Awards and other rights
under the Plan may not be pledged, mortgaged, hypothecated, or otherwise
encumbered, and shall not be subject to the claims of creditors.
(c) No Right to Continued Employment; Leaves of Absence. Neither the Plan
nor any action taken hereunder shall be construed as giving any employee,
consultant, subsidiary director, or other person the right to be retained in the
employ or service of the Company or any of its subsidiaries, nor shall it
interfere in any way with the right of the Company or any of its subsidiaries to
terminate any persons's employment or service at any time. Unless otherwise
specified in the applicable Award Agreement, an approved leave of absence shall
not be considered a termination of employment or service for purposes of an
Award under the Plan.
(d) Taxes. The Company and any subsidiary is authorized to withhold from
any Award granted or to be settled, any delivery of Stock in connection with an
Award, any other payment relating to an Award, or any payroll or other payment
to a Participant amounts of withholding and other taxes due or potentially
payable in connection with any transaction involving an Award, and to take such
other action as the Committee may deem advisable to enable the Company and
Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax obligations.
(e) Changes to the Plan and Awards. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of stockholders or Participants, except that
any amendment or alteration shall be subject to the approval of the Company's
stockholders at or before the next annual meeting of stockholders for which the
record date is after the date of such Board action if such stockholder approval
is required
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by any federal or state law or regulation or the rules of any stock
exchange or automated quotation system on which the Stock may then be listed or
quoted, and the Board may otherwise, in its discretion, determine to submit
other such amendments or alterations to stockholders for approval; provided,
however, that, without the consent of an affected Participant, no such action
may materially impair the rights of such Participant under any Award theretofore
granted to him. The Committee may waive any conditions or rights under, or
amend, alter, suspend, discontinue, or terminate, any Award theretofore granted
and any Award Agreement relating thereto; provided, however, that, without the
consent of an affected Participant, no such action may materially impair the
rights of such Participant under such Award.
(f) No Rights to Awards; No Stockholder Rights. No Participant or other
person shall have any claim to be granted any Award under the Plan, and there is
no obligation for uniformity of treatments of Participants, employees,
consultants, or subsidiary directors. No Award shall confer on any Participant
any of the rights of a stockholder of the Company unless and until Stock is duly
issued or transferred and delivered to the Participant in accordance with the
terms of the Award or, in the case of an Option, the Option is duly exercised.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of the Company;
provided, however, that the Committee may authorize the creation of trusts or
make other arrangements to meet the Company's obligations under the Plan to
deliver cash, Stock, other Awards, or other property pursuant to any Award,
which trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Committee otherwise determines with the consent of
each affected Participant.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements as it may deem desirable, including, without
limitation, the granting of awards otherwise than under the Plan, and such
arrangements may be either applicable generally or only in specific cases.
(i) No Fractional Shares. No fractional shares of Stock shall be issued or
delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards, or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) Compliance with Code Section 162(m). It is the intent of the Company
that Options, SARs, and other Awards designated as Awards to Covered Employees
subject to Section 8 shall constitute "qualified performance-based compensation"
within the meaning of Code Section 162(m) and regulations thereunder (including
Proposed Regulation 1.162-27). Accordingly, the terms of
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Sections 8(b), (c), and (d), including the definitions of Covered Employee
and other terms used therein, shall be interpreted in a manner consistent with
Code Section 162(m) and regulations thereunder. The foregoing notwithstanding,
because the Committee cannot determine with certainty whether a given
Participant will be a Covered Employee with respect to a fiscal year that has
not yet been completed, the term Covered Employee as used herein shall mean only
a person designated by the Committee, at the time of grant of Performance Awards
or an Annual Incentive Award, as likely to be a Covered Employee with respect to
a specified fiscal year. If any provision of the Plan or any agreement relating
to a Performance Award or Annual Incentive Award that is designated as intended
to comply with Code Section 162(m) does not comply or is inconsistent with the
requirements of Code Section 162(m) or regulations thereunder, such provision
shall be construed or deemed amended to the extent necessary to conform to such
requirements, and no provision shall be deemed to confer upon the Committee or
any other person discretion to increase the amount of compensation otherwise
payable in connection with any such Award upon attainment of the applicable
performance objectives.
(k) Governing Law. The validity, construction, and effect of the Plan, any
rules and regulations under the Plan, and any Award Agreement will be determined
in accordance with the Nevada General Corporation Law and other laws (including
those governing contracts) of the State of Nevada, without giving effect to
principles of conflicts of laws, and applicable federal law.
(l) Effective Date, Stockholder Approval, and Plan Termination. The Plan
became effective May 16, 1995, upon its approval by stockholders of the Company.
The 1998 amendment and restatement of the Plan shall be subject to the approval
of the stockholders of the Company by the vote required by Section 78.320.1(b)
of the Nevada Revised Statutes at the 1998 Annual Meeting of Stockholders.
Unless earlier terminated by action of the Board of Directors, the Plan will
remain in effect until such time as no Stock remains available for delivery
under the Plan and the Company has no further rights or obligations under the
Plan with respect to outstanding Awards under the Plan.
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EXHIBIT 10.5
SIERRA HEALTH SERVICES, INC.
1995 NON-EMPLOYEE DIRECTORS' STOCK PLAN
As Amended and Restated through May 18, 1998
1. Purpose. The purpose of this 1995 Non-Employee Directors' Stock Plan
(the "Plan") of Sierra Health Services, Inc. (the "Company") is to advance the
interests of the Company and its stockholders by providing a means to attract
and retain highly qualified persons to serve as non-employee directors of the
Company and to promote ownership by such directors of a greater proprietary
interest in the Company, thereby aligning such directors' interests more closely
with the interests of stockholders of the Company.
2. Definitions. In addition to terms defined elsewhere in the Plan, the
following terms are defined as set forth below:
(a) "Code" means the Internal Revenue Code of 1986, as amended from time to
time. References to any provision of the Code include regulations thereunder and
successor provisions and regulations thereto.
(b) "Change of Control" means a transaction or event in which, after the
effective date of the Plan, (i) the Company shall merge or consolidate with any
other corporation and shall not be the surviving corporation; (ii) the Company
shall transfer all or substantially all of its assets to any other person; or
(iii) any person shall have become the beneficial owner of more than 50% of the
voting power of outstanding voting securities of the Company.
(c) "Deferred Stock" means the credits to a Participant's deferral account
under Section 7, each of which represents the right to receive one share of
Stock upon settlement of the deferral account. Deferral accounts, and Deferred
Stock credited thereto, are maintained solely as bookkeeping entries by the
Company evidencing unfunded obligations of the Company.
(d) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
References to any provision of the Exchange Act include rules thereunder and
successor provisions and rules thereto.
(e) "Fair Market Value" of Stock means, as of any given date, the closing
sale price of a share of Stock reported in the table entitled "New York Stock
Exchange Composite Transactions" contained in The Wall Street Journal (or an
equivalent successor table) for such date or, if no such closing price was
reported for such date, for the most recent trading day prior to such date for
which such closing price was reported.
(f) "Option" means the right, granted to a director under Section 6, to
purchase a specified
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number of shares of Stock at the specified exercise price for a specified
period of time under the Plan. All Options will be non-qualified stock options.
(g) "Participant" means a director of the Company who is granted an Option
or who receives fees in the form of Stock or defers fees in the form of Deferred
Stock under the Plan.
(h) "Retirement" means a Participant ceasing to serve as a director at or
after reaching age 75, other than due to death.
(i) "Stock" means the Common Stock, $.005 par value, of the Company and
such other securities as may be substituted for Stock or such other securities
pursuant to Section 8.
3. Shares Available Under the Plan. Subject to adjustment as provided in
Section 8, the total number of shares of Stock reserved and available for
issuance under the Plan is 90,000. Such shares may be authorized but unissued
shares, treasury shares, or shares acquired in the market for the account of the
Participant. For purposes of the Plan, shares that may be purchased upon
exercise of an Option or delivered in settlement of Deferred Stock will not be
considered to be available after such Option has been granted or Deferred Stock
credited, except for purposes of issuance in connection with such Option or
Deferred Stock; provided, however, that, if an Option expires for any reason
without having been exercised in full, the shares subject to the unexercised
portion of such Option will again be available for issuance under the Plan.
4. Administration of the Plan. The Plan will be administered by the Board
of Directors of the Company; provided, however, that any action by the Board
relating to the Plan will be taken only if, in addition to any other required
vote, such action is approved by the affirmative vote of a majority of the
directors who are not then eligible to participate in the Plan.
5. Eligibility. Each director of the Company who, on any date on which an
Option is to be granted under Section 6 or on which fees are to be paid which
could be received in the form of Stock or deferred in the form of Deferred Stock
under Section 7, is not an employee of the Company or any subsidiary of the
Company will be eligible, at such date, to be granted an Option under Section 6
or receive fees in the form of Stock or defer fees in the form of Deferred Stock
under Section 7. No person other than those specified in this Section 5 will be
eligible to participate in the Plan.
6. Options. An Option to purchase 7,500 shares of Stock, subject to
adjustment as provided in Section 8, will be automatically granted (i) to a
person who is first elected or appointed to serve as a member of the Board of
Directors of the Company after the effective date of the Plan, on the date of
such election or appointment, if such director is eligible to be granted an
Option at that date, and (ii) to each member of the Board of Directors of the
Company on January 20, 1996 and on each January 20 thereafter if such director
is eligible to be granted an Option at that date and has not otherwise been
granted an Option under this Section 6 during the six-month period prior to and
including the date the Option would otherwise be granted hereunder. Options will
be subject to the
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following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock purchasable upon
exercise of an Option will be equal to 100% of the Fair Market Value of Stock on
the date of grant of the Option.
(b) Option Expiration. A Participant's Option will expire at the earlier of
(i) ten years after the date of grant, (ii) one year after the date the
Participant ceases to serve as a director of the Company due to death,
disability, or Retirement, or (iii) six months after the Participant ceases to
serve as a director of the Company for any reason other than death, disability
or Retirement; provided, however, that, if the Participant dies during the one
year after ceasing to serve as a director due to disability or Retirement or
during the six months after ceasing to serve as a director for reasons other
than disability or Retirement, the expiration shall be delayed until the earlier
of one year after the Participant's death or ten years after the date of grant
of the Option.
(c) Exercisability. Each Option will become cumulatively exercisable as to
20% of the shares of Stock subject to such Option on each anniversary of the
date of grant; provided, however, that a Participant's Option, to the extent it
has not previously become exercisable, will become immediately exercisable in
full (i) at the time the Participant ceases to serve as a director due to death
or disability, (ii) at the date six months prior to the expiration of the
Participant=s term of office as a director during which term the Participant
reaches age 75, if the Participant continues to serve as a director at such
vesting date, or (iii), in the case of an Option granted six months or more
prior to a Change of Control, upon such Change of Control; and provided further,
that a Participant's Option may be exercised after the Participant ceases to
serve as a director only to the extent that the Option was exercisable at or
before the date he or she ceased to be a director.
(d) Method of Exercise. A Participant may exercise an Option, in whole or
in part, at such time as it is exercisable and prior to its expiration, by
giving written notice of exercise to the Secretary of the Company, specifying
the Option to be exercised and the number of shares of Stock to be purchased,
and paying in full the exercise price in cash (including by check) or by
surrender of shares of Stock already owned by the Participant (except for shares
acquired from the Company by exercise of an option less than six months before
the date of surrender) having a Fair Market Value at the time of exercise equal
to the exercise price, or by a combination of cash and Stock.
7. Receipt of Stock or Deferred Stock in lieu of Fees. Each director of the
Company may, in lieu of receipt of fees in his or her capacity as a director
(including annual retainer fees for service on the Board, fees for service on a
Board committee, fees for service as chairman of a Board committee, and any
other fees paid to directors) in cash, receive such fees in the form of Stock or
defer receipt of such fees in the form of Deferred Stock in accordance with this
Section 7; provided, however, that such director is eligible to do so under
Section 5 at the date any such fee is otherwise payable.
(a) Elections. Each director who elects to receive fees for a given
calendar year in the form of
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Stock or to defer fees in the form of Deferred Stock for such year must
file an irrevocable written election with the Secretary of the Company on or
before such filing deadline as may be specified by the Secretary; provided,
however, that any newly elected or appointed director may file an election not
later than 30 days after the date such person first became a director, in which
case such election shall apply to fees payable for services performed after the
date of such filing. An election by a director shall be deemed to be continuing
and therefore applicable to subsequent Plan years unless the director revokes or
changes such election by filing a new election form by the due date for such
form specified in this Section 7(a). The election must specify the following:
(i) A percentage of fees to be received in the form of Stock or deferred in
the form of Deferred Stock under the Plan; and
(ii) In the case of a deferral, the period or periods during which
settlement of Deferred Stock will be deferred (subject to such limitations as
may be specified by counsel to the Company).
If required in order that transactions under this Section 7 shall be exempt
under Rule 16b-3(d), elections under this Section 7 shall be reviewed by the
Board of Directors and resulting transactions approved, for purposes of Rule
16b-3 under the Exchange Act, at the Board's first meeting at or following the
date by which the election has become irrevocable; failure of the Board to
approve transactions resulting from elections shall not, however, invalidate the
elections or preclude such transactions.
(b) Payment of Fees in the Form of Stock. At any date on which fees are
payable to a Participant who has elected to receive such fees in the form of
Stock, the Company will issue to such Participant, or to an account maintained
by a third party and designated by such Participant, a number of shares of Stock
having an aggregate Fair Market Value at that date equal to the fees, or as
nearly as possible equal to the fees (but in no event greater than the fees),
that would have been payable at such date but for the Participant's election to
receive Stock in lieu thereof. If the Stock is to be credited to an account
maintained by the Participant and to the extent reasonably practicable without
requiring the actual issuance of fractional shares, the Company shall cause
fractional shares to be credited to the Participant's account. If fractional
shares are not so credited, any part of the Participant's fees not paid in the
form of whole shares of Stock will be payable in cash to the Participant (either
separately or included in a subsequent payment of fees, including a subsequent
payment of fees subject to an election under this Section 7).
(c) Deferral of Fees in the Form of Deferred Stock. The Company will
establish a deferral account for each Participant who elects to defer fees in
the form of Deferred Stock under this Section 7. At any date on which fees are
payable to a Participant who has elected to defer fees in the form of Deferred
Stock, the Company will credit such Participant's deferral account with a number
of shares of Deferred Stock equal to the number of shares of Stock having an
aggregate Fair Market Value at that date equal to the fees that otherwise would
have been payable at such date but for the Participant's election to defer
receipt of such fees in the form of Deferred Stock. The amount of
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Deferred Stock so credited shall include fractional shares calculated to at
least three decimal places.
(d) Crediting of Dividend Equivalents. Whenever dividends are paid or
distributions made with respect to Stock, a Participant to whom Deferred Stock
is then credited in a deferral account shall be entitled to be receive, as
dividend equivalents, an amount equal in value to the amount of the dividend
paid or property distributed on a single share of Stock multiplied by the number
of shares of Deferred Stock (including any fractional share) credited to his or
her deferral account as of the record date for such dividend or distribution.
Such dividend equivalents shall be credited to the Participant's deferral
account as a number of shares of Deferred Stock determined by dividing the
aggregate value of such dividend equivalents by the Fair Market Value of a share
of Stock at the payment date of the dividend or distribution.
(e) Settlement of Deferred Stock. The Company will settle the Participant's
deferral account by delivering to the Participant (or his or her beneficiary) a
number of shares of Stock equal to the number of whole shares of Deferred Stock
then credited to his or her deferral account (or a specified portion in the
event of any partial settlement), together with cash in lieu of any fractional
share remaining at a time that less than one whole share of Deferred Stock is
credited to such deferral account. Such settlement shall be made at the time or
times specified in the Participant's election filed in accordance with Section
7(a); provided, however, that a Participant may further defer settlement of
Deferred Stock if counsel to the Company determines that such further deferral
likely would be effective under applicable federal income tax laws and
regulations.
(f) Designation of Beneficiary. Each Participant may designate one or more
beneficiaries to receive the amounts distributable from the Participant's
deferral account under the Plan in the event of such Participant's death, and
the terms of any such distribution, on forms provided by the Company. The
Company may rely upon the beneficiary designation last filed in accordance with
this Section 7(f).
(g) Nonforfeitability. The interest of each Participant in any fees paid in
the form of Stock or Deferred Stock (and any deferral account relating thereto)
at all times will be nonforfeitable.
8. Adjustment Provisions.
(a) Corporate Transactions and Events. In the event any recapitalization,
reorganization, merger, consolidation, spin-off, combination, repurchase,
exchange of shares or other securities of the Company, stock split or reverse
split, stock dividend, other special, large, and non-recurring dividend,
liquidation, dissolution, or other similar corporate transaction or event
affects the Stock such that an adjustment is appropriate in order to prevent
dilution or enlargement of each Participant's rights under the Plan, then an
adjustment shall be made, in a manner that is proportionate to the change to the
Stock and otherwise equitable, in (i) the number and kind of shares of Stock
remaining available for issuance under the Plan, (ii) the number and kind of
shares of Stock to be subject to each automatic grant of an Option under Section
6, (iii) the number and kind of
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shares of Stock issuable upon exercise of outstanding Options, and/or the
exercise price per share thereof (provided that no fractional shares will be
issued upon exercise of any Option), (iv) the kind of shares of Stock to be
issued in lieu of fees under Section 7, and (v) the number and kind of shares of
Stock to be issued upon settlement of Deferred Stock under Section 7. The
foregoing notwithstanding, no adjustment may be made hereunder except as will be
necessary to maintain the proportionate interest of the Participant under the
Plan and to preserve, without exceeding, the value of outstanding Options and
potential grants of Options.
(b) Insufficient Number of Shares. If at any date an insufficient number of
shares of Stock are available under the Plan for the automatic grant of Options
or the receipt of fees in the form of Stock or deferral of fees in the form of
Deferred Stock at that date, Options will first be automatically granted
proportionately to each eligible director, to the extent shares are then
available (provided that no fractional shares will be issued upon exercise of
any Option) and otherwise as provided under Section 6, and then, if any shares
remain available, fees shall be paid in the form of Stock or deferred in the
form of Deferred Stock proportionately among directors then eligible to
participate to the extent shares are then available and otherwise as provided
under Section 7.
9. Changes to the Plan. The Board of Directors may amend, alter, suspend,
discontinue, or terminate the Plan or authority to grant Options or pay fees in
the form of Stock or Deferred Stock under the Plan without the consent of
stockholders or Participants, except that any amendment or alteration will be
subject to the approval of the Company's stockholders at or before the next
annual meeting of stockholders for which the record date is after the date of
such Board action if such stockholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system, and the Board may otherwise determine to submit other such
amendments or alterations to stockholders for approval; provided, however, that,
without the consent of an affected Participant, no such action may materially
impair the rights of such Participant with respect to any previously granted
Option or any previous payment of fees in the form of Stock or deferral of fees
in the form of Deferred Stock.
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10. General Provisions.
(a) Agreements. Options, Deferred Stock, and any other right under the Plan
may be evidenced by agreements or other documents executed by the Company and
the Participant incorporating the terms and conditions set forth in the Plan,
together with such other terms and conditions not inconsistent with the Plan, as
the Board of Directors may from time to time approve.
(b) Compliance with Laws and Obligations. The Company will not be obligated
to issue or deliver shares of Stock in connection with any Option, in payment of
any directors' fees, or in settlement of Deferred Stock in a transaction subject
to the registration requirements of the Securities Act of 1933, as amended, or
any other federal or state securities law, any requirement under any listing
agreement between the Company and any stock exchange or automated quotation
system, or any other law, regulation, or contractual obligation of the Company,
until the Company is satisfied that such laws, regulations, and other
obligations of the Company have been complied with in full. Certificates
representing shares of Stock issued under the Plan will be subject to such
stop-transfer orders and other restrictions as may be applicable under such
laws, regulations, and other obligations of the Company, including any
requirement that a legend or legends be placed thereon.
(c) Limitations on Transferability. Options, Deferred Stock, and any other
right under the Plan will not be transferable by a Participant except by will or
the laws of descent and distribution (or to a designated beneficiary in the
event of a Participant's death), and will be exercisable during the lifetime of
the Participant only by such Participant or his or her guardian or legal
representative; provided, however, that Options and Deferred Stock (and rights
relating thereto) may be transferred to one or more trusts or other
beneficiaries during the lifetime of the Participant for purposes of the
Participant's estate planning, and may be exercised by such transferees in
accordance with the terms thereof, but only if and to the extent then consistent
with the registration of the offer and sale of shares of Stock related thereto
on Form S-8, Form S-3, or such other registration form of the Securities and
Exchange Commission as may then be filed and effective with respect to the Plan.
Options, Deferred Stock, and other rights under the Plan may not be pledged,
mortgaged, hypothecated, or otherwise encumbered, and shall not be subject to
the claims of creditors of any Participant.
(d) Compliance with Rule 16b-3.
(i) Compliance Generally. With respect to a Participant who is then subject
to the reporting requirements of Section 16(a) of the Exchange Act in respect of
the Company, the Board shall implement transactions under the Plan and
administer the Plan in a manner that will ensure that each transaction by such a
Participant is exempt from liability under Rule 16b-3, except that such a
Participant may be permitted to engage in a non-exempt transaction under the
Plan if written notice is given to the Participant regarding the non-exempt
nature of such transaction. The Board may authorize the Company to repurchase
any Award or shares of Stock resulting from any Award in order to prevent a
Participant who is subject to Section 16 of the Exchange Act from incurring
Amended95NED071698
<PAGE>
liability under Section 16(b). Unless otherwise specified by the
Participant, equity securities or derivative securities acquired under the Plan
which are disposed of by a Participant shall be deemed to be disposed of in the
order acquired by the Participant.
Amended95NED071698
<PAGE>
(ii) Six-Month Holding Period. Unless a Participant could otherwise dispose
of equity securities (including derivative securities) acquired under the Plan
without incurring liability under Section 16(b) of the Exchange Act, equity
securities acquired under the Plan must be held for a period of six months
following the date of such acquisition, provided that this condition shall be
satisfied with respect to a derivative security if at least six months elapse
from the date of acquisition of the derivative security to the date of
disposition of the derivative security (other than upon exercise or conversion)
or its underlying equity security.
(e) Continued Service as an Employee. If a Participant ceases serving as a
director of the Company and, immediately thereafter, is employed by the Company
or any subsidiary of the Company, then, solely for purposes of Sections 6(b) and
(c), such Participant will not be deemed to have ceased service as a director at
that time and his or her continued employment by the Company or any subsidiary
will be deemed to be continued service as a director.
(f) NO RIGHT TO CONTINUE AS A DIRECTOR. Nothing contained in the Plan or
any agreement hereunder will confer upon any Participant any right to continue
to serve as a director of the Company.
(g) No Stockholder Rights Conferred. Nothing contained in the Plan or any
agreement hereunder will confer upon any Participant (or any person or entity
claiming rights by or through a Participant) any rights of a stockholder of the
Company unless and until shares of Stock are in fact issued to such Participant
(or person) or his or her account maintained by a third party or, in the case an
Option, such Option is validly exercised in accordance with Section 6.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board of Directors nor its submission to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board to adopt such other compensatory arrangements for directors as it may deem
desirable.
(i) Governing Law. The validity, construction, and effect of the Plan and
any agreement hereunder will be determined in accordance with the Nevada General
Corporation Law and other laws (including those governing contracts) of the
State of Nevada, without giving effect to principles of conflicts of laws, and
applicable federal law.
11. Stockholder Approval Effective Date, and Plan Termination. The Plan
became effective May 16, 1995, upon its approval by stockholders of the Company.
Unless earlier terminated by action of the Board of Directors, the Plan will
remain in effect until such time as no shares of Stock remain available for
issuance under the Plan and the Company and Participants have no further rights
or obligations under the Plan.
Amended95NED071698
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE
STATEMENTS OF CONSOLIDATED OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 73,273,000
<SECURITIES> 120,676,000
<RECEIVABLES> 96,221,000
<ALLOWANCES> 9,173,000
<INVENTORY> 0
<CURRENT-ASSETS> 326,513,000
<PP&E> 218,564,000
<DEPRECIATION> 56,611,000
<TOTAL-ASSETS> 783,288,000
<CURRENT-LIABILITIES> 237,150,000
<BONDS> 95,330,000
0
0
<COMMON> 140,000
<OTHER-SE> 295,999,000
<TOTAL-LIABILITY-AND-EQUITY> 783,288,000
<SALES> 0
<TOTAL-REVENUES> 454,954,000
<CGS> 0
<TOTAL-COSTS> 418,741,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,900,000
<INCOME-PRETAX> 33,313,000
<INCOME-TAX> 8,575,000
<INCOME-CONTINUING> 24,738,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,738,000
<EPS-PRIMARY> .90<F1>
<EPS-DILUTED> .89
<FN>
<F1>During the second quarter of 1998, the Company announced a
three-for-two
stock split effective May 18, 1998. Prior Financial Data
Schedules have
not been restated for the split.
</FN>
</TABLE>
