UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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
(State or other jurisdiction of
incorporation or organization)
88-0200415
(I.R.S. Employer Identification Number)
2724 NORTH TENAYA WAY
LAS VEGAS, NEVADA 89128
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 242-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on
which registered
Common Stock, par value $.005
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on February 27, 1998 was $585,195,000.
The number of shares of the registrant's common stock outstanding on
February 27, 1998 was 18,275,000.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Registrant's Current Report on Form 8-K dated Part I
March 19, 1998. Part II, Item 7
Portions of the registrant's definitive proxy Part III statement for its 1998
annual meeting to be filed with the SEC not later than 120 days after the end of
the fiscal year.
<PAGE>
SIERRA HEALTH SERVICES, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business ............................................. 1
Item 2. Properties............................................ 14
Item 3. Legal Proceedings..................................... 15
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 15
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters........................ 16
Item 6. Selected Financial Data............................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 18
Item 7a. Quantitative and Qualitative Disclosures
about Market Rate ................................ 28
Item 8. Financial Statements and Supplementary Data........... 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 59
PART III
Item 10. Directors and Executive Officers
of the Registrant................................. 59
Item 11. Executive Compensation................................ 59
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................. 59
Item 13. Certain Relationships and Related Transactions........ 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................... 60
i
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Sierra Health Services, Inc. ("Sierra") and its subsidiaries (collectively
referred to as the "Company"), is a managed health care organization that
provides and administers the delivery of comprehensive health care and workers'
compensation programs with an emphasis on quality care and cost management. The
Company's strategy has been to develop and offer a portfolio of managed health
care and workers' compensation products to employer groups and individuals. The
Company's broad range of managed health care services is provided through its
federally qualified and non-qualified health maintenance organizations ("HMOs"),
insurance companies, managed indemnity plans, a third-party administrative
services programs for employer-funded health benefit plans and workers'
compensation medical management programs. Ancillary products and services that
complement the Company's managed health care and workers' compensation product
lines are also offered.
During the third quarter of 1997, Sierra Military Health Services, Inc.
("SMHS"), a wholly owned subsidiary of the Company, was notified it had been
awarded a multi-year triple-option health benefits ("TRICARE") managed care
support contract by the Department of Defense to serve TRICARE eligible
beneficiaries in Region 1. This region includes more than 600,000 beneficiaries
in 13 northeastern states and the District of Columbia. SMHS is currently in the
implementation period of the contract with actual health care delivery to
commence on June 1, 1998. SMHS subcontracts for health care delivery, including
some of the risk, for parts of the TRICARE contract.
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 for Region 1 and recommended that the contract be
re-bid. The TRICARE Management Activity ("TMA"), along with the Company, has
filed a motion requesting that 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. The Company currently
anticipates providing health care delivery for one year of the contract in the
event a re-bid occurs. (See "Management's Discussion and Analysis Overview")
In June 1996, the Department of Defense awarded a five-year TRICARE contract to
TriWest Healthcare Alliance ("TriWest"), a consortium consisting of Sierra and
13 other health care companies, to provide health services to Regions 7 and 8,
which includes a total of 16 states. In April 1997, TriWest began providing
health care to approximately 700,000 individuals, of which Sierra is responsible
for providing care to approximately 93,000 beneficiaries in Nevada and Missouri.
In August 1997, the Company acquired the assets and operations of Total Home
Care, Inc. ("THC") for approximately $3.1 million, net of cash acquired. THC
provides home infusion, oxygen, and durable medical equipment services in Nevada
and Arizona. The Company sold the Arizona operations in the first quarter of
1998 for approximately $1.5 million. Also, in the first quarter of 1998, the
Company purchased three medical clinics in southern Nevada for approximately
$7.3 million.
Effective December 31, 1996, the Company purchased Prime Holdings, Inc.
("Prime") for approximately $31.2 million in cash. At December 31, 1996, Prime
operated Med One Health Plan, Inc., a 12,800 member HMO, and also served 215,000
people through preferred provider organizations ("PPOs"), workers' compensation
programs and administrative services products for self-insured employers and
union welfare funds primarily in the state of Nevada.
1
<PAGE>
The principal executive offices of the Company are located at 2724 North Tenaya
Way, Las Vegas, Nevada 89128, and its telephone number is (702) 242-7000.
Managed Care Products and Services
The Company's primary types of health care coverage are HMO plans, HMO Point of
Service ("POS") plans, and managed indemnity plans, which include a PPO option.
As of December 31, 1997, the Company provided HMO products to approximately
192,000 members. Of these HMO members, approximately 90% reside in Nevada. The
POS products allow members to choose one of the various coverage options when
medical services are required instead of one plan for the entire year. The
Company also provides managed indemnity products to approximately 64,000
members, Medicare supplement products to approximately 25,000 members, and
administrative services to approximately 328,000 members. Medical premiums
account for approximately 71% of total revenues, 79% of such medical premiums
are derived from southern Nevada.
Health Maintenance Organizations. The Company operates mixed group network model
HMOs in Nevada, and a network model HMO in Texas. Most of its managed health
care services in Nevada are provided through its independently contracted
network of over 2000 providers and 18 hospitals. These networks include the
Company's multi-specialty medical group, which provides medical services to
approximately 72% of the Company's Nevada HMO members and employs over 145
primary care and other providers in various medical specialties. The Company
directly provides home health care, hospice care and behavioral health care
services. In addition, the Company operates two 24-hour urgent care centers, a
radiology department, a vision department, an occupational medicine department
and two free-standing, state-licensed and Medicare-approved ambulatory surgery
centers. The Company believes that this vertical integration of its health care
delivery system provides a competitive advantage as it has helped it to manage
health care costs effectively while delivering quality care. As of December 31,
1997, the Texas HMO members were served by approximately 1500 independent
contracted providers and 32 hospitals. Contracted primary care physicians and
specialists for the HMOs are compensated on a capitation or modified
fee-for-service basis. Contracts with their primary hospitals are on a
capitation or discounted per diem basis. Members receive a wide range of
coverage after paying a nominal co-payment and are eligible for preventive care
coverage. The HMOs do not require deductibles, co-insurance or claim forms.
In addition to its commercial HMO plans, which involve traditional HMO benefits
and Point of Service benefits, the Company offers prepaid health care programs
for Medicare-eligible beneficiaries called Senior Dimensions in Nevada and parts
of Arizona and Golden Choice in Texas. Senior Dimensions is marketed directly to
Medicare-eligible beneficiaries in the Company's Nevada service area as well as
certain parts of Arizona. Federal legislation has been enacted which allows
delivery of health care to Medicare beneficiaries through HMOs. Such legislation
provides that the federal government will reimburse HMOs for health care
services to Medicare beneficiaries in an amount equal to 95% of the Medicare
payments to fee-for-service providers in a defined service area. As of December
31, 1997, approximately 33,000, or 19%, of the Company's total Nevada HMO
members were enrolled in Senior Dimensions. The Senior Dimensions plan enables
Medicare beneficiaries to reduce their out-of-pocket expenses and receive
additional benefits not covered by Medicare. During 1996 the Company's Texas HMO
received approval to offer a Medicare risk product and at December 31, 1997
approximately 3,000, or 18%, of the Company's total Texas members were enrolled
in Golden Choice.
Social Health Maintenance Organization. Effective November 1, 1996, the Company
entered into a multi-year Social HMO contract pursuant to which a large portion
of the Company's Medicare risk enrollees will receive certain expanded benefits.
Sierra was one of six HMOs nationally to be awarded this contract, and is
currently the only company to have implemented the program as of December 31,
1997. The Company receives additional revenues for providing these expanded
benefits. The additional revenues are determined based on health risk
assessments that have been, and will continue to be, performed on the
2
<PAGE>
Company's eligible Medicare risk members. The additional benefits include, among
other things, assisting the eligible Medicare risk members with typical daily
living functions such as bathing, dressing and walking. These members, as
identified in the health risk assessments, are ones who currently have
difficulty performing such daily living functions because of a health or
physical problem. The additional reimbursement will be subject to adjustment
based on the number of beneficiaries who need assistance with the social
problems noted above and their individual health risk assessments. The ultimate
payment received from the Health Care Financing Administration ("HCFA") will be
based on these and other factors. At this time, however, there can be no
assurance as to what the final per member reimbursement will be.
Preferred Provider Organizations. The Company also offers health insurance
through its PPO. The Company's managed indemnity plans generally offer insureds
the option of receiving their medical care from either non-contracted or
contracted providers. Insureds pay higher deductibles and co-insurance or
co-payments when they receive care from non-contracted providers. Out-of-pocket
costs are lowered by utilizing contracted providers who are part of the
Company's Nevada PPO network, consisting of approximately 2700 providers and 36
hospitals. As of December 31, 1997, approximately 64,000 members were enrolled
in Sierra's managed indemnity plans.
The Company currently provides managed indemnity and Medicare supplement
services to individuals in Nevada, Arizona, Colorado, Texas, California, New
Mexico, Missouri, Iowa and South Carolina. The Company is also exploring further
expansion in certain other states. As of December 31, 1997 the PPO is licensed
in a total of 37 states and the District of Columbia. During 1996 the Company
adopted a plan to restructure certain insurance operations to allow the Company
to focus on more favorable operating markets. This plan significantly reduced
the Company's presence in Arizona and Colorado for certain managed indemnity
products.
Workers' Compensation Subsidiary. On October 31, 1995, the Company acquired CII
Financial, Inc. ("CII"), for approximately $76.3 million of common stock in a
transaction accounted for as a pooling of interests. CII writes workers'
compensation insurance in the states of California, Colorado, Kansas, Missouri,
Nebraska, New Mexico, Texas and Utah. CII has licenses in 29 states and the
District of Columbia. California and Colorado represent approximately 83% and
9%, respectively, of CII's fully insured workers' compensation insurance
premiums in 1997. Workers' compensation insurance premiums account for
approximately 18% of the Company's total revenue. In conjunction with the
acquisition, a supplemental indenture was filed modifying CII's 7 1/2%
convertible subordinated debentures (the "Debentures"). As a result each $1,000
in principal is now convertible into 16.921 shares of Sierra's common stock at a
conversion price of $59.097 per share.
Administrative Services. The Company's administrative services products provide,
among other things, utilization review and PPO services to large employer groups
that are usually self-insured. As of December 31, 1997, approximately 328,000
members were enrolled in the Company's administrative services plans.
Effective September 30, 1997, the Company terminated its workers' compensation
administrative services contract with the state of Nevada. The contract served
approximately 200,000 enrollees and provided approximately $3.2 million in
revenues for the year ended December 31, 1997. The contract was terminated to
allow the Company to participate in the Nevada workers' compensation insurance
market when the state allows private insurance companies to begin offering
products, which is anticipated for 1999.
3
<PAGE>
Ancillary Medical Services. Among the ancillary medical services offered by the
Company are outpatient surgical care, diagnostic tests, medical and surgical
procedures, inpatient and outpatient laboratory tests, x-ray, CAT scans and
nuclear medicine services. The Company also provides home health care services,
a hospice program and mental health and substance abuse services. These services
are provided to members of the Company's HMOs, managed indemnity and
administrative services plans. The mental health and substance abuse services
are also provided to approximately 99,000 participants from non-affiliated
employer groups and an insurance company.
Marketing
The Company's marketing efforts for its commercial managed care products involve
a two-step process. The Company first makes presentations to employers and then
provides information directly to employees once the employer has decided to
offer the Company's products. Once a relationship with a group is established
and a group agreement is negotiated and signed, the Company's marketing efforts
focus on individual employees. During a designated "open enrollment" period each
year, usually the month preceding the annual renewal of the agreement with the
group, employees choose whether to remain with, join or terminate their
membership with a specific health plan offered by the employer. New employees
decide whether to join one of the employers' health insurance options at the
time of their employment. Although contracts with employers are generally
terminable on 60 days notice, changes in membership occur primarily during open
enrollment periods. Medicare risk products are primarily marketed by the HMOs'
sales employees. Retention of employer groups and membership growth is
accomplished through print advertising directed to employers and through
consumer media campaigns. Media communications convey the Company's emphasis on
preventive care, ready access to health care providers and quality service.
Other communications to customers include employer and member newsletters,
member education brochures, prenatal information packets, employer/broker
seminars and direct mail advertising to clients. Members' satisfaction with
Company benefits and services is monitored by customer surveys. Results from
these surveys and other primary and secondary research guide the sales and
advertising efforts throughout the year.
The Company's workers' compensation insurance policies are sold primarily
through independent insurance agents and brokers, who may also represent other
insurance companies. The Company believes that independent insurance agents and
brokers choose to market the Company's insurance policies primarily because of
the price the Company charges. Additional considerations include the quality of
service that the Company provides and the commissions the Company pays. The
Company employs full-time employees as marketing representatives to make
personal contacts with agents and brokers, to maintain regular communication
with them, to advise them of the Company's services and products, and to recruit
additional agents and brokers. As of December 31, 1997, the Company had
relationships with approximately 600 agents and 20 brokers and paid its agents
and brokers commissions based on a percentage of the gross written premium
produced by such agents and brokers. The Company also utilizes a number of
promotional media, including advertising in publications and at trade fairs, to
support the efforts of its independent agents.
4
<PAGE>
Membership
Period End Membership:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
HMO:
<S> <C> <C> <C> <C> <C>
Commercial.............................. 156,000 147,000 116,000 107,000 89,000
Medicare................................ 36,000 30,000 25,000 20,000 15,000
Managed Indemnity........................... 64,000 46,000 31,000 24,000 30,000
Medicare Supplement......................... 25,000 23,000 15,000 9,000 4,000
Administrative Services (1) ................ 328,000 338,000 117,000 65,000 59,000
------- ------- ------- ------- -------
Total Membership........................ 609,000 584,000 304,000 225,000 197,000
======= ======= ======= ======= =======
</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 163,000, 94,000 and 79,000 members at
December 31, 1996, 1995 and 1994, respectively.
For the years ended December 31, 1997 and 1996, the Company received
approximately 23.7% and 24.2%, respectively, of its total revenues from its
contract with HCFA to provide health care services to Medicare enrollees. The
Company's contract with HCFA is subject to annual renewal at the election of
HCFA and requires the Company to comply with federal HMO and Medicare laws and
regulations and may be terminated if the Company fails to so comply. The
termination of the Company's contract with HCFA would have a material adverse
effect on the Company's business. In addition, there have been, and the Company
expects that there will continue to be, a number of legislative proposals to
limit Medicare reimbursements and to require additional benefits. Future levels
of funding of the Medicare program by the federal government cannot be predicted
with certainty.
The Company's ability to obtain and maintain favorable group benefit agreements
with employer groups affects the Company's profitability. The agreements are
generally renewable on an annual basis but are subject to termination on 60 days
prior notice. For the fiscal year ended December 31, 1997, the Company's ten
largest HMO employer groups were, in the aggregate, responsible for
approximately 10% of the Company's total revenues. Although none of such
employer groups accounted for more than 2% of total revenues during that period,
the loss of one or more of the larger employer groups would, if not replaced
with similar membership, have a material adverse effect upon the Company's
business. The Company has generally been successful in retaining these employer
groups. However, there can be no assurance that the Company will be able to
renew its agreements with such employer groups in the future or that it will not
experience a decline in enrollment within its employer groups. Additionally,
revenues received under certain government contracts are subject to audit and
retroactive adjustment.
Provider Arrangements and Cost Management
HMO and Managed Indemnity Products. A significant distinction between the
Company's health care delivery system and that of many other managed care
providers is the fact that approximately 72% of the Company's Nevada HMO members
receive primary health care through the Company's own multi-specialty medical
group. The Company makes health care available through providers employed by the
multi-specialty medical group and an independently contracted network of
physicians, hospitals and other providers.
Under the Company's HMOs, the member selects a primary care physician who
provides or authorizes any non-emergency medical care given to that member.
These primary care physicians and some specialists are compensated to a limited
extent on the basis of how well they coordinate appropriate medical care.
5
<PAGE>
The Company has a system of incentive risk arrangements and utilization
management with respect to its independently contracted primary care physicians.
The Company compensates its independently contracted primary care physicians and
specialists by using both capitation and modified fee-for-service payment
methods. Under both the capitation and modified fee-for-service methods, an
incentive risk arrangement is established for institutional services. Additional
amounts may be made available to certain capitated physicians if hospital costs
are less than anticipated for the Company's HMO members. For those primary care
physicians receiving payments on a modified fee-for-service basis, portions of
the payments otherwise due the physicians are withheld. The amounts withheld are
available for payment to the physicians if, at year-end, the expenditures for
both institutional and non-institutional medical services are within
predetermined, contractually agreed upon ranges. It is believed that this method
of incentive risk payment is advantageous to the physician, the Company and the
members because all share in the benefits of managing health care costs. The
Company has, however, negotiated capitation agreements with certain specialists
who do not participate in the incentive risk arrangements. The Company monitors
health care utilization, including evaluation of elective surgical procedures,
quality of care and financial stability of its capitated providers to facilitate
access to service and to ensure member satisfaction.
The Company also believes that it has negotiated favorable rates with its
contracted hospitals. The Company's contracts with its hospital providers
typically renew automatically with both parties granted the right to terminate
after a notice period ranging from between three and twelve months.
Reimbursement arrangements with other health care providers, including
pharmacies, generally renew automatically or are negotiated annually and are
based on several different payment methods, including per diems (where the
reimbursement rate varies and is based on a per day of service charge for
specified types of care), capitation or modified fee-for-service arrangements.
To the extent possible, when negotiating non-physician provider arrangements,
the Company solicits competitive bids.
The Company provides, or negotiates discounted contracts with hospitals for the
provision of, inpatient and outpatient hospital care, including room and board,
diagnostic tests and medical and surgical procedures. The Company believes that
it currently has a favorable contract with its primary southern Nevada
contracted hospital, Columbia Sunrise Hospital. Subject to certain limitations,
the contract provides, among other things, guaranteed contracted per diem rate
increases on an annual basis after December 31, 1997. Since a majority of the
Company's southern Nevada hospital days are at Columbia Sunrise Hospital, this
contract assists the Company in managing a significant portion of its medical
costs. The contract expires in the year 2012. The Company has negotiated a
capitation arrangement with Columbia Hospital, Inc. for hospital services
provided in Houston to members of the Company's Texas HMO.
The Company utilizes two reimbursement methods for health care providers
rendering services under the Company's indemnity plans. For services to members
utilizing a PPO plan, the Company reimburses participating physicians on a
modified fee-for-service basis which incorporates a limited fee schedule and
reimburses hospitals on a per diem or discounted fee-for-service basis. For
services rendered under a standard indemnity plan, pursuant to which a member
may select a non-plan provider, the Company reimburses non-contracted physicians
and hospitals at pre-established rates, less deductibles and co-insurance
amounts.
The Company also manages health care costs through its large case management
program, home health care agency, 24-hour urgent care centers and its hospice
which helps to minimize hospital admissions and lengths of stay. In addition,
the Company educates its members on how and when to use the services of its
plans and how to manage chronic disease conditions, and audits hospital bills to
identify inappropriate charges.
Risk Management
The Company maintains general and professional liability, property and fidelity
insurance coverage in amounts that it believes are adequate for its operations.
The Company's multi-specialty medical group maintains excess malpractice
insurance for the providers presently employed by the group. The Company has,
however, assumed the risk for the first $250,000 per malpractice case, not to
exceed $1.5 million in
6
<PAGE>
the aggregate per contract year up to its limits of coverage. In addition, the
Company requires all of its independently contracted provider physician groups,
individual practice physicians, specialists, dentists, podiatrists and other
health care providers (with the exception of certain hospitals) to maintain
professional liability coverage. Certain of the hospitals with which the Company
contracts are self-insured. The Company also maintains stop-loss insurance that
reimburses the Company between 50% and 90% of hospital charges for each
individual member of its HMO or managed indemnity plans whose hospital expenses
exceed $200,000 during the contract year and up to $2.0 million per member per
lifetime. Workers' compensation claims are reinsured between $350,000 and $60.0
million per occurrence. Effective January 1, 1998, workers' compensation claims
are reinsured between $500,000 and $100.0 million per occurrence. Effective July
1, 1997, the Company also maintains excess catastrophic coverage for one of the
Company's wholly-owned HMOs, Health Plan of Nevada, Inc. ("HPN"), that
reimburses the Company for amounts by which the ultimate net loss exceeds
$400,000, but does not exceed the annual maximum of $19.6 million per accident
and $39.2 million per contract. In the ordinary course of its business, however,
the Company is subject to claims that are not insured, principally claims for
punitive damages.
Information System
The Company has in place certain data systems which assist the Company in, among
other things, pricing its services, monitoring utilization and other cost
factors, providing bills on a timely basis, identifying accounts for collection
and handling various accounting and reporting functions. Its imaging and
workflow systems are used to process and track claims and coordinate customer
service. Where it is cost efficient, the Company's system is connected to large
provider groups, doctors' offices, payors and brokers to enable efficient
transfer of information and communication. The Company views its information
systems capability as critical to the performance of ongoing administrative
functions and integral to quality assurance and to the coordination of patient
care across care sites. The Company is continually modifying or improving its
information systems capabilities in an effort to improve operating efficiencies.
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 negatively impact its operations. The Company is in the
process of implementing two major systems at an estimated cost of approximately
$20.0 million. These systems will be Year 2000 compliant. The Company is
expensing the costs to make modifications as incurred. Management currently
estimates the remaining modification costs to be approximately $3.0 million to
$5.0 million over the next 12 to 18 months. 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 adversely affect the
Company's operations.
Quality Assurance and Improvement
The Company has developed programs to help ensure that the health care services
provided by its HMO and managed indemnity plans meet the professional standards
of care established by the medical community. The Company believes that its
emphasis on quality allows it to increase and retain its members. The Company
monitors and evaluates the availability and quality of the medical care rendered
by the providers in its HMO and insurance plans and periodically audits selected
diagnoses, problems and referrals to determine adherence to appropriate
standards of medical care. In addition, the Company has medical directors who,
supported by a professional medical staff, monitor the quality and
appropriateness of health care by analyzing a physician's utilization of
diagnostic tests, laboratory and radiology procedures,
7
<PAGE>
specialty referrals, prescriptions and hospitals. Physicians and hospitals
selected to provide services to the Company's members are subject to the
Company's quality assurance programs including a formal credentialing process of
all physicians.
The Company also has internal quality assurance and improvement review
committees that meet on a regular basis to review specialist referrals, monitor
the performance of physicians and review practice patterns, complaints and other
patient issues. Staff members regularly visit hospitals to review medical
records, meet with patients and review treatment programs and discharge plans
with attending physicians. In addition, the Company solicits information from
both existing and former members as to their satisfaction with the care
delivered. Complaints and grievances are responded to on both an informal and
formal basis, depending on the nature of the complaint.
Several independent organizations have been formed for the purpose of responding
to external demands for accountability over the health care industry. The
organizations utilized by the Company are the National Committee for Quality
Assurance (the "NCQA"), the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") and the American Association for Ambulatory Health Care
(the "AAAHC"). The NCQA performs site reviews of standards established for
quality management and improvement, physician credentials, members' rights and
responsibilities, preventive health services, utilization management and medical
records. The JCAHO reviews rights, responsibilities and ethics, continuum of
care, education and communication, leadership, management of information and
human resources and network performance. The AAAHC reviews rights of patients,
governance, administration, quality of care provided, quality management and
improvement, clinical records, professional improvement and facilities and
environment. In June 1997 HPN and its Medicare risk plan, Senior Dimensions,
received one-year accreditation from the NCQA for its operations in the
metropolitan Las Vegas area and Pahrump. The Company's home health care and
hospice subsidiaries are JCAHO accredited. The Company's Nevada multi-specialty
clinic has received a full three-year accreditation from the AAAHC -- the
highest accreditation issued to ambulatory care facilities. The clinic is the
only multi-specialty site in Nevada to be awarded this accreditation. There can
be no assurance, however, that the Company will maintain NCQA or other
accreditations in the future and there is no basis to predict what effect, if
any, the lack of NCQA or other accreditations could have on HPN's competitive
position in southern Nevada.
Underwriting
HMO. The Company structures premium rates for its various health plans primarily
through community rating and community rating by class method. Under the
community rating method, all costs of basic benefit plans for the Company's
entire membership population are aggregated. These aggregated costs are
calculated on a "per member per month" basis and converted to premium rates for
coverage types, such as single or family coverage. The community rating by class
method is based on the same principles as community rating, except that
actuarial adjustments to premium rates are made for various employer groups
based on the average age and sex of their employees. All employees of an
employer group are charged the same premium rate if the same coverage is
selected.
In addition to those premium charges paid by the employers with whom the
Company's HMOs contract, members also pay co-payments at the time certain
services are provided. The Company believes that such co-payments encourage
appropriate utilization of health care services while allowing the Company to
offer competitive premium rates. The Company also believes that the capitation
method of provider compensation encourages physicians to provide only medically
necessary and appropriate care.
Managed Indemnity. Premium charges for the Company's managed indemnity products
are set in a manner similar to the community rating by class method described
above. This rate calculation utilizes age, sex and industry factors to develop
group-specific adjustments from a given base rate by plan. Actual health claims
experience is used to develop premium rates for larger insurance member groups.
This process includes the use of utilization experience, adjustments for
incurred but not reported claims, inflationary factors, credibility and specific
reinsurance pooling levels for large claims.
8
<PAGE>
Workers' Compensation. Prior to insuring a particular risk, the Company reviews,
among other factors, the employer's prior loss experience and premium payment
history. Additionally, the Company determines whether the employer's employment
classifications are among the classifications that the Company has elected to
insure generally and if the amounts of the premiums for the classifications are
within the Company's guidelines. The Company reviews these classifications
periodically to evaluate whether they are profitable. A member of the Company's
loss control department may conduct an on-site safety inspection before the
Company insures the employer. The Company generally initiates this inspection
for enterprises with manufacturing or construction classifications. The Company
may also initiate inspections if the enterprise previously has had a high loss
ratio or frequent losses. If the on-site inspection reveals hazards that can be
corrected, and an agreement can be reached with the employer that these hazards
will be corrected in a time frame established by the Company's underwriting
department, the Company may issue a policy subject to correction of those
hazards. In the event the Company has issued a policy where no previous
inspection has been conducted, and subsequently learns through an inspection the
employer has hazards that must be corrected, the Company will request that the
employer correct the hazards within a specified period of time. If these hazards
are not corrected, the Company may cancel the policy for non-compliance of the
hazard correction. With regard to new business, the agent or broker will usually
submit the claims history on the prospective account. In those situations where
the claims history is not supplied by the agent or broker, other sources (such
as the prior insurer) are used to obtain the appropriate claims history if
possible.
In California, under open rating as it became effective for policyholders in
1995, the Company has subdivided many of the standard classifications. These
subclassifications have been determined on the Company's perception of
differences in risk exposure. As a result, different rates have been filed for
each of these subclassifications. The use of these subclassifications requires
more detailed information than was required prior to open rating. The Company
ascertains characteristics of various employers through the use of
questionnaires and telephone inquiries by underwriters to determine the proper
subclassification. Subclassifications are subject to verification by loss
control and premium audits.
Competition
HMO and Managed Indemnity. Managed care companies and HMOs operate in a highly
competitive environment. The Company's major competition is from self-funded
employer plans, PPO networks, other HMOs, such as Humana Care Plus and
Pacificare, Inc., and traditional indemnity carriers, such as Blue Cross/Blue
Shield. Many of the Company's competitors have substantially larger total
enrollments, have greater financial resources and offer a broader range of
products than the Company. Additional competitors with greater financial
resources than the Company may enter the Company's market in the future. The
Company believes that the most important competitive factors are the delivery of
reasonably priced, quality medical benefits to members and the adequacy and
availability of health care delivery services and facilities. The Company
depends on a large PPO network and flexible benefit plans to attract new
members. Competitive pressures are expected to limit the Company's ability to
increase premium rates and, to a lesser extent, to result in declining premium
rates. Accordingly, the profitability of the Company will, to a large extent,
depend on the Company's ability to manage the costs of providing health care
benefits to its members. The inability of the Company to manage these costs
would have an adverse impact on the Company's future results of operations by
reducing margins. In addition, competitive pressures may also result in reduced
membership levels. Any such reductions could materially affect the Company's
results of operations.
Workers' Compensation. The Company's workers' compensation business is
concentrated in California, a state where the workers' compensation insurance
industry is extremely competitive. The Company believes that there are more than
200 insurance companies writing workers' compensation insurance in California.
Many of the Company's competitors have been in business longer, have a larger
volume of business, offer a more diversified line of insurance coverage, have
greater financial resources and have
9
<PAGE>
greater distribution capability than the Company. The largest writer of workers'
compensation insurance in California is the State Compensation Insurance Fund.
Prior to 1995, the Company concentrated on insuring workers' compensation
accounts in the small- to medium-size range. Under the current open rating
environment, the Company is actively pursuing accounts of all sizes.
In all states in which the Company is currently writing business, competition
for workers' compensation insurance is primarily driven by price and secondarily
by services provided to insureds and agents. In states other than California the
National Council on Compensation Insurance ("NCCI") is usually the designated
rating organization. The NCCI accumulates statistical information and recommends
pure loss costs to the state's Department of Insurance. As in California under
the open rating environment, the Company then adds loss cost multipliers or
expense loads to derive premium rates. Rating plans in those states are more
"standardized" and are usually based on plans developed by the NCCI. Unlike
California, where the Company has developed subclasses, the Company will use
standard classes in the other states.
Losses and Loss Adjustment Expenses
Often, in workers' compensation insurance, several years may elapse between the
occurrence of a loss and the final settlement of the loss. To recognize
liabilities for unpaid losses, the Company establishes reserves, which are
balance sheet liabilities representing estimates of future amounts needed to pay
claims and related expenses for insured events, including reserves for events
that have occurred but have not yet been reported to the Company ("IBNR").
When a claim is reported, the Company's claims personnel initially establish
reserves on a case-by-case basis for the estimated amount of the ultimate
payment. These estimates reflect the judgment of the claims personnel based on
their experience and knowledge of the nature and value of the specific type of
claim and the available facts at the time of reporting as to severity of injury
and initial medical prognosis. Included in these reserves are estimates of the
expenses of settling claims, including legal and other fees, and the general
expenses of administering the claims adjustment process. Claims personnel adjust
the amount of the case reserves as the claim develops and as the facts warrant.
IBNR reserves are established for unreported claims and loss development
relating to current and prior accident years. In the event that a claim that
occurred during a prior accident year was not reported until the current
accident year, the case reserve for such claim typically will be established out
of previously established IBNR reserves for that prior accident year.
The Company reviews the adequacy of its reserves on a monthly basis and
considers external forces such as changes in the rate of inflation, the
regulatory environment, the judicial administration of claims, medical costs and
other factors that could cause actual losses and loss adjustment expenses
("LAE") to change. Reserves are reviewed with the Company's independent actuary
at least annually. The actuarial projections include a range of estimates
reflecting the uncertainty of projections. Management evaluates the reserves in
the aggregate, based upon the actuarial indications and makes adjustments where
appropriate. The consolidated financial statements of the Company provide for
reserves based on the anticipated ultimate cost of losses.
Once an employer is insured by the Company, the Company's loss control
department may assist the insured in developing and maintaining safety programs
and procedures to minimize on-the-job injuries and industrial health hazards.
The safety programs and procedures vary from insured to insured. The Company's
loss control department may recommend to the employer that a safety committee
consisting of members of the employer's management staff and its general labor
force be established. The Company's loss control department may then assist the
committee members in isolating safety hazards, advising the committee on how to
correct the hazards and assisting the employer in establishing procedures to
enforce the corrections. The Company's loss control department may also revisit
the
10
<PAGE>
employer to determine whether the recommended corrections and procedures have
been implemented. Depending upon the size, classifications, and loss experience
of the employer, the Company's loss control department will periodically inspect
the employer's places of business and may recommend changes that could prevent
industrial accidents. In addition, severe or recurring injuries may also warrant
on-site inspections. In certain instances, members of the Company's loss control
department may conduct special educational training sessions for insured
employees to assist in the prevention of on-the-job injuries. For example,
employers engaged in manufacturing may be offered a training session on how to
prevent back injuries or employers engaged in contracting may be offered a
training session on general first aid and prevention of injuries that may result
from specific work exposures.
Government Regulation and Recent Legislation
HMOs and Managed Indemnity. Federal and state governments have enacted statutes
extensively regulating the activities of HMOs. In addition, growing government
concerns over increasing health care costs and quality could result in new or
additional state or federal legislation that could affect health care providers,
including HMOs, PPOs and other health insurers. Among the areas regulated by
federal and state law are the scope of benefits available to members, premium
structure, procedures for review of quality assurance, enrollment requirements,
the relationship between an HMO and its health care providers, licensing and
financial condition.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Changes in
applicable laws and regulations are continually being considered and
interpretation of existing laws and rules also may change from time to time.
Regulatory agencies generally have broad discretion in promulgating regulations
and in interpreting and enforcing laws and regulations.
While the Company is unable to predict what regulatory changes may occur or the
impact on the Company of any particular change, the Company's operations and
financial results could be negatively affected by regulatory revisions. For
example, any proposals affecting underwriting practices, limiting rate
increases, requiring new or additional benefits or affecting contracting
arrangements (including proposals to require HMOs and PPOs to accept any health
care providers willing to abide by an HMO's or PPO's contract terms) may have a
material adverse effect on the Company's business. The continued consideration
and enactment of "anti-managed care" laws and regulations by federal and state
bodies may make it more difficult for the Company to control medical costs and
may adversely affect financial results.
In addition to changes in applicable laws and regulations, the Company is
subject to various audits, investigations and enforcement actions. These include
possible government actions relating to the federal Employee Retirement Income
Security Act, which regulates insured and self-insured health coverage plans
offered by employers, the Federal Employees Health Benefit Plan, federal and
state fraud and abuse laws, and laws relating to utilization management and the
delivery of health care and payment or reimbursement therefor. Any such
government action could result in assessment of damages, civil or criminal fines
or penalties, or other sanctions, including exclusion from participation in
government programs. In addition, disclosure of any adverse investigation or
audit results or sanctions could negatively affect the Company's reputation in
various markets and make it more difficult for the Company to sell its products
and services.
The Company has HMO licenses in Nevada, Texas and Arizona. The Company's HMO
operations are subject to regulation by the Nevada Division of Insurance, the
Nevada Division of Health, the Texas Department of Insurance and the Arizona
Department of Insurance. The Company's health insurance subsidiary is domiciled
and incorporated in California and is licensed in 37 states and the District of
Columbia, with current operations primarily in Nevada, Arizona, Colorado, Texas,
California, New Mexico, Missouri, Iowa and South Carolina. It is subject to
licensing by and other regulations of the California Department of Insurance as
well as the insurance departments of other states in which it operates or holds
11
<PAGE>
licenses. The Company's premium rate increases are subject to various state
insurance department approvals. The Company's HMO and insurance subsidiaries are
also required by state regulatory agencies to maintain certain deposits and must
also meet certain net worth and reserve requirements. The Company also has
certain other deposit requirements. The Company has restricted assets on deposit
in various states ranging from $20,000 to $2.0 million and totalling $16.5
million at December 31, 1997. The Company's HMO and insurance subsidiaries meet
requirements to maintain minimum stockholder's equity ranging from $1.1 million
to $5.2 million. The Company's Nevada HMO and health insurance subsidiaries
currently maintain home offices and a regional home office, respectively, in Las
Vegas and, accordingly, are eligible for certain premium tax credits in Nevada.
The Company's HMO subsidiaries are also restricted by state law as to the amount
of dividends that can be declared and paid. Moreover, insurance companies and
HMOs domiciled in Texas, Nevada and California generally may not pay
extraordinary dividends without providing the state insurance commissioner with
30 days prior notice, during which period the commissioner may disapprove the
payment. An "extraordinary dividend" is generally defined as a dividend whose
fair market value together with that of other dividends or distributions made
within the preceding 12 months exceeds the greater of (i) ten percent of the
insurer's surplus as of the preceding December 31 or (ii) the net gain from
operations of such insurer for the 12-month period ending on the preceding
December 31. The Company is not in a position to assess the likelihood of
obtaining future approval for the payment of "extraordinary dividends" or
dividends other than those specifically allowed by law in each of its
subsidiaries' states of domicile. No prediction can be made as to whether any
legislative proposals relating to dividend rules in the domiciliary states of
the Company's subsidiaries will be made or adopted in the future, whether the
insurance departments of such states will impose either additional restrictions
in the future or a prohibition on the ability of the Company's regulated
subsidiaries to declare and pay dividends or as to the effect of any such
proposals or restrictions on the Company's regulated subsidiaries.
The Company is subject to the Federal HMO Act and the regulations promulgated
thereunder. Of the Company's three subsidiary HMOs, only Med One Health Plan,
acquired at the end of 1996, is not federally-qualified under this Act. In order
to obtain federal qualification, an HMO must, among other things, provide its
members certain services on a fixed, prepaid fee basis and set its premium rates
in accordance with certain rating principles established by federal law and
regulation. The HMO must also have quality assurance programs in place with
respect to its health care providers. Furthermore, an HMO may not refuse to
enroll an employee, in most circumstances, because of such person's health, and
may not expel or refuse to re-enroll individual members because of their health
or their need for health services.
Under the "corporate practice of medicine" doctrine, in most states, business
organizations, other than those authorized to do so, are prohibited from
providing, or holding themselves out as providers of, medical care. Some states,
including Nevada, exempt HMOs from this doctrine. The laws relating to this
doctrine are subject to numerous conflicting interpretations. Although the
Company seeks to structure its operations to comply with corporate practice of
medicine laws in all states in which it operates, there can be no assurance
that, given the varying and uncertain interpretations of those laws, the Company
would be found to be in compliance with those laws in all states. A
determination that the Company is not in compliance with applicable corporate
practice of medicine laws in any state in which it operates could have a
material adverse effect on the Company if it were unable to restructure its
operations to comply with the laws of that state.
Medicare and Medicaid antifraud and abuse provisions are codified at 42 U.S.C.
Sections 1320a-7(b) (the "Anti-kickback Statute") and 1395nn (the "Stark
Amendments"). Many states have similar anti-kickback and anti-referral laws.
These statutes prohibit certain business practices and relationships involving
the referral of patients for the provision of health care items or services
under certain circumstances. Sanctions for violations of the Anti-kickback
Statute and the Stark Amendments include criminal penalties and civil sanctions,
including fines and possible exclusion from the Medicare and Medicaid programs.
Similar
12
<PAGE>
penalties are provided for violation of state anti-kickback and anti-referral
laws. The Department of Health and Human Services ("HHS") has issued regulations
establishing "safe harbors" with respect to the Anti- kickback Statute. The
Office of the Inspector General recently proposed new rules to clarify those
safe harbors. HHS has also recently proposed to establish certain safe harbors
under the Stark Amendments. The Company believes that its business arrangements
and operations are in compliance with the Antikickback Statute and the Stark
Amendments and the exceptions set forth therein, regardless of the availability
of regulatory safe harbor protection with respect to those statutes. There can,
however, be no assurance that (i) government officials charged with
responsibility for enforcing the prohibitions of the Anti- kickback Statute and
the Stark Amendments will not assert that the Company or certain transactions in
which it is involved are in violation of those statutes and (ii) such statutes
will ultimately be interpreted by the courts in a manner consistent with the
Company's interpretation.
The Health Insurance Portability and Accountability Act of 1996 (the
"Accountability Act") was passed by Congress and signed into law by President
Clinton on August 21, 1996 and effective beginning July 1, 1997. While the
Accountability Act contains provisions regarding health insurance or health
plans, such as portability and limitations on pre-existing condition exclusions,
guaranteed availability and renewability, it also contains several anti-fraud
measures that significantly change health care fraud and abuse provisions. Some
of the provisions include (i) creation of an anti-fraud and abuse trust fund and
coordination of fraud and abuse efforts by federal, state and local authorities,
(ii) extension of the criminal anti-kickback statues to all federal health
programs, (iii) expansion of and increase in the amount of civil monetary
penalties and establishment of a knowledge standard for individuals or entities
potentially subject to civil monetary penalties, and (iv) revisions to current
sanctions for fraud and abuse, including mandatory and permissive exclusion from
participation in the Medicare or Medicaid programs.
Workers' Compensation. The Company is subject to extensive governmental
regulation and supervision in each state in which it conducts workers'
compensation business. The primary purpose of such regulation and supervision is
to provide safeguards for policyholders and injured workers rather than protect
the interests of shareholders. The extent and form of the regulation may vary,
but generally has its source in statutes that establish regulatory agencies and
delegate to the regulatory agencies broad regulatory, supervisory and
administrative authority. Typically, state regulations extend to such matters as
licensing companies; restricting the types or quality of investments; requiring
triennial financial examinations and market conduct surveys of insurance
companies; licensing agents; regulating aspects of a company's relationship with
its agents; restricting use of some underwriting criteria; regulating rates,
forms and advertising; limiting the grounds for cancellation or nonrenewal of
policies, solicitation and replacement practices; and specifying what might
constitute unfair practices. Moreover, the payment of dividends and the making
of other distributions to the Company by its workers' compensation insurance
company subsidiaries are contingent upon the earnings of those subsidiaries and
are subject to various business considerations, applicable state corporate laws
and regulations, the terms of agreements to which they may become a party and
government regulations, which restrict in certain circumstances the payment of
dividends and distributions and the transfer of assets to the Company.
In the normal course of business, the Company and the various state agencies
that regulate the activities of the Company may disagree on interpretations of
laws and regulations, policy wording and disclosures or other related issues.
These disagreements, if left unresolved, could result in administrative hearings
and/or litigation. The Company attempts to resolve all issues with the
regulatory agencies, but is willing to litigate issues where it believes it has
a strong position. The ultimate outcome of these disagreements could result in
sanctions and/or penalties and fines assessed against the Company. Currently,
there are no litigation matters pending with any department of insurance.
Typically, states mandate participation in insurance guaranty associations,
which assess solvent insurance companies in order to fund claims of
policyholders of insolvent insurance companies. Under this arrangement, insurers
can be assessed up to 1% (or 2% in certain states) of premiums written for
workers'
13
<PAGE>
compensation insurance in that state each year to pay losses and LAE on covered
claims of insolvent insurers. In California and certain other states, insurance
companies are allowed to recoup such assessments from policyholders while
several states allow an offset against premium taxes. Potential assessment
expenses, net of recoupment, if any, for insolvencies are not accrued until
after an insolvency has occurred since the likelihood and the amount of the
assessment expense cannot be reasonably determined or estimated. In California,
there have been no new assessments for insolvent workers' compensation insurance
companies since 1990.
California's Insurance Holding Company Act regulates the payment of shareholder
dividends by insurance companies. To date, the workers' compensation insurance
subsidiaries have not paid dividends to the Company.
General. Besides state insurance laws, the Company is subject to general
business and corporation laws, federal and state securities laws, consumer
protection laws, fair credit reporting acts and other laws regulating the
conduct and operation of its subsidiaries.
Employees
The Company had approximately 2,800 employees on December 31, 1997. None of
these employees are covered by a collective bargaining agreement. The Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company owns several administrative facilities in southern Nevada totalling
approximately 218,000 square feet. Such facilities include an approximate
134,000 square foot six-story home office building and an approximate 43,000
square foot two-story corporate administrative headquarters. These buildings are
subject to liens securing a $5.8 million loan balance from Bank of America.
Also, the Company recently constructed an additional approximately 180,000
square foot six-story administrative headquarters building which should be fully
occupied by the end of the first quarter. This building was financed in January
1998 and subject to a $15.0 million loan balance. The Company also owns several
clinical facilities in the southern Nevada area totalling approximately 370,000
square feet and consisting primarily of seven medical clinics and two surgery
centers including a newly constructed 59,000 square foot medical building
completed in the fourth quarter of 1997. Certain clinical space is subject to a
$3.1 million mortgage in favor of GE Capital Asset Management Corporation. The
Company leases additional office and clinical space in Nevada totalling
approximately 122,000 and 70,000 square feet, respectively. The Company owns
real estate and a building in Park City, Utah purchased in 1996 to provide
entertainment and a meeting environment for significant current and prospective
clients, brokers and others who assist in the Company's marketing efforts. In
connection with its workers' compensation insurance subsidiary, the Company
leases approximately 67,000 square feet of office space in California. The
Company also leases approximately 180,000 square feet of office space in various
states as needed for other regional operations, including the Texas HMO and
TRICARE service centers.
The Company believes that current and planned clinical space will be adequate
for its present needs. Additional clinical space may be required, however, if
membership continues to expand in southern Nevada.
14
<PAGE>
ITEM 3. 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 alleging, among other things, breach of the
merger agreement and equitable fraud, and seeking a declaratory judgment,
monetary damages and other remedies. No answer to the Company's complaint or
counterclaims (if any) have been filed. 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 and
claims by providers for payment for medical services rendered to HMO members.
Also included in such litigation are claims for workers' compensation 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's common stock, par value $.005 per share (the "Common Stock"), has
been listed on the New York Stock Exchange under the symbol SIE since April 26,
1994 and, prior to that, was listed on the American Stock Exchange since the
Company's initial public offering on April 11, 1985. The following table sets
forth the high and low sales prices for the Common Stock for each quarter of
1997 and 1996.
<TABLE>
<CAPTION>
Period High Low
1997
<S> <C> <C> <C> <C>
First Quarter........................................ $27 3/4 $24 5/8
Second Quarter....................................... 32 1/8 24 1/8
Third Quarter........................................ 37 3/8 31 3/16
Fourth Quarter....................................... 40 31 3/16
1996
First Quarter........................................ $36 $29 7/8
Second Quarter....................................... 35 7/8 29
Third Quarter........................................ 34 7/8 25 1/4
Fourth Quarter....................................... 34 3/8 22 3/8
</TABLE>
On February 27, 1998, the closing sale price of the common stock was $36 5/8 per
share.
Holders
The number of record holders of Common Stock at February 27, 1998 was 276. Based
upon information available to it, the Company believes there are several
thousand beneficial holders of the Common Stock.
Dividends
No cash dividends have been paid on the Common Stock since the Company's
inception. The Company currently intends to retain its earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. As a holding company, the Company's ability to declare and to pay
dividends is dependent upon cash distributions from its operating subsidiaries.
The ability of the Company's HMO and insurance subsidiaries to declare and to
pay dividends is limited by state regulations applicable to the maintenance of
minimum deposits, reserves and net worth. (See Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.) The declaration of any future dividends will be at the
discretion of the Company's Board of Directors and will depend on, among other
things, future earnings, debt covenants, operations, capital requirements and
the financial condition of the Company and upon general business conditions.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of Sierra Health Services,
Inc., and subsidiaries (the "Company"), for each of the fiscal years in the
five-year period ended December 31, 1997 should be read in conjunction with the
Consolidated Financial Statements and the related Notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other information which appears elsewhere in this Annual Report on Form 10-K.
The selected consolidated financial data below has been derived from the audited
Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ----------- --------
(Amounts in thousands, except per share data)
Statement of Operations Data (1):
OPERATING REVENUES:
<S> <C> <C> <C> <C> <C>
Medical Premiums........................................... $513,857 $386,968 $319,475 $269,382 $240,691
Specialty Product Revenues ................................ 146,211 133,324 102,807 101,287 113,714
Professional Fees.......................................... 31,238 28,836 19,417 12,331 11,254
Military Contract Revenues ................................ 4,346
Investment and Other Revenues.............................. 26,072 26,283 25,310 19,081 17,771
-------- -------- -------- ---------- ----------
Total.................................................... 721,724 575,411 467,009 402,081 383,430
-------- ------- ------- ---------- ---------
OPERATING EXPENSES:...........................................
Medical Expenses........................................... 419,272 315,915 245,135 200,229 178,526
Specialty Product Expenses................................. 143,082 130,758 102,859 96,600 118,868
General, Administrative and Marketing Expenses............. 93,919 72,237 63,562 53,671 50,715
Military Contract Expenses ............................... 4,193
Merger, Restructuring, and Start-up Expenses (2) .......... 29,350 12,064 11,614
------ -------- --------
Total.................................................... 689,816 530,974 423,170 350,500 348,109
------- -------- ------- --------- ---------
OPERATING INCOME ............................................. 31,908 44,437 43,839 51,581 35,321
INTEREST EXPENSE AND OTHER, NET............................... (4,433) (2,823) (3,737) (6,401) (4,437)
-------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ..................................... 27,475 41,614 40,102 45,180 30,884
PROVISION FOR INCOME TAXES.................................... 3,234 10,471 12,198 8,236 8,435
-------- -------- ------ -------- --------
INCOME FROM CONTINUING OPERATIONS............................. 24,241 31,143 27,904 36,944 22,449
LOSS FROM DISCONTINUED OPERATIONS ............................ (6,600) (2,501) (404)
CUMULATIVE EFFECT OF ADOPTING FAS 109......................... 5,250
----------- ----------- ----------- ------------ ---------
NET INCOME ................................................... $ 24,241 $ 31,143 $ 21,304 $ 34,443 $ 27,295
========= ======== ======== ========= =========
EARNINGS PER COMMON SHARE:
Income from Continuing Operations Per Share ............... $1.35 $1.76 $1.60 $2.36 $1.50
Loss Per Share from Discontinued Operations ............... (.38) (.16) (.02)
Cumulative Effect of Adopting FAS 109. .................... .35
-------- -------- -------- -------- -------
Net Income Per Share ...................................... $1.35 $1.76 $1.22 $2.20 $1.83
===== ===== ===== ===== =====
Weighted Average Number of Common
Shares Outstanding ...................................... 18,008 17,726 17,414 15,678 14,939
====== ========= ========= ========= =========
EARNINGS PER COMMON SHARE ASSUMING DILUTION:
Income from Continuing Operations Per Share ............... $1.33 $1.72 $1.57 $2.31 $1.47
Loss Per Share from Discontinued Operations ............... (.37) (.16) (.02)
Cumulative Effect of Adopting FAS 109. .................... .34
-------- -------- -------- -------- -------
Net Income Per Share ...................................... $1.33 $1.72 $1.20 $2.15 $1.79
===== ===== ===== ===== =====
Weighted Average Number of Common
Shares Outstanding Assuming Dilution .................... 18,284 18,127 17,734 15,999 15,256
====== ========= ========= ========= =========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ----------- --------
(Amounts in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working Capital ........................................... $ 88,377 $ 76,530 $ 18,157 $ 71,337 $ 21,323
Total Assets............................................... 723,936 629,462 575,146 535,487 445,510
Long-term Debt (Net of Current Maturities)................. 90,841 66,189 71,257 75,209 72,802
Cash Dividends Per Common Share............................ NONE NONE NONE NONE NONE
Stockholders' Equity....................................... 265,682 234,482 207,715 168,157 84,708
</TABLE>
(1) The Company's consolidated financial statements have been restated to
reflect the results of acquisitions accounted for in accordance with pooling of
interests method of accounting. See Note 1 of Notes to the Consolidated
Financial Statements.
(2) In connection with certain acquisitions and
restructurings, the Company recorded certain non-recurring incremental costs.
See Note 14 of Notes to the Consolidated Financial Statements.
ITEM 7. 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 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 1997 Annual Report on Form 10-K should
be considered in connection with certain cautionary statements contained in the
Company's Current Report on Form 8-K filing 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.
Acquisitions
Effective December 31, 1996, the Company purchased Prime Holdings, Inc.
("Prime") for approximately $32.2 million in cash. At December 31, 1996, Prime
operated Med One Health Plan, Inc., a 12,800 member HMO, and also served 215,000
people through preferred provider organizations, workers' compensation programs,
and administrative services products for self-insured employers and union
welfare funds, primarily in the state of Nevada. The acquisition of Prime has
been accounted for as a purchase and, therefore, none of Prime's prior
operations have been included in the information contained in this discussion
and analysis; however, all of the acquired assets and liabilities have been
reflected in the Company's ending consolidated balance sheet, as of December 31,
1996, along with the associated goodwill.
In November 1996, the Company acquired the remaining ownership interests of HMO
Texas for $5.0 million. The Company had previously held a 50 percent interest in
the Houston-based health plan.
On October 31, 1995, the Company acquired CII Financial, Inc., ("CII") a
workers' compensation insurance holding company, for approximately $76.3 million
of common stock, in a transaction accounted for as a pooling of interests. The
information contained in this Annual Report on Form 10-K includes the results of
CII for all periods presented.
18
<PAGE>
Overview
The Company derives revenues from its health maintenance organizations, managed
indemnity and workers' compensation insurance subsidiaries. To a lesser extent,
the Company also derives additional specialty product revenues from non-HMO and
insurance products (consisting of fees for workers' compensation administration,
utilization management services and ancillary products), professional fees
(consisting primarily of fees for providing health care services to non-members
and co-payment fees received from members), and investment and other revenue.
Medical premium revenues accounted for approximately 71.2%, 67.3% and 68.4% of
the Company's total revenues for 1997, 1996 and 1995, respectively. Continued
medical premium revenue growth is principally dependent upon continued
enrollment in the Company's products and upon competitive and regulatory
factors. Effective September 30, 1997, the Company terminated its workers'
compensation administrative contract with the state of Nevada. The contract was
terminated to allow the Company to participate in the Nevada workers'
compensation insurance market when the state allows private insurance companies
to begin offering products, which is anticipated for 1999.
The Company's principal expenses consist of medical expenses, specialty product
expenses, and general, administrative and marketing expenses. Medical expenses
represent the aggregate expenses of operating the Company's multi-specialty
medical group and other provider subsidiaries as well as capitation fees and
other fee-for-service payments paid to independently contracted physicians,
hospitals and other health care providers. As a provider of managed care
services, the Company seeks to manage medical expenses by employing or
contracting with physicians, hospitals and other health care providers at
negotiated price levels, by adopting quality assurance programs, by monitoring
and managing utilization of physicians and hospital services and by providing
incentives to use cost-effective providers. Specialty product expenses primarily
consist of losses and loss adjustment expenses, and underwriting expenses
associated with the Company's workers' compensation insurance subsidiaries.
General, administrative and marketing expenses generally represent operational
costs other than those associated with the delivery of health care services and
specialty product services.
During the third quarter of 1997, Sierra Military Health Services, Inc.
("SMHS"), a wholly owned subsidiary of the Company, was notified it had been
awarded a multi-year triple-option health benefits ("TRICARE") managed care
contract by the Department of Defense to serve TRICARE eligible beneficiaries in
Region 1. This region includes more than 600,000 beneficiaries in 13
northeastern states and the District of Columbia. SMHS is currently in the
implementation period of the contract with actual health care delivery to
commence on June 1, 1998. SMHS subcontracts for the health care delivery,
including some of the risk, for parts of the TRICARE contract. The Company
believes the TRICARE contract will add approximately $240 million of annualized
revenues when health care delivery begins in 1998. Revenues and expenses
resulting from this contract are recorded separately on the financial
statements. There can be no assurance that the Company will be successful in
managing the implementation and delivery of health care services under the
multi-year TRICARE contract or that such contract will provide the Company with
an adequate level of profitability.
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 that 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. The Company currently
anticipates providing health care delivery for one year of the contract should a
re-bid occur.
19
<PAGE>
Merger, restructuring and start-up expenses represent the non-recurring
incremental costs the Company has incurred in connection with various mergers,
acquisitions and planned dispositions as well as expenses associated with the
Company's proposal to serve TRICARE beneficiaries in Region 1. Such start-up
expenses were charged to operations upon notification of award.
Results of Operations
The following table sets forth selected operating data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---------- ---------- -------
OPERATING REVENUES:
<S> <C> <C> <C>
Medical Premiums........................................ 71.2% 67.3% 68.4%
Specialty Product Revenues ............................. 20.3 23.2 22.0
Professional Fees....................................... 4.3 5.0 4.2
Military Contract Revenues ............................. .6
Investment and Other Revenues .......................... 3.6 4.5 5.4
------ ------ ------
Total................................................ 100.0 100.0 100.0
----- ----- -----
OPERATING EXPENSES:
Medical Expenses........................................ 58.1 54.9 52.5
Specialty Product Expenses.............................. 19.8 22.7 22.0
General, Administrative and Marketing Expenses.......... 13.0 12.6 13.6
Military Contract Expenses ............................. .6
Merger, Restructuring and Start-up Expenses ............ 4.1 2.1 2.5
------ ----- -----
Total................................................ 95.6 92.3 90.6
---- ----- -----
OPERATING INCOME ............................................ 4.4 7.7 9.4
INTEREST EXPENSE AND OTHER, NET.............................. (.6) (.5) (.8)
---- ---- ----
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................................... 3.8 7.2 8.6
PROVISION FOR INCOME TAXES................................... .4 1.8 2.6
----- ----- -----
INCOME FROM CONTINUING OPERATIONS ........................... 3.4 5.4 6.0
NET OPERATING LOSS ON DISCONTINUED
OPERATIONS .............................................. (.4)
NET LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS .................................. (1.0)
NET INCOME................................................... 3.4% 5.4% 4.6%
===== ===== =====
</TABLE>
20
<PAGE>
1997 Compared to 1996
Revenues. The Company's total operating revenues for 1997 increased 25.4% to
$721.7 million from $575.4 million for 1996. The increase was primarily due to
medical premium revenue increases of approximately $126.9 million, or 32.8%,
from the Company's HMO and managed indemnity insurance subsidiaries. Such
premium growth resulted principally from an approximate 30.3% increase in member
months (the number of months of each year that an individual is enrolled in a
plan). The Company's HMO and insurance subsidiaries' premium rates increased
approximately 2.5%, primarily due to an increase in its capitation rate for its
Medicare members as established by the Health Care Financing Administration
("HCFA"). The increase was due in part to the Company's participation in HCFA's
social HMO program. The Company realized 1% to 3% rate increases for its
existing HMO subsidiaries' commercial groups and the managed indemnity
subsidiary. However, these increases were offset in part by lower premium rates
at Med One Health Plan, an HMO acquired on December 31, 1996. The Company's
specialty product revenue increased $12.9 million, or 9.7%, to $146.2 million in
1997 from $133.3 million in 1996. The increase was due to specialty product
revenue growth in the workers' compensation insurance market of approximately
$8.3 million and an increase in administrative services and other of $4.6
million due primarily to the acquisition of Prime Health, Inc., at the end of
1996. Some of this increase will be offset in the future by the loss of a
portion of the state of Nevada's self-insured medical business. Also, effective
September 30, 1997, the Company terminated its workers' compensation
administrative services contract with the state of Nevada. The contract served
approximately 200,000 enrollees and provided approximately $3.2 million in
revenues for the year ended December 31, 1997. The contract was terminated to
allow the Company to participate in the Nevada workers' compensation insurance
market when the state allows private insurance companies to begin offering
products, which is anticipated for 1999. Professional fees increased $2.4
million, or 8.3%, over 1996 to $31.2 million. This increase is due in part to
the acquisition of the assets and operations of Total Home Care, Inc. ("THC")
during the third quarter. THC provides home infusion, oxygen and durable medical
equipment services in Nevada and Arizona. During the fourth quarter of 1997,
SMHS began the implementation period of its TRICARE contract. The military
contract revenue of $4.3 million is a result of this contract. The Company
expects these revenues to increase substantially in 1998, subject to the results
of the bid protest discussed previously. Investment and other revenue was
consistent with the prior year.
Medical and Specialty Product Expenses. Total medical expenses increased by
$103.4 million in 1997 compared to 1996. This 32.7% increase resulted from the
consolidated member month growth discussed previously. Medical expenses as a
percentage of medical premiums and professional fees ("Medical Loss Ratio")
increased from 76.0% to 76.9% due primarily to member growth and expansion in
areas with higher medical expenses, such as northern Nevada and Texas. In
addition, Med One Health Plan has a higher Medical Loss Ratio, which further
contributed to the increase in the Company's overall Medical Loss Ratio.
Specialty product expenses increased $12.3 million, or 9.4%, over 1996. This
increase is due primarily to the increase in workers' compensation premiums
noted above. Specialty product revenue and expense is primarily related to the
workers' compensation insurance business.
The combined ratio for the workers' compensation insurance business was 101.9%
compared to 103.2% for the comparable prior year period. The reduction was due
to a 40 basis point decrease in the loss ratio along with a 90 basis point
decrease in the expense ratio. Compared to the prior year period, 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. In addition, the Company had net favorable loss development
totaling $9.0 million compared to net favorable loss development of $15.3
million for the comparable prior year period. The favorable development is
largely due to actual paid losses below projected losses and the majority of the
favorable loss development occurred on the 1992 through 1995 accident years.
There can be no assurances that favorable development, or the magnitude thereof,
will continue in the future. The losses and loss adjustment expense ratio for
the year ended December 31, 1997 reflects the Company's current projection of
the ultimate costs of claims occurring in the current as
21
<PAGE>
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 Expenses. General, administrative and
marketing ("G&A") costs increased $21.7 million, or 30.0%, for the twelve months
ended December 31, 1997 compared to the twelve months ended December 31, 1996.
As a percentage of revenues, G&A costs for the twelve months ended December 31,
1997 increased to 13.0% from 12.6% during the comparable period in 1996. Of the
$21.7 million increase in G&A, $8.6 million is in compensation costs primarily
resulting from additional employees supporting expanded services and increased
incentive amounts for management. Broker, third-party administration, and
premium tax expenses increased approximately $8.5 million due to increased
membership. Amortization and depreciation costs increased approximately $1.9
million primarily due to the amortization of goodwill resulting from the Prime
acquisition. The remaining G&A increase is due to additional expenses in several
areas including data processing maintenance.
Military Contract Expense. During the fourth quarter of 1997, SMHS began
the implementation period of its TRICARE contract. The military contract
expense is a result of this contract.
Merger, Restructuring and Start-up Expenses. During 1997, the Company recorded
and paid expenses of approximately $11.0 million, $8.4 million after tax, for
merger-related costs. On March 18, 1997, the Company announced it had terminated
its merger agreement with Physician Corporation of America, Inc. ("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. The lawsuit has been dismissed for
failure to join a necessary party. The Company has also initiated a lawsuit in
the Court of Chancery of the State of Delaware seeking a declaratory judgment as
well as 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.
During the third quarter of 1997, SMHS, a wholly owned subsidiary of the
Company, was awarded a contract to serve TRICARE eligible beneficiaries in
Region 1. This region includes more than 600,000 TRICARE beneficiaries in 13
northeastern states and the District of Columbia. Development expenses of $18.4
million, $10.6 million net of taxes, were recorded in the third quarter
primarily for expenses associated with the Company's proposal to serve eligible
beneficiaries in Region 1. Such expenses were charged to operations upon
notification of award. SMHS is currently in the implementation period of the
contract with actual health care delivery to commence on June 1, 1998. SMHS
subcontracts for health care delivery, including some of the risk, for parts of
the TRICARE contract. The Company believes the TRICARE contract will add
approximately $240 million of annualized revenues when health care delivery
begins in 1998.
SMHS was notified on February 13, 1998 that the 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 TMA, along with the Company, has
filed a motion requesting that 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. The Company currently
anticipates providing health care delivery for one year of the contract should a
re-bid occur.
Interest Expense and Other. Interest expense and other increased approximately
$1.6 million over the prior year primarily due to the $2.1 million benefit for
minority interests recorded in 1996, offset in part by an increase in
capitalized interest related to various construction projects in 1997. In
November 1996, the Company acquired complete ownership of a Texas HMO in which
it had previously held a 50% interest.
22
<PAGE>
That HMO began business in March 1995 and experienced losses in both years. In
the prior year, a portion of these losses resulted in a benefit from minority
interests.
Income Taxes. The Company's effective tax rate for the year ended December 31,
1997 was 11.8%, compared to 25.2% in 1996. The difference between the Company's
effective tax rate and the current federal tax rate is due primarily to a $4.7
million tax benefit recorded as a result of a reduction of the deferred tax
valuation allowance and the Company's portfolio of tax preferred investments.
These benefits are more significant as a result of the non-recurring charges
related to the PCA acquisition and start-up costs associated with the TRICARE
contract. Excluding these non-recurring costs, the effective tax rate for 1997
is 23.9%. See Note 9 of Notes to Consolidated Financial Statements.
Net Income. Excluding non-recurring items and the related tax effects, income
from ongoing operations for 1997 increased $3.1 million, or 7.6%. Net income for
1997, including all non-recurring items, decreased $6.9 million, or 22.2%, from
1996. This decrease was impacted in part by non-recurring items including the
merger-related and start-up costs in 1997 and the restructurings and disposal
costs in 1996.
1996 Compared to 1995
Revenues. The Company's total operating revenues for 1996 increased 23.2% to
$575.4 million from $467.0 million for 1995. The increase was primarily due to
medical premium revenue increases of approximately $67.5 million, or 21.1%, from
the Company's HMO and managed indemnity insurance subsidiaries. Such premium
growth resulted principally from a 19.6% increase in member months. The Company
experienced an overall rate increase for its Medicare members due to an
approximate 2.9% increase in its capitation rate established by HCFA.
Additionally, the Company realized minimal rate changes for the HMO subsidiary's
commercial groups and managed indemnity insurance subsidiary. The Company's
specialty product revenue increased $30.5 million, or 29.7%, to $133.3 million
in 1996 from $102.8 million in 1995. Such increases were primarily from workers'
compensation premiums in California. Professional fees increased $9.4 million,
or 48.5%, over 1995 to $28.8 million. This increase is due primarily to the
acquisition of a medical facility in the fourth quarter of 1995 as well as
expanded services at the Company's existing medical facilities. Investment and
other revenue increased $1.0 million, or 3.8%, over the prior year due to
changes in the investment balances and market yield fluctuations.
Medical and Specialty Product Expenses. Total medical expenses increased by
$70.8 million in 1996 compared to 1995. This 28.9% increase resulted from the
consolidated member month growth discussed above, as well as the clinical
expansions and increases associated with professional fee growth. These factors,
as well as an increase in Medicare members as a percentage of total members,
increased the Company's medical loss ratio to 76.0% for the twelve months ended
December 31, 1996, from 72.3% for the comparable twelve months in 1995. The cost
of providing medical care to Medicare members generally requires a greater
percentage of the premium revenue received. Specialty product expenses increased
$27.9 million, or 27.1%, over 1995. This increase is due primarily to the
increase in workers' compensation premiums noted above, offset in part by the
Company's ability to overlay managed care techniques on the management and
payment of certain workers' compensation claims. In addition, specialty product
expenses for 1996 and 1995 were impacted by the loss development on prior
accident years. During the year, the Company had net favorable loss development
on prior accident years of $15.3 million, compared to net favorable loss
development of $20.1 million for the comparable prior year period. The majority
of the favorable loss development occurred on the 1992 through 1994 accident
years. The favorable development on the 1992 year appears to be primarily due to
the Company's aggressive actions to resolve claims. The favorable development on
the 1993 and 1994 accident years appears to have been aided by the workers'
compensation reforms that were enacted in July 1993 to combat the abuses in
California's workers' compensation system. There can be no assurances that
favorable development, or the magnitude of the development, will continue in the
future. See Note 7 of Notes to Consolidated Financial Statements.
23
<PAGE>
General, Administrative and Marketing Expenses. G&A costs increased $8.7
million, or 13.6%, for the twelve months ended December 31, 1996 compared to the
twelve months ended December 31, 1995. As a percentage of revenues, however, G&A
costs for the twelve months ended December 31, 1996 decreased to 12.6% from
13.6% during the comparable period in 1995. Of the $8.7 million increase in G&A,
$3.3 million is in compensation costs primarily resulting from additional
employees supporting expanded services, $3.8 million is from percent of premium
costs such as broker commissions and premium taxes, and the remaining $1.6
million is made up of various changes which individually are insignificant.
Merger, Restructuring and Start-up Expenses. During 1995, as part of the
Company's clinical expansion and growth efforts, the Company acquired a medical
facility in Mohave County, Arizona, across the border from Laughlin, Nevada.
This medical facility included a small 12-bed hospital. During 1996 the Company
implemented a plan to exit the hospital business and actively pursued buyers for
this business. As a result of this plan, the Company took a charge of $3.8
million ($2.8 million after tax) in the fourth quarter of 1996, primarily to
recognize the estimated costs to dispose of the hospital. As of December 31,
1997, the Company has been unable to reach an agreement to sell the hospital.
As a result of higher than expected claim and administrative costs relative to
premium rates that can be obtained in certain regional insurance operations and
the Company's inability to negotiate adequate provider contracts due to its
limited presence in some of these markets, the Company adopted a plan to
restructure certain insurance operations during the third quarter of 1996 and
recorded a charge of $8.3 million. The plan included the sale or closure of
certain regional operations in California, Arizona and Colorado. The plan will
allow the Company to focus on more favorable operating markets and improve
operating efficiencies. The Company believes that this restructuring, over time,
will result in improved cash flow and operating cost savings in excess of the
amount of the charge.
As a result of these restructurings, the Company recorded expenses of $12.1
million. These costs included cancellation of certain contractual obligations of
$6.0 million, lease termination costs of $1.5 million, and $4.6 million of other
costs including the estimated costs to dispose of the hospital.
Income Taxes. The Company's effective tax rate for the year ended December 31,
1996 was 25.2%, compared to 30.4% in 1995, or 25.4% after taking into account
the non-deductible merger costs incurred in 1995. The difference between the
Company's effective tax rate and the current federal tax rate is due primarily
to a $2.7 million tax benefit recorded as a result of a reduction of the
deferred tax valuation allowance and the Company's significant portfolio of tax
preferred investments. See Note 9 of Notes to Consolidated Financial Statements.
Net Income. Net income for 1996 increased $9.8 million, or 46.2%, over 1995.
This increase was impacted in part by several non-recurring items including the
restructurings in 1996 and discontinued operations and merger costs in 1995.
Excluding non-recurring items and the related tax effects, income from ongoing
operations for 1996 increased $2.6 million, or 6.9%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by approximately $6.8 million
to $96.8 million at December 31, 1997, from $103.6 million at December 31, 1996.
At December 31, 1997, the Company had working capital of $88.4 million. The
primary source of cash received during the year ended December 31, 1997, was
operations.
The Company's cash flow from operating activities resulted in $52.8 million of
cash flow for the twelve months ended December 31, 1997. This cash flow was
primarily generated from net income of $24.2 million, $13.5 million in
depreciation and amortization and $4.3 million in provision for doubtful
accounts,
24
<PAGE>
as well as a net change in operating assets and liabilities, excluding cash and
cash equivalents, of approximately $10.8 million. The increase in cash from
fluctuations in such operating assets and liabilities is principally due to
increases in the reserve for losses and loss adjustment expense, other current
liabilities and medical claims payable. These increases in cash were offset by
decreases in cash due to increases in accounts receivable and other current
assets.
In 1997 the Company spent $3.1 million, net of cash received, to acquire the
operations and assets of a company that provides home infusion, oxygen and
durable medical equipment services in Nevada and Arizona. In the first quarter
of 1998 the Arizona business was sold for $1.5 million. Capital expenditures
were primarily for new facilities as well as the expansion of existing medical
facilities and include $33.9 million for the construction of both a 59,000
square foot medical facility in Las Vegas completed in the fourth quarter of
1997, and an additional administrative headquarters building of approximately
180,000 square feet which should be fully occupied by the end of the first
quarter of 1998. Other capital expenditures were primarily for furniture and
equipment associated with the Company's new military health services subsidiary,
remodeling of certain existing medical space, as well as business expansion of
the HMO and insurance operations, along with general corporate expansion. Such
amounts include $6.1 million in computer hardware and software. Additionally,
the Company used $5.5 million to purchase treasury stock on the open market,
$2.4 million for the reduction of debt, and there was a $28.9 million net change
in marketable securities. These cash outflows were offset by $10.3 million
received in connection with the purchase of stock through the Company's employee
stock plans.
In the second quarter of 1997, the Company amended and increased to $100.0
million its unsecured line of credit from Bank of America National Trust &
Savings Association ("BofA") for a term of five years at an interest rate based
on the London InterBank Offering Rate ("LIBOR"). In March 1997 and December
1997, the Company borrowed $17.0 million and $8.0 million, respectively, for
general corporate purposes. The remaining line of credit may be used for
additional working capital, if necessary. Also in the second quarter of 1997,
the Company's Board of Directors authorized a $3.0 million line of credit from
the Company to the Company's Chief Executive Officer ("CEO"). The CEO borrowed a
total of $2.0 million in 1997, at an interest rate equal to the London InterBank
Offering Rate plus 53 basis points. The line of credit is collateralized by
certain amounts of the CEO's Sierra stock options and is due and payable no
later than June 30, 1998.
In September 1991, CII issued convertible subordinated debentures (the
"Debentures") due September 15, 2001. The Debentures bear interest at 7 1/2%
which is due semi-annually on March 15 and September 15. Each $1,000 in
principal is convertible into 16.921 shares of the Company's common stock at a
conversion price of $59.097 per share. Unamortized issuance costs of $800,000
are included in other assets on the balance sheet and are being amortized over
the life of the Debentures. The Debentures are general unsecured obligations of
CII only and are not guaranteed by Sierra Health Services, Inc. ("Sierra").
During the twelve months ended December 31, 1997, the Company purchased $30,000
of the Debentures on the open market. At December 31, 1997, CII had total assets
of $343.0 million, consisting primarily of investments, and total liabilities of
$285.4 million, consisting primarily of reserves for losses and loss adjustment
expense and the debentures. For the year ended December 31, 1997, CII had net
premiums earned of $129.2 million, investment and other revenue of $17.4
million, and total operating expenses of $135.8 million.
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. The contract
will result in approximately $1.2 billion in estimated revenues over the
five-year term of the contract. The expenses incurred in connection with
obtaining this contract were expensed in the third quarter as previously
discussed. The Company will fund approximately $25.0 million to SMHS during the
seven-month
25
<PAGE>
implementation period of the TRICARE Region 1 contract. These monies will be
reimbursed by the Department of Defense in accordance with the provisions of the
contract. SMHS was notified on February 13, 1998 that the 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 TMA, along with the
Company, has filed a motion requesting that 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. The Company currently anticipates providing health care delivery for
one year of the contract should a re-bid occur.
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 negatively impact its operations. The Company is in the
process of implementing two major systems at an estimated cost of $20.0 million.
These systems will be Year 2000 compliant. The Company is expensing the costs to
make modifications as incurred. Management currently estimates the remaining
modification costs to be approximately $3.0 million to $5.0 million over the
next 12 to 18 months. 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.
The Company has a 1998 capital budget of approximately $50.0 million, primarily
for computer hardware and software, medical buildings, 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. The Company financed a portion of the newly constructed
administrative building in January 1998, and received $15.0 million. On January
12, 1998, $7.3 million of the projected capital expenditure budget was used by
the Company to purchase all of the assets and operations of three clinics in
southern Nevada. The Company's liquidity needs over the next 12 months will
primarily be for the capital items noted above to support growing membership in
Nevada, implementation of the Region 1 TRICARE contract, the Company's stock
repurchase program, as well as debt service and expansion of the Company's
operations, including potential acquisitions. The Company believes that existing
working capital, operating cash flow and, if necessary, mortgage financing and
equipment leasing, and amounts available under its credit facility will be
sufficient to fund its capital expenditures, debt service and any expansion
activities during the next 12 months. 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.
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 reserve requirements. The HMO and insurance subsidiaries had
restricted assets on deposit in various states totaling $16.5 million and $13.6
million, as of December 31, 1997 and December 31, 1996, respectively. The HMO
and insurance subsidiaries also meet requirements to maintain minimum
stockholder's equity ranging from $1.1 million to $5.2 million. Of the cash and
cash equivalents held at December 31, 1997, $82.2 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 terms of existing management
agreements and by
26
<PAGE>
dividends. Remaining amounts are available on an unrestricted basis. The holding
company will not receive dividends from its HMO or insurance subsidiaries that
would cause violation of statutory net worth and reserve requirements.
Inflation
Health care costs generally continue to rise at a faster rate than the Consumer
Price Index. The Company uses various strategies to mitigate the negative
effects of health care cost inflation, including setting commercial premiums
based on its anticipated health care costs, risk-sharing arrangements with the
Company's various health care providers, and other health care cost containment
measures. There can be no assurance, however, that, in the future, the Company's
ability to manage medical costs will not be negatively impacted by items such as
technological advances, competitive pressures, applicable regulations, pharmacy
costs, utilization changes and catastrophic items, which could, in turn, result
in medical cost increases equaling or exceeding premium increases.
Government Regulation
The Company's business, offering health care coverage, health care management
services, workers' compensation programs and, to a lesser extent, the delivery
of medical services, is heavily regulated at both the federal and state levels.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Changes in
applicable laws and regulations are continually being considered and
interpretation of existing laws and rules also may change from time to time.
Regulatory agencies generally have broad discretion in promulgating regulations
and in interpreting and enforcing laws and regulations.
While the Company is unable to predict what regulatory changes may occur or the
impact on the Company of any particular change, the Company's operations and
financial results could be negatively affected by regulatory revisions. For
example, any proposals affecting underwriting practices, limiting rate
increases, requiring new or additional benefits or affecting contracting
arrangements (including proposals to require HMOs and PPOs to accept any health
care providers willing to abide by an HMO's or PPO's contract terms) may have a
material adverse effect on the Company's business. The continued consideration
and enactment of "anti-managed care" laws and regulations by federal and state
bodies may make it more difficult for the Company to control medical costs and
may adversely affect financial results.
In addition to changes in applicable laws and regulations, the Company is
subject to various audits, investigations and enforcement actions. These include
possible government actions relating to the federal Employee Retirement Income
Security Act, which regulates insured and self-insured health coverage plans
offered by employers, the Federal Employees Health Benefit Plan, federal and
state fraud and abuse laws, and laws relating to utilization management and the
delivery of health care. Any such government action could result in assessment
of damages, civil or criminal fines or penalties, or other sanctions, including
exclusion from participation in government programs. In addition, disclosure of
any adverse investigation1
or audit results or sanctions could negatively affect the Company's reputation
in various markets and make it more difficult for the Company to sell its
products and services.
Recently Issued Accounting Standards
Statement of Financial Accounting No. 130, "Reporting Comprehensive Income"
is effective for periods beginning after December 15, 1997 and requires
companies to classify items of other comprehensive income by their nature in a
financial statement. Management does not believe this statement will have a
material impact on the Company's financial statements. Statement of Financial
Accounting No. 131,
27
<PAGE>
"Disclosures about Segments of an Enterprise and Related Information" is also
effective for periods beginning after December 15, 1997 and establishes
additional standards for segment disclosures in the financial statements.
Management has not determined the effect of this statement on its financial
statement disclosure.
ITEM 7a. 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 and by Rule 305
of Regulation S-K are inapplicable to the Company at this time.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Management Report on Consolidated Financial Statements.................... 30
Independent Auditors' Report.............................................. 31
Consolidated Balance Sheets at December 31, 1997 and 1996................. 32
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996, and 1995...................................... 33
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995................... 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995...................................... 35
Notes to Consolidated Financial Statements................................ 36
29
<PAGE>
MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
The management of Sierra Health Services, Inc., is responsible for the integrity
and objectivity of the accompanying Consolidated Financial Statements. The
statements have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis and are not misstated due to fraud or
material error. The statements include some amounts that are based upon the
Company's best estimates and judgment.
The accounting systems and controls of the Company are designed to provide
reasonable assurance that transactions are executed in accordance with
management's authorization, that the financial records are reliable for
preparing financial statements and maintaining accountability for assets, and
that assets are safeguarded against losses from unauthorized use or disposition.
Management believes that for the year ended December 31, 1997, such systems and
controls were adequate to meet the objectives discussed herein.
The accompanying Consolidated Financial Statements have been audited by
independent certified public accountants, whose audits thereof were made in
accordance with generally accepted auditing standards and included a review of
internal accounting controls to the extent necessary to design audit procedures
aimed at gathering sufficient evidence to provide a reasonable basis for their
opinion on the fairness of presentation of the Consolidated Financial Statements
taken as a whole.
The Audit Committee of the Board of Directors, comprised solely of directors
from outside the Company, meets regularly with management and the independent
auditors to review the work procedures of each. The independent auditors have
free access to the Audit Committee, without management being present, to discuss
the results of their opinions on the adequacy of the Company's accounting
controls and the quality of the Company's financial reporting. The Board of
Directors, upon the recommendation of the Audit Committee, appoints the
independent auditors, subject to stockholder ratification.
Anthony M. Marlon, M.D.
Chairman and
Chief Executive Officer
James L. Starr
Senior Vice President,
Chief Financial Officer,
and Treasurer
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sierra Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of Sierra
Health Services, Inc., and its subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedules listed in the index
at Item 14 (a)(2). These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Sierra Health Services, Inc.
and its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 16, 1998
31
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
ASSETS
<CAPTION>
1997 1996
--------------- ----------
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents.............................................. $ 96,841,000 $103,587,000
Short-term Investments................................................. 115,498,000 83,688,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts 1997 - $7,916,000; 1996 - $7,324,000)..................... 42,041,000 31,849,000
Current Portion of Deferred Tax Asset ................................. 15,496,000 13,713,000
Prepaid Expenses and Other Current Assets.............................. 30,730,000 20,098,000
------------ ------------
Total Current Assets............................................... 300,606,000 252,935,000
PROPERTY AND EQUIPMENT, NET................................................ 148,831,000 99,804,000
LONG-TERM INVESTMENTS...................................................... 155,153,000 160,482,000
RESTRICTED CASH AND INVESTMENTS............................................ 16,540,000 13,648,000
REINSURANCE RECOVERABLE, Net of Current Portion............................ 20,245,000 14,721,000
GOODWILL .................................................................. 42,803,000 44,602,000
OTHER ASSETS............................................................... 39,758,000 43,270,000
------------ ------------
TOTAL ASSETS............................................................... $723,936,000 $629,462,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued Liabilities....................................................... $ 43,601,000 $ 37,650,000
Accrued Payroll and Taxes................................................. 14,838,000 12,503,000
Medical Claims Payable.................................................... 55,943,000 46,969,000
Current Portion of Reserve for
Losses and Loss Adjustment Expense .................................. 63,358,000 52,878,000
Unearned Premium Revenue.................................................. 29,763,000 24,210,000
Current Portion of Long-term Debt......................................... 4,726,000 2,195,000
------------- -------------
Total Current Liabilities............................................ 212,229,000 176,405,000
RESERVE FOR LOSSES AND
LOSS ADJUSTMENT EXPENSE (Less Current Portion) ........................... 139,341,000 134,898,000
LONG-TERM DEBT (Less Current Portion) ........................................ 90,841,000 66,189,000
OTHER LIABILITIES ............................................................ 15,843,000 17,488,000
------------- -------------
TOTAL LIABILITIES............................................................. 458,254,000 394,980,000
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 Par Value, 1,000,000
Shares Authorized; None Issued or Outstanding
Common Stock, $.005 Par Value, 40,000,000
Shares Authorized; Shares Issued: 1997 --
18,473,000; 1996-- 17,910,000........................................ 92,000 89,000
Additional Paid-in Capital................................................ 164,294,000 152,035,000
Treasury Stock; 1997-- 284,500; 1996-- 100,200
Common Shares........................................................ (5,601,000) (130,000)
Unrealized Holding Gain on Available-for-Sale Investment.................. 655,000 487,000
Retained Earnings......................................................... 106,242,000 82,001,000
------------ ------------
Total Stockholders' Equity........................................... 265,682,000 234,482,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $723,936,000 $629,462,000
============ ============
</TABLE>
See the accompanying notes to consolidated financial statements.
32
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------
OPERATING REVENUES:
<S> <C> <C> <C>
Medical Premiums............................................. $513,857,000 $386,968,000 $319,475,000
Specialty Product Revenues .................................. 146,211,000 133,324,000 102,807,000
Professional Fees............................................ 31,238,000 28,836,000 19,417,000
Military Contract Revenues .................................. 4,346,000
Investment and Other Revenues ............................... 26,072,000 26,283,000 25,310,000
------------ ------------- --------------
Total..................................................... 721,724,000 575,411,000 467,009,000
------------- ------------ -------------
OPERATING EXPENSES:
Medical Expenses............................................. 419,272,000 315,915,000 245,135,000
Specialty Product Expenses................................... 143,082,000 130,758,000 102,859,000
General, Administrative and Marketing Expenses............... 93,919,000 72,237,000 63,562,000
Military Contract Expenses .................................. 4,193,000
Merger, Restructuring and Start-up Expenses................. 29,350,000 12,064,000 11,614,000
------------ ------------ -------------
Total..................................................... 689,816,000 530,974,000 423,170,000
----------- ------------ -------------
OPERATING INCOME.................................................. 31,908,000 44,437,000 43,839,000
INTEREST EXPENSE AND OTHER, NET................................... (4,433,000) (2,823,000) (3,737,000)
---------- ------------ -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ......................................... 27,475,000 41,614,000 40,102,000
PROVISION FOR INCOME TAXES........................................ 3,234,000 10,471,000 12,198,000
------------ ----------- -------------
INCOME FROM CONTINUING OPERATIONS................................. 24,241,000 31,143,000 27,904,000
NET OPERATING LOSS ON
DISCONTINUED OPERATIONS ..................................... (2,010,000)
NET LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS ..................................... (4,590,000)
----------------- ----------------- -------------
NET INCOME ....................................................... $ 24,241,000 $ 31,143,000 $ 21,304,000
============ ============ ============
EARNINGS PER COMMON SHARE:
Income from Continuing Operations ........................... $1.35 $1.76 $1.60
Net Operating Loss on Discontinued Operations ............... (.12)
Net Loss on Disposal of Discontinued Operations ............. (.26)
-------- -------- ------
Net Income Per Share .................................... $1.35 $1.76 $1.22
===== ===== =====
EARNINGS PER COMMON SHARE ASSUMING DILUTION:
Income from Continuing Operations ........................... $1.33 $1.72 $1.57
Net Operating Loss on Discontinued Operations ............... (.11)
Net Loss on Disposal of Discontinued Operations ............. (.26)
-------- -------- ------
Net Income Per Share .................................... $1.33 $1.72 $1.20
===== ===== =====
</TABLE>
See the accompanying notes to consolidated financial statements.
33
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
(Loss)
Gain on
Additional Available- Total
Common Stock Paid- In Treasury for-Sale Retained Stockholders
Shares Amount Capital Stock Investments Earnings Equity
-------- -------- ------------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995.......... 17,336,000 $87,000 $141,398,000 $(130,000) $(2,752,000) $29,554,000 $168,157,000
Issuance of Common Stock in
Connection with Stock Plans.... 304,000 1,000 4,297,000 4,298,000
Issuance of Stock in Connection
with Acquisition .............. 37,000 87,000 87,000
Income Tax Benefit Realized Upon
Exercise of Stock Options...... 1,458,000 1,458,000
Change in Unrealized Holding Gains
(Losses), Net of Taxes......... 12,411,000 12,411,000
Net Income........................ 21,304,000 21,304,000
------------ ----------- ----------- --------- --------- ----------- ---------
BALANCE, DECEMBER 31, 1995........ 17,677,000 88,000 147,240,000 (130,000) 9,659,000 50,858,000 207,715,000
Issuance of Common Stock in
Connection with Stock Plans.... 233,000 1,000 3,637,000 3,638,000
Income Tax Benefit Realized Upon
Exercise of Stock Options...... 1,158,000 1,158,000
Change in Unrealized Holding Gains
(Losses), Net of Taxes ........ (9,172,000) (9,172,000)
Net Income........................ 31,143,000 31,143,000
---------- ---------- ------------ --------- ----------- -----------
BALANCE, DECEMBER 31, 1996 ....... 17,910,000 89,000 152,035,000 (130,000) 487,000 82,001,000 234,482,000
Issuance of Common Stock in
Connection with Stock Plans.... 563,000 3,000 10,255,000 10,258,000
Purchase of Treasury Stock ....... (5,471,000) (5,471,000)
Income Tax Benefit Realized Upon
Exercise of Stock Options...... 2,004,000 2,004,000
Change in Unrealized Holding Gains
(Losses), Net of Taxes ........ 168,000 168,000
Net Income........................ 24,241,000 24,241,000
---------- ----------- ------------ ----------- --------- ------------ -----------
BALANCE, DECEMBER 31, 1997 ....... 18,473,000 $92,000 $164,294,000 $(5,601,000) $655,000 $106,242,000 $265,682,000
========== ======= ============ =========== ======== ============ ============
</TABLE>
See the accompanying notes to consolidated financial statements.
34
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income ........................................................ $24,241,000 $ 31,143,000 $ 21,304,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Loss on Discontinued Operations ............................... 6,600,000
Depreciation and Amortization.................................. 13,510,000 10,499,000 9,505,000
Provision for Doubtful Accounts................................ 4,283,000 3,057,000 1,694,000
Change in Assets and Liabilities, Net of
Effects from Acquisitions:
Other Assets................................................... (5,851,000) (16,301,000) (7,542,000)
Reinsurance Recoverable ....................................... (5,635,000) 10,164,000 3,464,000
Reserve for Losses and Loss Adjustment Expense ................ 14,923,000 5,458,000 (8,645,000)
Other Liabilities ............................................. 6,838,000 6,985,000 1,665,000
Minority Interests............................................. (12,000) (1,746,000) (2,606,000)
Accounts Receivable............................................ (12,290,000) (12,469,000) (923,000)
Other Current Assets........................................... (11,853,000) (4,671,000) (2,549,000)
Medical Claims Payable......................................... 8,974,000 4,973,000 6,341,000
Other Current Liabilities...................................... 15,692,000 15,354,000 8,873,000
------------ ------------ -----------
Net Cash Provided by Continuing Operations ....................... 52,820,000 52,446,000 37,181,000
Net Cash Used by Discontinued Operations .......................... (2,651,000)
----------------- ----------------- ------------
Net Cash Provided by Operating Activities ..................... 52,820,000 52,446,000 34,530,000
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures............................................... (55,642,000) (17,927,000) (20,522,000)
Property and Equipment Dispositions, Net........................... 772,000 172,000 725,000
Purchase of Available-for-Sale Investments......................... (1,078,396,000) (712,503,000) (368,875,000)
Proceeds from Sales/Maturities of
Available-for-Sale Investments................................. 1,046,523,000 752,279,000 365,539,000
Purchase of Held-to-Maturity Investments........................... (7,523,000) (25,835,000) (11,735,000)
Proceeds from Maturities of Held-to-Maturity Investments........... 10,449,000 39,184,000 20,183,000
Change in Financed Premium Receivable ............................. 15,676,000
Acquisitions, Net of Cash Acquired................................. (3,145,000) (36,310,000) (11,023,000)
------------ ------------ -----------
Net Cash Used for Investing Activities......................... (86,962,000) (940,000) (10,032,000)
------------ ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-term Borrowing.................................. 25,000,000 1,000,000 2,625,000
Payments on Debt and Capital Leases................................ (2,391,000) (9,601,000) (11,931,000)
Purchase of Treasury Stock ........................................ (5,471,000)
Exercise of Stock in Connection with Stock Plans................... 10,258,000 3,638,000 3,807,000
------------ ----------- ----------
Net Cash Provided by (Used for) Financing Activities........... 27,396,000 (4,963,000) (5,499,000)
------------ ---------- ----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS............................................... (6,746,000) 46,543,000 18,999,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................... 103,587,000 57,044,000 38,045,000
------------- ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................. $ 96,841,000 $103,587,000 $ 57,044,000
============ ============ ============
</TABLE>
See the accompanying notes to consolidated financial statements.
35
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
1. BUSINESS
Business. The consolidated financial statements include the accounts of Sierra
Health Services, Inc. ("Sierra") and its subsidiaries (collectively referred to
as the "Company"). The Company is a managed health care organization that
provides and administers the delivery of comprehensive health care and workers'
compensation programs with an emphasis on quality care and cost management. The
Company's broad range of managed health care services is provided through its
health maintenance organizations ("HMOs"), managed indemnity plans, third-party
administrative services programs for employer-funded health benefit plans and
workers' compensation medical management programs. Ancillary products and
services that complement the Company's managed health care product lines are
also offered.
Acquisitions. On October 31, 1995, the Company issued approximately 2.7 million
shares of its common stock in exchange for all of the outstanding common stock
of CII Financial, Inc., and subsidiaries ("CII"). In addition, all outstanding
CII stock options were converted into options to purchase up to approximately
540,000 shares of the Company's common stock. The merger was accounted for as a
pooling of interests and, accordingly, the Company's consolidated financial
statements have been restated to include the accounts and operations of CII for
all periods prior to the merger.
In November 1996, the Company acquired complete ownership of HMO Texas, LC ("HMO
Texas") for $5,040,000. The Company had previously held a 50 percent interest in
the Houston-based health plan.
The purchase resulted in goodwill of $5,040,000.
Effective December 31, 1996 the Company purchased Prime Holdings, Inc.
("Prime"), for approximately $32,219,000 in cash. At December 31, 1996 Prime
operated Med One Health Plan, Inc. ("Med One"), a 12,800 member HMO. Prime also
served 215,000 people through preferred provider organizations, workers'
compensation programs and administrative service products for self-insured
employers and union welfare trust funds, primarily in the state of Nevada. The
acquisition resulted in goodwill of $31,117,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. All significant intercompany transactions and
balances have been eliminated. Sierra's wholly owned subsidiaries include Health
Plan of Nevada, Inc. ("HPN"), HMO Texas and Med One, all licensed HMOs, Sierra
Health and Life Insurance Company, Inc. ("SHL"), a health and life insurance
company, Southwest Medical Associates, Inc. ("SMA"), a multi-specialty medical
group, CII, a holding company primarily engaged in writing workers' compensation
insurance through its wholly owned subsidiaries, Sierra Military Health
Services, Inc., ("SMHS"), a company that has been contracted to provide and
administer managed care services to certain TRICARE eligible beneficiaries,
administrative services companies, a home health care agency, a hospice and a
company that provides and manages mental health and substance abuse services.
Medical Premiums. Non-Medicare member enrollment is represented principally by
employer groups. Medical premiums are billed to each employer group in
accordance with negotiated contracts, and such premium revenue is recognized
when earned. Unearned premium revenue includes payments under prepaid Medicare
contracts with the Health Care Financing Administration ("HCFA") and prepaid
HPN, HMO Texas and Med One commercial and SHL indemnity premiums. HPN and HMO
Texas offer a prepaid health care program to Medicare recipients. Revenues
associated with these Medicare recipients were approximately $186,105,000,
$140,611,000, and $111,584,000 in 1997, 1996 and 1995, respectively.
36
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
Specialty Product Revenue. These revenues consist primarily of workers'
compensation premiums. Premiums are calculated by formula such that the premium
written is earned pro rata over the term of the policy. Also included in
specialty product revenues are administrative services and certain ancillary
product revenues. Such revenues are recognized in the period in which the
service is performed or the period that coverage for services is provided.
Premiums written in excess of premiums earned are recorded as an unearned
premium revenue liability. Premiums earned include an estimate for earned but
unbilled premiums.
Professional Fees. Revenue for professional medical services is recorded on the
accrual basis in the period in which the services are provided. Such revenue is
recorded at established rates net of provisions for estimated contractual and
charitable allowances.
Medical Expenses. Sierra contracts with hospitals, physicians and other
providers of health care under capitated or discounted fee-for-service
arrangements including hospital per diems to provide medical care services to
enrollees. Capitated providers are at risk for the cost of medical care services
provided to the Company's enrollees in the relevant geographic areas; however,
the Company is ultimately responsible for the provision of services to its
enrollees should the capitated provider be unable to provide the contracted
services. Health care costs are recorded in the period when services are
provided to enrolled members, including estimates for provider costs which have
been incurred as of the balance sheet date but not reported to the Company.
Losses on specific contracts, if any, are accrued when measurable.
Specialty Product Expenses. This expense consists primarily of losses and loss
adjustment expense ("LAE") and policy acquisition costs associated with issued
workers' compensation policies. Losses and LAE is based upon the accumulation of
cost estimates for reported claims occurring during the period as well as an
estimate for losses that have occurred but have not yet been reported. Policy
acquisition costs consist of commissions, premium taxes and other underwriting
costs, which are directly related to the production and retention of new and
renewal business and are deferred and amortized as the related premiums are
earned. Should it be determined that future policy revenues and earnings on
invested funds relating to existing insurance contracts will not be adequate to
cover related costs and expenses, deferred costs are expensed. Also included in
specialty product expense are costs associated with administrative services and
certain ancillary products. These costs are recorded when incurred.
Cash and Cash Equivalents. The Company considers cash and cash equivalents as
all highly liquid instruments with a maturity of three months or less at time of
purchase. The carrying amount of cash and cash equivalents approximates fair
value because of the short maturity of these instruments.
Marketable Investments. Short- and long-term investments consist
principally of U.S. Government securities and municipal bonds, as well as
corporate and mortgage backed securities. Short-term investments have maturities
of one year or less. Long-term investments have maturities in excess of one
year.
Restricted Cash and Investments. Certain subsidiaries are required by state
regulatory agencies to maintain certain deposits and must also meet certain net
worth and reserve requirements. The Company and its subsidiaries are in
compliance with the applicable minimum regulatory and capital requirements.
37
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
Property and Equipment. Property and equipment are stated at cost. Maintenance
and repairs that do not improve or extend the life of the respective assets are
charged to operations. Depreciation and amortization is computed using the
straight-line method over the estimated service lives of the assets or terms of
leases if shorter. Estimated useful lives are as follows:
Buildings and Improvements 30 years
Leasehold Improvements 3 - 10 years
Furniture, Fixtures and Equipment 3 - 5 years
Data Processing Hardware and Software 3 - 5 years
Goodwill. Goodwill has been recorded primarily as a result of various business
acquisitions by the Company. Amortization is provided on a straight line basis
over periods not exceeding 30 years. The Company evaluates the carrying value of
its intangible assets at each balance sheet date.
Medical Claims Payable. Medical claims payable includes the estimated cost for
unpaid claims for which health care services have been provided to enrollees and
a provision of the estimated costs for claims that have occurred but have not
been reported.
Reserve for Losses and Loss Adjustment Expense. The reserve for losses and LAE
consists of estimated costs of each unpaid claim reported to the Company prior
to the close of the accounting period, as well as those incurred but not yet
reported. The methods for establishing and reviewing such liabilities are
continually reviewed and adjustments are reflected in current operations.
Income Taxes. The Company accounts for income taxes using the liability method.
Deferred income tax assets and liabilities result from temporary differences
between the tax basis of assets and liabilities and the reported amounts in the
consolidated financial statements that will result in taxable or deductible
amounts in future years. The Company's temporary differences arise principally
from certain net operating losses, accrued expenses, reserves and depreciation.
Discontinued Operations. During 1995, CII sold its interest in a subsidiary
for a combination of common stock and warrants of the purchaser. This
transaction was recorded as a discontinued operation.
Concentration of Credit Risk. The Company's financial instruments that are
exposed to credit risk consist primarily of investments and accounts receivable.
The Company maintains cash and cash equivalents, and short- and long-term
investments with various financial institutions. These financial institutions
are located in many different geographies, and company policy is designed to
limit exposure with any one institution.
Credit risk with respect to accounts receivable is generally diversified due to
the large number of entities comprising the Company's customer base and their
dispersion across many different industries. These customers are primarily
located in the states in which the Company operates. Such operations are
principally in California, Colorado, Nevada and Texas. However, the Company is
licensed and does business in several other states as well. The Company also has
receivables from certain reinsurers. Reinsurance contracts do not relieve the
Company from its obligations to enrollees or policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company. The
Company evaluates the financial condition of its reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. All reinsurers that
the Company has reinsurance contracts with are rated A or better by the A.M.
Best Company.
38
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
Recently Issued Accounting Standards. Statement of Financial Accounting No. 130,
"Reporting Comprehensive Income" is effective for periods beginning after
December 15, 1997 and requires companies to classify items of other
comprehensive income by their nature in a financial statement. Management does
not believe this statement will have a material impact on the Company's
financial statements. Statement of Financial Accounting No. 131, "Disclosures
about Segments of an Enterprise and Related Information" is also effective for
periods beginning after December 15, 1997 and establishes additional standards
for segment disclosures in the financial statements. Management has not
determined the effect of this statement on its financial statement disclosure.
Estimates and Assumptions. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates and assumptions include, but are not
limited to, medical and specialty product expenses. Actual results may
materially differ from estimates.
Merger, Restructuring and Start-up Expenses. Merger, restructuring and start-up
expenses represent the non-recurring incremental costs the Company has incurred
in connection with various mergers, acquisitions and planned dispositions as
well as costs associated with the Company's proposal to serve eligible TRICARE
beneficiaries in Region 1. Costs recorded for restructurings satisfy the
definitions and criteria set forth in Emerging Issues Task Force Issue 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)," that
are directly related to the restructurings.
Reclassifications. Certain amounts in the Consolidated Financial Statements for
the years ended December 31, 1996 and 1995 have been reclassified to conform
with the current year presentation.
39
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
3. EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted earnings
per share ("EPS"):
<TABLE>
<CAPTION>
Dilutive
Basic Stock Options Diluted
For the Year Ended December 31, 1997:
<S> <C> <C>
Income from Continuing Operations.............. $24,241,000 $24,241,000
Shares......................................... 18,008,000 276,000 18,284,000
Per Share Amount............................... 1.35 1.33
For the Year Ended December 31, 1996:
Income from Continuing Operations.............. 31,143,000 31,143,000
Shares......................................... 17,726,000 401,000 18,127,000
Per Share Amount............................... 1.76 1.72
For the Year Ended December 31, 1995:
Income from Continuing Operations.............. 27,904,000 27,904,000
Shares......................................... 17,414,000 320,000 17,734,000
Per Share Amount............................... 1.60 1.57
</TABLE>
CII issued convertible subordinated debentures (the "Debentures") due September
15, 2001. Each $1,000 in principal is convertible into 16.921 shares of the
Company's common stock at a conversion price of $59.097 per share. The
Debentures were not included in the computation of EPS because their effect
would be anti-dilutive.
40
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
Classification 1997 1996
<S> <C> <C>
Land................................................... $14,296,000 $12,224,000
Buildings and Improvements............................. 109,307,000 63,229,000
Furniture, Fixtures and Equipment...................... 38,692,000 35,785,000
Data Processing Equipment and Software................. 31,452,000 21,034,000
Construction in Progress............................... 4,170,000 7,858,000
Less: Accumulated Depreciation ........................ ( 49,086,000) (40,326,000)
------------ -----------
Net Property and Equipment......................... $148,831,000 $99,804,000
============ ===========
</TABLE>
The following is an analysis of property and equipment under capital leases by
classification as of December 31:
<TABLE>
<CAPTION>
Classification 1997 1996
<S> <C> <C>
Data Processing Equipment and Software ................ $4,779,000 $1,682,000
Furniture, Fixtures and Equipment...................... 728,000 730,000
Building............................................... 245,000 245,000
Less: Accumulated Depreciation......................... (467,000) (1,496,000)
---------- ----------
Net Property and Equipment.......................... $5,285,000 $1,161,000
========== ==========
</TABLE>
The Company capitalizes interest expense as part of the cost of construction of
facilities and the implementation of computer systems. Interest expense
capitalized in 1997, 1996 and 1995 was $1,621,000, $245,000 and $183,000,
respectively.
5. CASH AND INVESTMENTS
Marketable debt investments that the Company has the intention and ability to
hold to maturity are stated at amortized cost and categorized as
held-to-maturity. The remaining marketable debt and equity investments have been
categorized as available-for-sale and as a result are stated at their fair
value. Unrealized holding gains and losses on available-for-sale securities are
included as a separate component of stockholders' equity until realized. Gross
realized gains and losses in 1997 were $2,878,000 and $2,373,000, respectively.
Realized gains and losses are calculated using the specific identification
method and are included in net income.
41
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
The following table summarizes the Company's short-term, long-term and
restricted investments as of December 31, 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-Sale Investments:
Classified as Short-term:
U.S. Government
<S> <C> <C> <C> <C>
and its Agencies........................... $ 7,577,000 $ 31,000 $ 1,000 $ 7,607,000
Municipal Obligations......................... 41,732,000 88,000 194,000 41,626,000
Corporate Bonds............................... 48,945,000 345,000 74,000 49,216,000
Other . . . . . .............................. 6,163,000 9,000 99,000 6,073,000
------------- ----------- --------- -------------
Total Short-term........................... 104,417,000 473,000 368,000 104,522,000
------------ ---------- --------- ------------
Classified as Long-term:
U.S. Government
and its Agencies........................... 38,031,000 169,000 59,000 38,141,000
Municipal Obligations......................... 3,160,000 139,000 1,000 3,298,000
Corporate Bonds............................... 81,299,000 776,000 43,000 82,032,000
Other . . . . ................................ 63,000 63,000
-------------- -------------- ------------ --------------
Total Long-term............................ 122,553,000 1,084,000 103,000 123,534,000
------------ ---------- -------- ------------
Classified as Restricted:
U.S. Government
and its Agencies........................... 8,639,000 34,000 12,000 8,661,000
Municipal Obligations......................... 3,166,000 104,000 3,270,000
Corporate Bonds............................... 497,000 1,000 498,000
Other. . . . . . . . . ....................... 2,373,000 2,373,000
-------------- -------------- ------------- --------------
Total Restricted .......................... 14,675,000 139,000 12,000 14,802,000
------------- ------------ --------- -------------
Total Available-for-Sale ............... $241,645,000 $1,696,000 $483,000 $242,858,000
============ ========== ======== ============
Held-to-Maturity Investments:
Classified as Short-term:
U.S. Government
and its Agencies........................... $ 2,884,000 $ 33,000 $ 2,917,000
Corporate Bonds .............................. 8,092,000 189,000 8,281,000
-------------- ----------- ------------
Total Short-term........................... 10,976,000 222,000 11,198,000
------------- ----------- ------------
Classified as Long-term:
U.S. Government
and its Agencies........................... 14,313,000 20,000 $ 38,000 14,295,000
Municipal Obligations......................... 6,038,000 372,000 6,410,000
Corporate Bonds............................... 11,268,000 509,000 11,000 11,766,000
----------- ----------- --------- -----------
Total Long-term............................ 31,619,000 901,000 49,000 32,471,000
----------- ----------- -------- -----------
Classified as Restricted:
Municipal Obligations......................... 575,000 26,000 601,000
Corporate Bonds............................... 1,163,000 22,000 1,185,000
------------- ----------- ------------
Total Restricted .......................... 1,738,000 48,000 1,786,000
------------- ----------- ------------
Total Held-to-Maturity ................. $44,333,000 $1,171,000 $ 49,000 $ 45,455,000
============ ========== ========= ============
</TABLE>
42
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
The following table summarizes the Company's short-term, long-term and
restricted investments as of December 31, 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-Sale Investments:
Classified as Short-term:
U.S Government
<S> <C> <C> <C>
and its Agencies..................... $ 14,410,000 $ 25,000 $ 14,435,000
Municipal Obligations................... 36,363,000 164,000 $ 78,000 36,449,000
Corporate Bonds......................... 10,521,000 26,000 3,000 10,544,000
Other. . . . ............... 21,902,000 66,000 211,000 21,757,000
------------ --------- --------- -----------
Total Short-term..................... 83,196,000 281,000 292,000 83,185,000
------------ -------- -------- ------------
Classified as Long-term:
U.S. Government
and its Agencies..................... 67,108,000 131,000 791,000 66,448,000
Municipal Obligations................... 14,049,000 519,000 62,000 14,506,000
Corporate Bonds......................... 32,315,000 199,000 184,000 32,330,000
Other . . . . .......................... 158,000 29,000 129,000
-------------- ------------- ----------- --------------
Total Long-term...................... 113,630,000 849,000 1,066,000 113,413,000
------------ --------- ---------- ------------
Classified as Restricted:
U.S. Government
and its Agencies..................... 6,997,000 102,000 12,000 7,087,000
Municipal Obligations................... 2,485,000 149,000 2,634,000
Corporate Bonds......................... 492,000 492,000
Other. . . . . . . . . ................. 1,797,000 1,797,000
-------------- -------------- -------------- -------------
Total Restricted .................... 11,771,000 251,000 12,000 12,010,000
------------- ---------- ----------- ------------
Total Available-for-Sale ......... $208,597,000 $1,381,000 $1,370,000 $208,608,000
============ ========== ========== ============
Held-to-Maturity Investments:
Classified as Short-term:
Municipal Obligations .................. $ 503,000 $ 6,000 $ 509,000
-------------- ------------ -------------
Classified as Long-term:
U.S. Government
and its Agencies..................... 20,644,000 28,000 $ 460,000 20,212,000
Municipal Obligations................... 6,359,000 456,000 6,815,000
Corporate Bonds......................... 20,066,000 398,000 194,000 20,270,000
------------ ---------- ---------- ------------
Total Long-term...................... 47,069,000 882,000 654,000 47,297,000
------------ ---------- ---------- ------------
Classified as Restricted:
Municipal Obligations................... 575,000 38,000 613,000
Corporate Bonds......................... 1,063,000 28,000 1,091,000
------------ ---------- ------------
Total Restricted .................... 1,638,000 66,000 1,704,000
------------ ---------- ------------
Total Held-to-Maturity ........... $ 49,210,000 $ 954,000 $ 654,000 $ 49,510,000
============ ========== ========== ============
</TABLE>
43
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
The contractual maturities of available-for-sale short-term, long-term and
restricted investments at December 31, 1997 are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations. <TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
Due in one year or less...................................... $ 61,517,000 $ 61,339,000
Due after one year through five years........................ 92,459,000 93,201,000
Due after five years through ten years....................... 66,406,000 66,961,000
Due after ten years.......................................... 21,263,000 21,357,000
------------ ------------
Total................................................... $241,645,000 $242,858,000
============ ============
</TABLE>
The contractual maturities of held-to-maturity short-term, long-term and
restricted investments at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
Due in one year or less...................................... $ 1,140,000 $ 1,140,000
Due after one year through five years........................ 16,111,000 16,767,000
Due after five years through ten years....................... 8,707,000 9,005,000
Due after ten years.......................................... 18,375,000 18,543,000
----------- -----------
Total................................................... $44,333,000 $45,455,000
=========== ===========
</TABLE>
Of the cash and cash equivalents that total $96,841,000 in the accompanying
Consolidated Balance Sheet at December 31, 1997, $82,194,000 is limited for use
only by the Company's regulated subsidiaries. Such amounts are available for
transfer to Sierra from the regulated subsidiaries only to the extent that they
can be remitted in accordance with terms of existing management agreements and
by dividends which customarily must be approved by regulating state insurance
departments. The remainder is available to Sierra on an unrestricted basis.
6. REINSURANCE
In the normal course of business, the Company seeks to reduce potential losses
that may arise from catastrophic events that cause unfavorable underwriting
results by reinsuring certain levels of such risk with other reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsurance policy.
The Company is covered under medical reinsurance agreements that provide
coverage for 50% - 90% of hospital and other costs in excess of $200,000 per
case, up to a maximum of $2,000,000 per member per lifetime for both the managed
indemnity and HMO subsidiaries. In addition, certain of the Company's HMO
members are covered by an excess catastrophe reinsurance contract. Reinsurance
premiums of $3,156,000, $3,235,000 and $2,827,000 net of reinsurance recoveries
of $1,729,000, $2,276,000 and $1,133,000 are included in medical expense for
1997, 1996 and 1995, respectively. In addition, SHL maintains reinsurance on
certain other insurance products.
44
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
CII also has reinsurance treaties in effect. The reinsurers have assumed the
liability on that portion of workers' compensation claims between $350,000 and
$60,000,000 per occurrence for 1997 and 1996 and between $250,000 and
$60,000,000 per occurrence for 1995. At December 31, 1997 and 1996, the amount
of reinsurance recoverable for unpaid losses and loss adjustment expense was
$21,056,000 and $15,676,000, respectively. The amount of reinsurance receivable
for paid losses and loss adjustment expense was $358,000 and $103,000,
respectively.
Reinsurance contracts do not relieve the Company from its obligations to
enrollees or policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company. The Company evaluates the financial
condition of its reinsurers to minimize its exposure to significant losses from
reinsurer insolvencies. All reinsurers that the Company has reinsurance
contracts with are rated A or better by the A.M. Best Company.
The following table provides workers' compensation reinsurance information for
the three years ended December 31, 1997:
<TABLE>
<CAPTION>
Change in
Recoveries Recoverable
on Paid on Unpaid Premiums
Losses/LAE Losses/LAE Ceded
1997:
<S> <C> <C> <C>
General Reinsurance Corporation................. $ 841,000 $ 5,380,000 $ 4,872,000
Others ......................................... 187,000
--------------- ----------------- -----------
Total .......................................... $ 841,000 $ 5,380,000 $ 5,059,000
========== =========== ===========
1996:
General Reinsurance Corporation................. $3,076,000 $(10,195,000) $4,713,000
Others ......................................... 456,000
--------------- ----------------- -----------
Total .......................................... $3,076,000 $(10,195,000) $5,169,000
========== ============ ==========
1995:
General Reinsurance Corporation................. $2,426,000 $ (3,472,000) $3,727,000
Others ......................................... 300,000
--------------- ------------------ -----------
Total .......................................... $2,426,000 $ (3,472,000) $4,027,000
========== ============ ==========
</TABLE>
45
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
7. LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
reserve balances for unpaid losses and LAE. There can be no assurances that
favorable development, or the magnitude of the development, will continue in the
future. <TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
--------------- --------------- ---------
<S> <C> <C> <C>
Net Beginning Losses and LAE Reserve ..................... $172,100,000 $156,447,000 $161,620,000
Net Provision for Insured Events Incurred in:
Current Year .......................................... 102,301,000 101,401,000 75,978,000
Prior Years............................................ (8,970,000) (15,284,000) (20,079,000)
------------ ------------- -------------
Total Net Provision.................................. 93,331,000 86,117,000 55,899,000
------------ ------------- -------------
Net Payments for Losses and LAE
Attributable to Insured Events Incurred in:
Current Year .......................................... 26,811,000 24,733,000 16,553,000
Prior Years............................................ 56,977,000 45,731,000 44,519,000
------------ ------------ ------------
Total Net Payments .................................. 83,788,000 70,464,000 61,072,000
------------ ------------ ------------
Net Ending Losses and LAE Reserve ........................ 181,643,000 172,100,000 156,447,000
Reinsurance Recoverable .................................. 21,056,000 15,676,000 25,871,000
------------ ------------ ------------
Gross Ending Losses and LAE Reserve ...................... $202,699,000 $187,776,000 $182,318,000
============ ============ ============
</TABLE>
46
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
8. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------------- ----------
<S> <C> <C> <C>
7 1/2% Convertible Subordinated Debentures ........................ $54,467,000 $54,497,000
Revolving Loan ...................................................... 25,000,000 0
7 3/8% Mortgage Note ............................................... 5,833,000 7,833,000
Adjustable Rate Mortgage Note ....................................... 3,116,000 3,167,000
Other................................................................ 7,151,000 2,887,000
------------ ------------
Total.............................................................. 95,567,000 68,384,000
Less Current Portion................................................. (4,726,000) (2,195,000)
----------- -----------
Long-term Debt....................................................... $90,841,000 $66,189,000
=========== ===========
</TABLE>
7 1/2% Convertible Subordinated Debentures. In September 1991 CII issued
convertible subordinated debentures (the "Debentures") due September 15, 2001.
The Debentures bear interest at 7-1/2% which is due semi-annually on March 15
and September 15. Each $1,000 in principal is convertible into 16.921 shares of
the Company's common stock at a conversion price of $59.097 per share.
Unamortized issuance costs of $803,000 are included in other assets on the
balance sheet and are being amortized over the life of the Debentures. Accrued
interest on the Debentures as of December 31, 1997 and 1996 was $1,191,000 and
$1,192,000, respectively. The Debentures are redeemable by CII, in whole or in
part, at redemption prices ranging from 102.25% in 1998 to 100.75% in 2000, plus
accrued interest. The Debentures are general unsecured obligations of CII only
and were not assumed or guaranteed by Sierra. During the twelve months ended
December 31, 1997 and 1996, the Company purchased $30,000 and $2,303,000,
respectively, of the debentures on the open market.
Revolving Loan. As of December 31, 1997, the Company has drawn $25.0 million on
its $100.0 million line of credit ("LOC") for general corporate purposes at a
current interest rate of 6.3%. The remaining line of credit may be used for
general corporate purposes, including acquisitions, and may be available for
additional working capital, if necessary.
7 3/8% Mortgage Note. In December 1993, the Company obtained a loan from Bank of
America, Nevada. This loan is secured by a deed of trust, assignment of rents
and leases, and a security agreement and fixture filing covering a portion of
the Company's administrative headquarters complex and underlying real property.
In January 1998, the Company obtained a $15,000,000 loan from Bank of America,
Nevada at an interest rate of 7.11%. This loan is secured by a deed of trust,
assignment of rents and leases, and a security agreement and fixture filing
covering the newly constructed portion of the Company's administrative
headquarters complex and underlying real property. This note is not reflected in
the Company's financial statements at December 31, 1997.
Adjustable Rate Mortgage Note. The Company has a mortgage which has an
adjustable rate with an interest margin of 3% over the Federal Home Loan Bank
Board 11th District Cost of Funds Index, a maximum interest rate of five
percentage points above the initial rate of 11.85% and a minimum interest rate
of 8%. The interest rate at December 31, 1997 was 8.0%. This mortgage is secured
by a medical facility.
47
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
Other. The Company has obligations under capital leases with interest rates from
6.3% to 13.4%. In addition, the Company has a term loan due July 1998 including
cumulative interest at 7.0%.
Scheduled maturities of the Company's notes payable and future minimum payments
under capital leases, together with the present value of the net minimum lease
payments at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Obligations
Notes Under Capital
Year ending December 31, Payable Leases
<S> <C> <C> <C>
1998................................................. $ 3,846,000 $1,247,000
1999................................................. 5,058,000 1,260,000
2000................................................. 2,000,000 1,301,000
2001................................................. 54,467,000 1,137,000
2002 ................................................ 25,000,000 1,133,000
Thereafter........................................... -- 401,000
-------------- ----------
Total............................................. $90,371,000 6,479,000
===========
Less: Amounts Representing Interest................. (1,283,000)
----------
Present Value of Minimum Lease Payments.............. $5,196,000
==========
</TABLE>
The fair value of the Debentures at December 31, 1997 was $51,744,000 which was
determined based on the quoted market price at December 31, 1997. Excluding the
Debentures, the fair value of long-term debt, including the current portion, is
$41,410,000 based on the borrowing rates currently available to the Company for
bank loans with similar terms and average maturities.
48
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
9. INCOME TAXES
A summary of the provision for income taxes for the years ended December 31,
1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ --------
Provision for Income Taxes:
<S> <C> <C> <C>
Current..................................... $5,528,000 $11,860,000 $11,736,000
Deferred.................................... (2,294,000) (1,389,000) 462,000
---------- ---------- -----------
$3,234,000 $10,471,000 $12,198,000
========== =========== ===========
</TABLE>
The following reconciles the difference between the 1997, 1996 and 1995 current
and statutory provision for income taxes:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ --------
<S> <C> <C> <C>
Statutory Rate .................................. 35% 35% 35%
Tax Preferred Investments ....................... (5) (6) (9)
Change in Valuation Allowance ................... (17) (6) (2)
Non-deductible Acquisition Costs ................ 5
Other ....................................... (1) 2 1
-- --- ---
Provision for Income Taxes ................. 12% 25% 30%
== === ===
</TABLE>
49
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
The tax effects of significant items comprising the Company's net deferred
tax assets are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------
Deferred Tax Assets:
<S> <C> <C>
Medical and Losses and LAE Reserves ...................... $ 7,428,000 $ 5,277,000
Accruals Not Currently Deductible......................... 7,269,000 5,334,000
Compensation Accruals .................................... 2,344,000 2,960,000
Bad Debt Allowances....................................... 2,041,000 2,946,000
Loss Carryforwards and Credits............................ 11,543,000 13,389,000
Other .................................................... 872,000 803,000
----------- ------------
31,497,000 30,709,000
----------- -----------
Deferred Tax Liabilities:
Deferred Policy Acquisition Costs ........................ 596,000 613,000
Depreciation and Amortization ............................ 4,872,000 4,102,000
Other .................................................... 1,066,000 825,000
----------- ------------
6,534,000 5,540,000
----------- -----------
Net Deferred Tax Asset Before
Valuation Allowance.................................... 24,963,000 25,169,000
Valuation Allowance ...................................... (6,266,000) (10,929,000)
------------ -----------
Net Deferred Tax Asset ................................... $18,697,000 $14,240,000
=========== ===========
</TABLE>
At December 31, 1997, the Company had approximately $27,048,000 of regular tax
net operating loss carryforwards which are limited to use at the rate of
approximately $7,021,000 per year during the carryforward period. The net
operating loss carryforwards can be used to reduce future taxable income until
they expire through the year 2011. The Company also has California net operating
loss carryforwards of approximately $7,492,000 which expire through the year
2000. In addition to these net operating loss carryforwards, the Company has
alternative minimum tax credits of approximately $848,000 which can be used to
reduce regular tax liabilities in future years. There is no expiration date for
the alternative minimum tax credits. The majority of the above items are subject
to both annual and separate company limitations required by the Internal Revenue
Code.
Due to the above referenced limitations, a valuation allowance has been set up
to reflect the Company's inability to use tax benefits from recent acquisitions
currently or in the near future. As the benefits are realizable by the Company,
the valuation allowance will be reduced as required by Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). For the
years ended December 31, 1997 and 1996, the Company was able to realize a
portion of the tax benefits for which a valuation allowance had been previously
established. As a result, the Company reduced its valuation allowance by
$4,663,000 and $2,685,000 for the years ended December 31, 1997 and 1996,
respectively. The valuation allowance of $6,266,000 at December 31, 1997 is
considered necessary under the more likely than not criteria required by FAS
109.
50
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
10. COMMITMENTS AND CONTINGENCIES
Leases. The Company is the lessee under several operating leases, most of which
relate to office facilities and equipment. The rentals on these leases are
charged to expense over the lease term as the Company becomes obligated for
payment and, where applicable, provide for rent escalations based on certain
costs and price index factors. The following is a schedule, by year, of the
future minimum lease payments under existing operating leases: <TABLE>
<CAPTION>
Year Ending December 31,
<S> <C> <C>
1998................................................... $6,894,000
1999................................................... 6,351,000
2000................................................... 5,745,000
2001................................................... 5,153,000
2002 .................................................. 4,832,000
Thereafter............................................. 7,089,000
------------
Total............................................. $36,064,000
===========
</TABLE>
Rent expense totaled $5,827,000, $4,945,000 and $4,942,000 in 1997, 1996 and
1995, respectively.
Litigation and Legal Matters. The Company is subject to legal proceedings and
claims that arise in the ordinary course of business. In the opinion of
management, the amount of ultimate liability with respect to these legal
proceedings will not materially impact the consolidated financial statements of
the Company.
11. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan. The Company has a defined contribution pension and
401(k) plan (the "Plan") for its employees. The Plan covers all employees who
meet certain age and length of service requirements. The Company contributes 2%
of eligible employees' compensation and matches 50% of a participant's elective
deferral up to a maximum of either 10% of an employee's compensation or the
maximum allowable under current IRS statute. Expense under the plan totaled
$3,929,000, $3,216,000 and $2,516,000 in 1997, 1996 and 1995, respectively.
Supplemental Retirement Plan. The Company has Supplemental Retirement Plans (the
"SRPs") for certain officers, directors and highly compensated employees. The
SRPs are non-qualified deferred compensation plans through which participants
may elect to postpone the receipt and taxation of all or a portion of their
salary and bonuses received from the Company. The Company also matches 50% of
those contributions that participants are restricted from deferring, if any,
under the Company's pension and 401(k) plan. As contracted with the Company, the
participants or their designated beneficiaries may begin to receive benefits
under the SRPs upon participant death, disability, retirement, termination of
employment or certain other circumstances including financial hardship.
Executive Life Insurance Plan. Effective July 1, 1997 the Company and certain
officers and key executives selected and approved by the Sierra Board of
Directors entered into split dollar life insurance agreements whereby the
Company has funded the insurance premiums. The premiums paid by the Company will
be reimbursed upon the occurrence of certain events as specified in the
contract.
51
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
Supplemental Executive Retirement Plan. Effective July 1, 1997, the Company
adopted a defined benefit retirement plan covering certain key employees. The
Company is funding the benefits through the purchase of certain life insurance
policies. Benefits are based on, among other things, the employee's average
earnings over the five-year period prior to retirement or termination, and
length of service. Benefits attributable to service prior to the adoption of the
plan are amortized over the estimated remaining service period for those
employees participating in the plan.
A reconciliation of ending year balances is as follows:
<TABLE>
<CAPTION>
Change in Benefit Obligation:
<S> <C>
Projected Benefit Obligation at Inception .................... $9,008,000
Service Cost ................................................. 132,000
Interest Cost ................................................ 375,000
Benefits Paid ................................................
Benefit Obligation at December 31, 1997 ...................... 9,515,000
----------
Change in Plan Assets:
Actual Return on Plan Assets ................................. (308,000)
Company Contributions ........................................ 2,180,000
Benefits Paid ................................................
Fair Value of Plan Assets at December 31, 1997 ............... 1,872,000
Funded Status of the Plan .................................... (7,643,000)
Unrecognized Prior Service Credit ............................ 8,647,000
-----------
Total Recognized ............................................. $1,004,000
==========
Total Recognized Amounts in the Financial
Statements Consist of:
Unrecognized Net Loss ........................................ $ (394,000)
Accrued Benefit Liability .................................... (2,964,000)
Intangible Asset ............................................. 4,362,000
----------
Total ........................................................ $1,004,000
==========
Assumptions as of December 31, 1997
Discount Rate ................................................ 7.0%
Expected Return on Plan Assets ............................... 8.0%
Rate of Compensation Increase ................................ 5.0%
Benefit Cost ..................................................... $ 781,000
</TABLE>
Other CII Plans. Prior to the acquisition of CII, CII maintained various
supplemental benefit, executive benefit, and profit sharing plans. Subsequent to
the merger all such plans have been, or are in the process of being,
discontinued, terminated, or merged into the Company's existing plans. During
the year ended December 31, 1995, CII expensed $1,574,000 under the various
plans. Eligible CII employees are included in the Company's plans discussed
above.
52
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
12. CAPITAL STOCK PLANS
Stockholders' Rights Plan. Each share of Sierra common stock, par value $.005
per share, contains one right (a "Right"). Each Right entitles the registered
holder to purchase from Sierra a unit consisting of one one-hundredth of a share
of the Series A Junior Participating Preferred Shares (a "Unit"), par value $.01
per share, of Sierra, or a combination of securities and assets of equivalent
value, at a purchase price of $100.00 per Unit, subject to adjustment. The
Rights have certain anti-takeover effects. The Rights will cause substantial
dilution to a person or group that attempts to acquire Sierra on terms not
approved by Sierra's Board of Directors, except pursuant to an offer conditioned
on a substantial number of Rights being acquired. The Rights should not
interfere with any merger or other business combination approved by the Board of
Directors since Sierra may redeem the Rights at the price of $.02 per Right
prior to the time that a person or group has acquired beneficial ownership of
20% or more of Sierra common stock.
Stock Option Plans. During 1995 the shareholders of the Company approved the
1995 Long-Term Incentive Plan ("LTIP"). The LTIP provides for the granting of
Options, Stock, and other stock-based awards. Under the LTIP 1.2 million shares
were reserved along with remaining shares reserved from certain previous stock
option and capital accumulation plans which have not been and will not be issued
under those plans. Awards are granted by a committee appointed by the Board of
Directors. Options become exercisable at such times and in such installments as
set by the committee. Under this plan, the exercise price of each option equals
the market price of the Company's stock on the date of grant. Options currently
granted under the LTIP vest for the employees at a rate of 20% - 25% per year.
Options expire one year after the end of the vesting period.
In addition, in 1995 the shareholders of the Company approved the 1995
Non-Employee Directors' Stock Plan ("Directors' Plan"). Under the Directors'
Plan non-employee directors are granted an option to purchase 3,000 shares of
common stock. Options are granted annually on January 20 at the current fair
market value and become exercisable over a five-year period. The Company
reserved 60,000 shares under the Directors' Plan.
53
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
The following table reflects the activity of the stock option plans:
<TABLE>
<CAPTION>
Number of Option Weighted
Shares Price Average Price
<S> <C> <C> <C> <C> <C>
Outstanding January 1, 1995................. 1,272,000 $ 2.44 - $28.63 $16.29
Granted.................................. 882,000 14.86 - 31.75 26.30
Exercised................................ (241,000) 2.44 - 21.00 12.14
Canceled................................. (53,000) 3.38 - 28.63 17.49
----------
Outstanding December 31, 1995............... 1,860,000 3.38 - 31.75 21.54
Granted.................................. 320,000 25.00 - 35.00 26.15
Exercised................................ (166,000) 3.38 - 28.63 12.57
Canceled................................. (15,000) 10.69 - 31.75 21.70
----------
Outstanding December 31, 1996 .............. 1,999,000 7.50 - 35.00 23.01
Granted.................................. 306,000 24.38 - 36.75 34.73
Exercised................................ (470,000) 7.50 - 31.75 17.71
Canceled................................. ( 65,000) 9.46 - 35.00 26.00
---------
Outstanding December 31, 1997 .............. 1,770,000 9.46 - 36.75 26.30
=========
Exercisable at December 31, 1997 ........... 696,000 $ 9.46 - $36.75 $23.79
=========
Available for Grant at
December 31, 1997 ....................... 402,000
=======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Weighted-Average Weighted-Average
Range of Exercise Remaining Options Exercise Price
Prices Contractual Life Outstanding Exercisable Outstanding Exercisable
<S> <C> <C> <C> <C> <C> <C> <C>
$ 9.46 - $10.69 156 days 29,000 29,000 $ 9.76 $ 9.76
14.86 - 21.00 598 days 244,000 154,000 17.15 17.47
24.38 - 31.75 1,385 days 1,230,000 508,000 26.35 26.39
34.50 - 36.75 1,762 days 267,000 5,000 36.60 34.98
</TABLE>
Employee Stock Purchase Plan. The Company has an employee stock purchase plan
(the "Purchase Plan") whereby employees may purchase newly issued shares of
stock through payroll deductions at 85% of the fair market value of such shares
on specified dates as defined in the Purchase Plan. As of December 31, 1997, the
Company had 331,000 shares reserved for purchase under the Purchase Plan. During
1997, a total of 92,000 shares were purchased at a price of $20.93 per share.
During January 1998, 48,000 shares were issued to employees at $26.62 per share
in connection with the Purchase Plan.
54
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
Accounting for Stock-Based Compensation. At December 31, 1997, the Company had
three stock-based compensation plans, which are described above. The Company
uses the intrinsic value method in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans nor the
Purchase Plan. Had compensation cost for the Company's three stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below: <TABLE>
<CAPTION>
For the Years Ended 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income As reported $24,241,000 $31,143,000 $21,304,000
Pro forma 22,177,000 29,703,000 20,203,000
Net Income Per Share As reported $1.35 $1.76 $1.22
Pro forma 1.23 1.68 1.16
Net Income Per Share
Assuming Dilution As reported $1.33 $1.72 $1.20
Pro forma 1.21 1.64 1.14
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield
of 0% for all years; expected volatility of 35%, 29% and 34%; risk-free interest
rates of 5.89%, 5.92%, and 6.12%; and expected lives of four years for all
years. The weighted fair value of options granted in 1997, 1996 and 1995 was
$12.40, $8.47 and $9.49, respectively.
The fair value of the look-back option implicit in each offering of the Purchase
Plan is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in 1997,
1996 and 1995, respectively: dividend yield of 0% for all years; expected
volatility of 35%, 29% and 34%; risk-free interest rates of 5.32%, 5.29% and
6.07%; and expected lives of six months for all years.
Due to the fact that the Company's stock option programs vest over many years
and additional awards are made each year, the above pro forma numbers are not
indicative of the financial impact had the disclosure provisions of FAS 123 been
applicable to all years of previous option grants. The above numbers do not
include the effect of options granted prior to 1995.
55
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
13. STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
Supplemental statements of cash flows information for the years ended
December 31, is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ --------
Cash Paid During the Year for Interest
<S> <C> <C> <C>
(Net of Amount Capitalized)............................... $4,463,000 $5,275,000 $ 6,430,000
Cash Paid During the Year for Income Taxes.................... 7,943,000 7,966,000 10,509,000
Noncash Investing and Financing Activities:
Liabilities Assumed in Connection with
Corporate Acquisitions................................. 195,000 7,890,000 3,113,000
Reductions to Funds Withheld by Ceding
Insurance Company and Future
Policy Benefits........................................ 8,471,000 773,000 990,000
Stock Issued for Exercise of Options
and Related Tax Benefits............................... 2,004,000 1,158,000 1,949,000
Assumption of Liability in Connection with
Land Purchase ......................................... -- -- 1,956,000
Additions to Capital Leases............................... 4,574,000 -- 278,000
Stock and Warrants Received on Sale
of Discontinued Operations ............................ -- -- 1,000,000
</TABLE>
14. MERGER, RESTRUCTURING AND START-UP EXPENSES
During 1997, the Company recorded and paid expenses of approximately
$11,000,000, $8,360,000 after tax, for merger-related costs. On March 18, 1997,
the Company announced it had terminated its merger agreement with 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. The lawsuit has been dismissed for
failure to join a necessary party. The Company has also initiated a lawsuit in
the Court of Chancery of the State of Delaware seeking a declaratory judgment as
well as 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.
During the third quarter of 1997, SMHS was notified it had been awarded a
multi-year triple-option health benefits ("TRICARE") managed care contract by
the Department of Defense to serve eligible beneficiaries in Region 1. This
region includes more than 600,000 beneficiaries in 13 northeastern states and
the District of Columbia. Development expenses of $18,350,000, $10,600,000 net
of taxes, were recorded in the third quarter, primarily for expenses associated
with the Company's proposal to serve TRICARE beneficiaries in Region 1. Such
expenses had been deferred until award notification. SMHS is currently in the
implementation period of the contract with actual health care delivery to
commence on June 1, 1998. SMHS subcontracts for health care delivery, including
some of the risk, for parts of the TRICARE contract.
56
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
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 that 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. The Company currently
anticipates providing health care delivery for one year of the contract should a
re-bid occur.
During 1995, as part of the Company's clinical expansion and growth efforts, the
Company acquired a medical facility in Mohave County, Arizona, across the border
from Laughlin, Nevada. This medical facility included a 12-bed hospital. During
1996 the Company implemented a plan to exit the hospital business and has
actively pursued buyers for this business. As a result of this plan, the Company
recorded a charge of $3,814,000 ($2,860,000 after tax) in the fourth quarter of
1996, primarily to recognize the estimated costs to dispose of the hospital. As
of December 31, 1997, the Company has been unable to reach an agreement to sell
the hospital.
As a result of higher than expected claim and administrative costs relative to
premium rates that can be obtained in certain regional insurance operations and
the Company's inability to negotiate adequate provider contracts due to its
limited presence in some of these markets, the Company adopted a plan to
restructure certain insurance operations during the third quarter of 1996 and
recorded a charge of $8,250,000 ($6,187,000 after tax). The plan will allow the
Company to focus on more favorable operating markets and improve operating
efficiencies. The Company believes that this restructuring, over time, will
result in improved cash flow and operating cost savings. These restructuring
costs included cancellation of certain contractual obligations of $6,000,000,
lease termination costs of $1,500,000 and approximately $750,000 of other costs.
In connection with the merger and integration of CII, $11,614,000 of costs and
expenses ($9,677,000 after tax) were incurred and charged to expense in the
fourth quarter of 1995. These costs include $6,400,000 in professional fees,
$1,700,000 for the write-off of certain redundant hardware and software,
$1,300,000 for the cancellation of certain contractual obligations and other
settlement costs, $900,000 related to transition and severance-related payments
and approximately $1,314,000 for other integration costs.
57
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
15. UNAUDITED QUARTERLY INFORMATION (Amounts in thousands, except per
share data)
<TABLE>
<CAPTION>
March June September December
31 30 30 31
Year Ended December 31, 1997:
<S> <C> <C> <C> <C>
Operating Revenues................................... $170,578 $176,321 $183,859 $190,966
Operating Income (Loss) ............................. 3,242 15,103 (2,765) 16,328
Income (Loss) From Continuing Operations
Before Income Taxes .............................. 1,840 13,896 (3,705) 15,444
Net Income........................................... 1,398 10,561 495 11,787
Earnings Per Share .................................. .08 .59 .03 .65
Earnings Per Share Assuming Dilution ................ .08 .58 .03 .64
Year Ended December 31, 1996:
Operating Revenues................................... $136,012 $141,362 $146,245 $151,792
Operating Income..................................... 14,375 14,520 6,137 9,405
Income From Continuing Operations
Before Income Taxes .............................. 13,566 13,688 5,422 8,938
Net Income........................................... 10,164 10,211 4,067 6,701
Earnings Per Share .................................. .58 .58 .23 .38
Earnings Per Share Assuming Dilution ................ .56 .56 .22 .37
</TABLE>
58
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in Sierra's
Proxy Statement for its 1998 Annual Meeting of Stockholders, is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Compensation of Executive Officers"
in Sierra's Proxy Statement for its 1998 Annual Meeting of Stockholders, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in Sierra's Proxy Statement for its 1998
Annual Meeting of Stockholders, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" in Sierra's Proxy Statement for its 1998 Annual Meeting of
Stockholders, is incorporated herein by reference.
59
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are included in Part II,
Item 8 of this Report:
Page
Independent Auditors' Report................................... 31
Consolidated Balance Sheets at December 31, 1997 and 1996...... 32
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995............................ 33
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995........ 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995............................ 35
Notes to Consolidated Financial Statements..................... 36
(a)(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant..... S-1
Schedule V - Supplemental Information Concerning
Property-Casualty Insurance ...................... S-4
Section 403.04 b - Reconciliation of Beginning and Ending Loss
and Loss Adjustment Expense Reserves
and Exhibit of Redundancies (Deficiencies) .. S-5
All other schedules are omitted because they are not applicable, not required,
or because the required information is in the consolidated financial statements
or notes thereto.
(a)(3) and (c) The following exhibits are filed as part of, or
incorporated by reference into, this Report as required by
Item 601 of Regulation S-K:
(3.1) Articles of Incorporation, together with amendments thereto to
date, incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1990.
(3.2) Certificate of Division of Shares into Smaller Denominations
of the Registrant, incorporated by reference to Exhibit 3.3 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
(3.3) Amended and Restated Bylaws of the Registrant, as amended
through December 12, 1997.
(4.1) Rights Agreement, dated as of June 14, 1994, between the
Registrant and Continental Stock Transfer & Trust Company,
incorporated by reference to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-3 effective October 11, 1994
(Reg. No. 33- 83664).
60
<PAGE>
(4.2) Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4(e) to the Registrant's Registration Statement on Form S-8 as filed and
effective on August 5, 1994 (Reg. No. 33-82474).
(4.3) Form of Indenture, of 7 1/2% convertible subordinated
debentures due 2001 from CII Financial, Inc. to Manufacturers
Hanover Trust Company as Trustee dated September 15, 1991,
incorporated by reference to Exhibit 4.2 of Post-Effective
Amendment No. 1 on Form S-3 to Registration Statement on Form
S-4 dated October 6, 1995 (Reg. No. 33-60591).
(4.4) First Supplemental Indenture between CII Financial, Inc., Sierra
Health Services, Inc. and Chemical Bank as Trustee, dated as of October 31,
1995, to Indenture dated September 15, 1991, incorporated by reference to
Exhibit 4.3 of Post-Effective Amendment No. 2 on Form S-3 to Registration
Statement on Form S-4 dated October 31, 1995 (Reg. No. 33- 60591).
(10.1) Administrative Services agreement between Health Plan of
Nevada, Inc. and the Registrant dated December 1, 1987,
incorporated by reference to Exhibit 10.17 to Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
(10.2) Administrative Services agreement between Sierra Health and
Life Insurance Company, Inc. and the Registrant dated April 1,
1989, incorporated by reference to Exhibit 10.18 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
(10.3) Agreement between Health Plan of Nevada, Inc. and the United States
Health Care Financing Administration dated July 24, 1992, incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K filed
for the fiscal year ended December 31, 1992.
(10.4) Credit Agreement dated as of April 11, 1996 among Sierra
Health Services, Inc., as Borrower, Bank of America National
Trust and Savings Association, as Agent and Issuing Bank, and
the Other Financial Institutions Party thereto for a $50.0
million Line of Credit, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1996.
(10.5) First Amendment, dated as of May 31, 1997, to Credit Agreement and
Waiver among Sierra Health Services, Inc., as Borrower, Bank of America National
Trust and Savings Association, as Agent and Issuing Bank and the Other Financial
Institutions Party Hereto, originally dated as of April 11, 1996 and filed as
Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the three-month
period ended March 31, 1996, incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1997.
(10.6) Compensatory Plans, Contracts and Arrangements.
(1) Employment Agreement with Jonathon W. Bunker dated
November 15, 1997.
(2) Employment Agreement with Frank E. Collins dated November
15, 1997.
(3) Employment Agreement with William R. Godfrey dated
November 15, 1997.
(4) Employment Agreement with Laurence S. Howard dated
November 15, 1997.
61
<PAGE>
(5) Employment Agreement with Anthony M. Marlon, M.D. dated
November 15, 1997.
(6) Employment Agreement with Erin E. MacDonald dated November
15, 1997.
(7) Employment Agreement with Michael A. Montalvo dated
November 15, 1997.
(8) Employment Agreement with Marie H. Soldo dated November
15, 1997.
(9) Employment Agreement with James L. Starr dated November
15, 1997.
(10) Draft of Split Dollar Life Insurance Agreement effective as of July 1,
1997, by and between Sierra Health Services, Inc., and Jonathon W. Bunker, Ria
Marie Carlson, Frank E. Collins, William R. Godfrey, Laurence S. Howard, Erin E.
MacDonald, Anthony M. Marlon, M.D., Kathleen M. Marlon, Michael A. Montalvo,
John A. Nanson, M.D., Marie H. Soldo, and James L. Starr, incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1997.
(11) Sierra Health Services, Inc. Deferred Compensation Plan
Effective May 1, 1996 as Amended and Restated Effective
July 1, 1997, dated as of July 1, 1997, incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June
30, 1997.
(12) Sierra Health Services, Inc. Supplemental Executive
Retirement Plan Effective as of July 1, 1997, dated as
of July 7, 1997, incorporated by reference to Exhibit
10.4 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1997.
(13) The Registrant's Second Amended and Restated 1986 Stock
Option Plan as amended to date, incorporated by
reference to Exhibit 10.24 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1992.
(14) The Registrant's Second Restated Capital Accumulation
Plan, as amended to date, incorporated by reference to
Exhibit 10.24 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992.
(15) Protocols for cash bonus awards, incorporated by
reference to Exhibit 10.17 (5) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(16) The Company's Long-Term Incentive Plan incorporated by
reference to Form S-8 filed July 7, 1995.
(10.7) Agreement and Plan of Merger dated as of June 12, 1995 among
the Registrant, Health Acquisition Corp., and CII Financial,
Inc., incorporated by reference to the Report on Form 8-K
dated June 13, 1995, as amended.
(10.8) Agreement between the Registrant and First Option Health Plan
to develop and implement a Medicare risk product in New Jersey
dated January 6, 1995, incorporated by reference to Exhibit
10.20 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
62
<PAGE>
(10.9) Loan Agreement dated August 11, 1997 between the Company and
Anthony M. Marlon for a revolving credit facility in the
maximum aggregate amount of $3,000,000, incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1997.
(21) Subsidiaries of the Registrant (listed herein):
There is no parent of the Registrant. The following is a
listing of the active subsidiaries of the Registrant:
Jurisdiction of
Incorporation
Sierra Health and Life Insurance Company, Inc. California
Health Plan of Nevada, Inc. Nevada
Sierra Healthcare Options, Inc. and Subsidiary Nevada
Behavioral Healthcare Options, Inc. Nevada
Family Health Care Services Nevada
Family Home Hospice, Inc. Nevada
Southwest Medical Associates, Inc. Nevada
Sierra Medical Management, Inc. and Subsidiaries Nevada
Southwest Realty, Inc. Nevada
Sierra Health Holdings, Inc. (HMO Texas, L.C.) Texas
Sierra Texas Systems, Inc. Texas
CII Financial, Inc., and Subsidiaries California
Northern Nevada Health Network, Inc. Nevada
Intermed, Inc. Arizona
Prime Holdings, Inc. and Subsidiaries Nevada
Sierra Military Health Services, Inc. Nevada
Sierra Home Medical Products, Inc. Nevada
(23.1) Consent of Deloitte & Touche LLP
(27.1) Financial Data Schedule -- 1997
(27.2) Financial Data Schedule -- 1996, 1995
(99) Registrant's current report on Form 8-K dated March 19, 1998,
incorporated herein.
All other Exhibits are omitted because they are not applicable.
(b) Reports on Form 8-K
None
(d) Financial Statement Schedules
The Exhibits set forth in Item 14 (a)(2) are filed herewith.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned thereto duly authorized.
SIERRA HEALTH SERVICES, INC.
By: /S/ ANTHONY M. MARLON
Anthony M. Marlon, M.D.
Date: March 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ ANTHONY M. MARLON, M.D. Chief Executive Officer March 25, 1998
- ---------------------------------
Anthony M. Marlon, M.D. and Chairman of the Board
(Chief Executive Officer)
/S/ JAMES L. STARR Senior Vice President of Finance, March 25, 1998
- ---------------------------------------
James L. Starr Chief Financial Officer,
and Treasurer
(Chief Accounting Officer)
/S/ ERIN E. MACDONALD _ President and March 25, 1998
- ---------------------------------------
Erin E. MacDonald Chief Operating Officer
Director
/S/ PAUL H. PALMER Assistant Vice President March 25, 1998
- ---------------------------------------
Paul H. Palmer and Corporate Controller
/S/ CHARLES L. RUTHE Director March 25, 1998
- ---------------------------------------
Charles L. Ruthe
/S/ WILLIAM J. RAGGIO Director March 25, 1998
- ---------------------------------------
William J. Raggio
/S/ THOMAS Y. HARTLEY Director March 25, 1998
- ---------------------------------------
Thomas Y. Hartley
</TABLE>
64
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS - Parent Company Only
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------- ----------
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents .......................................... $ 15,115,000 $ 17,761,000
Short-term Investments.............................................. 2,090,000 12,055,000
Prepaid Expenses and Other Current Assets........................... 10,415,000 8,103,000
------------ ------------
Total Current Assets.......................................... 27,620,000 37,919,000
PROPERTY AND EQUIPMENT - NET ............................................ 55,251,000 32,596,000
EQUITY IN NET ASSETS OF SUBSIDIARIES .................................... 204,204,000 145,939,000
NOTES RECEIVABLE FROM SUBSIDIARIES ...................................... 9,744,000 9,804,000
LONG-TERM INVESTMENTS ................................................... 86,000 6,021,000
GOODWILL AND OTHER INTANGIBLE ASSETS .................................... 2,362,000 14,896,000
OTHER ................................................................... 24,081,000 10,330,000
------------ ------------
TOTAL ASSETS ............................................................ $323,348,000 $257,505,000
============ ============
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities ..................... $ 16,757,000 $ 13,268,000
Current Portion of Long-term Debt .................................. 2,349,000 444,000
----------- ------------
Total Current Liabilities .................................... 19,106,000 13,712,000
LONG-TERM DEBT (Less Current Portion).................................... 25,858,000 3,241,000
OTHER LIABILITIES ....................................................... 12,702,000 6,070,000
------------ -------------
TOTAL LIABILITIES ....................................................... 57,666,000 23,023,000
------------ ------------
STOCKHOLDERS' EQUITY:
Capital Stock ...................................................... 92,000 89,000
Additional Paid-in Capital ......................................... 164,294,000 152,035,000
Treasury Stock ..................................................... (5,601,000) (130,000)
Unrealized Holding Gain on Available-for-sale Investments .......... 655,000 487,000
Retained Earnings .................................................. 106,242,000 82,001,000
------------ ------------
Total Stockholders' Equity ................................... 265,682,000 234,482,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $323,348,000 $257,505,000
============ ============
</TABLE>
Note: Scheduled maturities of long-term debt, including the principal
portion of obligations under capital leases, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C> <C>
1998........................................................... $2,349,000
1999........................................................... 429,000
2000........................................................... 429,000
2001........................................................... --
2002 .......................................................... 25,000,000
Thereafter..................................................... --
-------------
Total...................................................... $28,207,000
===========
</TABLE>
S-1
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENT OF OPERATIONS -- Parent Company Only
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
--------------- -------------- ----------
OPERATING REVENUES:
<S> <C> <C> <C>
Management Fees........................................ $47,303,000 $44,139,000 $40,115,000
Subsidiary Dividends................................... 1,700,000 3,733,000 250,000
Investment and Other Income............................ 6,688,000 5,145,000 4,087,000
----------- ----------- ------------
Total Operating Revenues............................ 55,691,000 53,017,000 44,452,000
----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Payroll and Benefits................................... 17,616,000 11,579,000 12,805,000
Depreciation........................................... 3,707,000 3,433,000 3,323,000
Rent................................................... 615,000 649,000 738,000
Repairs and Maintenance................................ 459,000 408,000 382,000
Legal.................................................. 293,000 1,874,000 226,000
Consulting............................................. 769,000 827,000 583,000
Other.................................................. 7,047,000 5,145,000 4,252,000
Acquisition, Restructuring and Other Expenses ......... 29,350,000 12,064,000 11,614,000
----------- ----------- -----------
Total General and Administrative.................... 59,856,000 35,979,000 33,923,000
INTEREST EXPENSE AND OTHER, NET............................ (676,000) (503,000) (396,000)
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES............................... 25,615,000 21,991,000 15,785,000
----------- ----------- -----------
INCOME BEFORE INCOME TAXES................................. 20,774,000 38,526,000 25,918,000
BENEFIT FROM (PROVISION FOR)
INCOME TAXES.......................................... 3,467,000 (7,383,000) (4,614,000)
----------- ------------ ------------
NET INCOME................................................. $24,241,000 $31,143,000 $21,304,000
=========== =========== ===========
</TABLE>
S-2
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS -- Parent Company Only
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-------------- -------------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income........................................................... $24,241,000 $31,143,000 $21,304,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization.................................... 3,885,000 3,611,000 3,449,000
Equity in Undistributed Earnings of Subsidiaries..................... (25,615,000) (21,991,000) (15,787,000)
Change in Assets and Liabilities:
Other Assets..................................................... (1,177,000) (15,917,000) (5,021,000)
Current Assets................................................... (2,312,000) (5,959,000) (504,000)
Current Liabilities.............................................. 5,493,000 4,712,000 7,429,000
Other Long-term Liabilities ..................................... 6,634,000 6,069,000
----------- -----------
Net Cash Provided by Operating Activities........................ 11,149,000 1,668,000 10,870,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Net ........................................... (26,453,000) (9,292,000) (8,763,000)
Decrease in Short-term Securities.................................... 9,732,000 14,136,000 22,990,000
Decrease (Increase) in Other Assets.................................. 5,820,000 6,942,000 (8,963,000)
Dividends from Subsidiary............................................ 1,700,000 3,733,000 250,000
Acquisitions, Net of Cash Acquired .................................. (3,145,000) (31,270,000)
(Decrease) Increase in Net Assets in Subsidiaries.................... (30,816,000) 14,321,000 (1,572,000)
------------ ------------ -----------
Net Cash (Used for) Provided by Investing Activities ............ (43,162,000) (1,430,000) 3,942,000
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-term Borrowing ................................... 25,000,000
Loans to Subsidiaries ............................................... (12,593,000)
Reductions in Long-term Obligations and
Payments on Capital Leases....................................... (480,000) (718,000) (789,000)
Proceeds from Note Receivable to Subsidiary.......................... 60,000 2,789,000
Purchase of Treasury Stock .......................................... (5,471,000)
Exercise of Stock in Connection with Stock Plans..................... 10,258,000 3,638,000 3,807,000
----------- ----------- -----------
Net Cash Provided by (Used for) Financing Activities............. 29,367,000 5,709,000 (9,575,000)
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents....................... (2,646,000) 5,947,000 5,237,000
Cash and Cash Equivalents at Beginning of Year............................. 17,761,000 11,814,000 6,577,000
----------- ------------ ------------
Cash and Cash Equivalents at End of Year................................... $15,115,000 $17,761,000 $11,814,000
----------- =========== ===========
Supplemental condensed statements of cash flows information:
Cash Paid During the Year for Interest
(Net of Amount Capitalized).......................................... $632,000 $ 443,000 $ 455,000
Cash Paid During the Year for Income Taxes................................. 7,916,000 6,423,000 2,746,000
Noncash Investing and Financing Activities:
Additions to Capital Leases.......................................... -- -- 278,000
Assumptions of Liability in Connection with
Land Purchase.................................................... -- -- 1,956,000
Stock Issued for Exercise of Options
and Related Tax Benefits......................................... 2,004,000 1,158,000 1,949,000
</TABLE>
S-3
<PAGE>
SIERRA HEALTH SERVICES, INC.
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY -- CASUALTY INSURANCE
(amounts in thousands)
<TABLE>
<CAPTION>
Gross
Reserves
Deferred for Unpaid
Policy Claims and Discount if any Gross Net
Acquisition Adjustment Deducted in Unearned Earned Investment
Affiliation With Costs Expenses Column C Premiums Premiums Income
Registrant Column A Column B Column C Column D Column E Column F Column G
- ------------------- -------- -------- -------- -------- -------- --------
Consolidated Property and
Casualty Entities of CII
Financial, Inc. for
Years Ended:
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997........ $1,800 $202,699 -- $11,285 $134,262 $16,780
December 31, 1996........ 1,832 187,776 -- 9,885 126,121 16,422
December 31, 1995 ....... 1,928 182,318 -- 9,282 94,611 14,301
</TABLE>
<TABLE>
<CAPTION>
Claims & Claim
Adjustment Amortization
Expenses Incurred of Deferred Paid Claims
Related to Policy and Claims Direct
(1) (2) Acquisition Adjustment Premiums
Affiliation With Current Prior Year Costs Expenses Written
Registrant Column A Year Column H Column I Column J Column K
- ------------------- -------- ---------- -------- -------- --------
Consolidated Property and
Casualty Entities of CII
Financial, Inc. for
Years Ended:
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997........ $102,301 $(8,970) $26,211 $83,788 $135,580
December 31, 1996........ 101,401 (15,284) 21,968 70,464 126,497
December 31, 1995 ....... 75,978 (20,079) 22,028 67,071 94,953
</TABLE>
S-4
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SECTION 403.04b
RECONCILIATION OF BEGINNING AND ENDING LOSS AND LOSS
ADJUSTMENT EXPENSE RESERVES
AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES)
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------
Losses and LAE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve............. $202,699 $187,776 $182,318 $190,962 $200,356 $178,460 $112,749 $ 67,593 $ 37,466 $10,277
Less Reinsurance
Recoverables (1) 21,056 15,676 25,871 29,342 25,841 20,207
-------- -------- -------- -------- -------- --------
Net Loss and LAE
Reserves ............. 181,643 172,100 156,447 161,620 174,515 158,253
Cumulative Net Paid
as of:
One Year Later 56,977 45,731 44,519 50,210 50,360 57,611 39,118 14,820 3,954
Two Years Later 70,854 68,619 79,788 84,465 89,177 65,165 28,657 6,609
Three Years Later 80,645 94,865 104,569 108,849 76,988 36,579 8,198
Four Years Later 102,395 114,293 120,539 83,822 39,345 8,938
Five Years Later 119,462 126,100 87,618 41,043 9,235
Six Years Later 129,060 89,607 41,962 9,398
Seven Years Later 90,721 42,541 9,471
Eight Years Later 42,818 9,517
Nine Years Later 9,541
Net Reserve Re-estimated
as of:
One Year Later 163,130 141,163 139,741 160,562 154,388 140,815 83,841 37,463 10,072
Two Years Later 132,193 125,279 141,100 147,167 142,447 96,011 39,753 9,902
Three Years Later 117,792 126,483 134,747 143,433 97,142 43,528 9,598
Four Years Later 122,517 132,193 137,143 97,942 44,404 9,330
Five Years Later 131,112 135,249 94,852 45,027 10,042
Six Years Later 135,299 93,561 44,543 10,110
Seven Years Later 93,672 43,741 10,124
Eight Years Later 43,682 9,695
Nine Years Later 9,768
Cumulative Redundancy
(Deficiency) 8,970 24,254 43,828 51,998 27,141 (22,550) (26,079) (6,216) 509
Net Reserve............ 181,643 172,100 156,447 161,620 174,515
Reinsurance Recoverables 21,056 15,676 25,871 29,342 25,841
-------- -------- -------- -------- --------
Gross Reserve ......... $202,699 $187,776 $182,318 $190,962 $200,356
======== ======== ======== ======== ========
Net Re-estimated Reserve 163,130 132,193 117,792 122,517
Re-estimated Reinsurance
Recoverables 16,333 19,184 19,891 14,656
-------- -------- -------- --------
Gross Re-Estimated
Reserve ............ 179,463 151,377 137,683 137,173
-------- ------- ------- -------
Gross Cumulative
Redundancy.......... $ 8,313 $ 30,941 $ 53,279 $ 63,183
======== ======== ======== ========
</TABLE>
(1) The Company adopted Financial Accounting Standards Board Statement No.
113 ("FAS 113"), "Accounting and Reporting for Short-Duration and
Long-Duration Reinsurance Contracts" for the year ended December 31,
1992. As permitted, prior financial statements have not been restated.
Reinsurance recoverables on unpaid losses and LAE are shown as an asset
on the balance sheets at December 31, 1997 and 1996. However, for
purposes of the reconciliation and development tables, loss and LAE
information will be shown net of reinsurance.
See the notes to consolidated financial statements.
S-5
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 96,841,000 94,065,000 59,396,000 87,077,000
<SECURITIES> 287,191,000 278,719,000 297,106,000 270,760,000
<RECEIVABLES> 49,957,000 41,976,000 40,330,000 37,180,000
<ALLOWANCES> 7,916,000 7,539,000 7,318,000 7,518,000
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 300,606,000 231,394,000 217,072,000 244,148,000
<PP&E> 197,917,000 174,447,000 162,019,000 149,189,000
<DEPRECIATION> 49,086,000 48,116,000 45,526,000 42,907,000
<TOTAL-ASSETS> 723,936,000 679,345,000 660,462,000 645,359,000
<CURRENT-LIABILITIES> 212,229,000 202,585,000 191,670,000 198,309,000
<BONDS> 90,841,000 79,539,000 79,949,000 65,641,000
0 0 0 0
0 0 0 0
<COMMON> 92,000 92,000 90,000 89,000
<OTHER-SE> 265,590,000 251,489,000 248,205,000 235,240,000
<TOTAL-LIABILITY-AND-EQUITY> 723,936,000 679,345,000 660,462,000 645,359,000
<SALES> 0 0 0 0
<TOTAL-REVENUES> 721,724,000 530,758,000 346,899,000 170,578,000
<CGS> 0 0 0 0
<TOTAL-COSTS> 660,466,000 485,828,000 317,554,000 156,336,000
<OTHER-EXPENSES> 29,350,000<F1> 29,350,000<F1> 11,000,000<F1>
11,000,000<F1>
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 4,433,000 3,549,000 2,609,000 1,402,000
<INCOME-PRETAX> 27,475,000 12,031,000 15,736,000 1,840,000
<INCOME-TAX> 3,234,000 (423,000) 3,777,000 442,000
<INCOME-CONTINUING> 24,241,000 12,454,000 11,959,000 1,398,000
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 24,241,000 12,454,000 11,959,000 1,398,000
<EPS-PRIMARY> 1.35 0.70 0.67 0.08
<EPS-DILUTED> 1.33 0.69 0.66 0.08
<FN>
<F1>Merger, Restructuring and Start-up Expenses
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1995
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996
DEC-31-1995
<CASH> 103,587,000 73,691,000 79,758,000 60,772,000
57,044,000
<SECURITIES> 257,818,000 299,551,000 289,024,000 313,112,000
319,759,000
<RECEIVABLES> 39,173,000 29,070,000 28,170,000 26,618,000
26,723,000
<ALLOWANCES> 7,324,000 5,722,000 4,960,000 4,664,000
5,000,000
<INVENTORY> 0 0 0 0
0
<CURRENT-ASSETS> 252,935,000 222,898,000 195,846,000 184,227,000
175,417,000
<PP&E> 140,130,000 131,767,000 129,689,000 124,629,000
122,725,000
<DEPRECIATION> 40,326,000 37,717,000 36,274,000 33,876,000
31,549,000
<TOTAL-ASSETS> 629,462,000 579,514,000 570,090,000 571,322,000
575,146,000
<CURRENT-LIABILITIES> 176,405,000 138,004,000 136,125,000 145,343,000
157,260,000
<BONDS> 66,189,000 66,612,000 67,449,000 69,111,000
71,257,000
0 0 0 0
0
0 0 0 0
0
<COMMON> 89,000 89,000 89,000 88,000
88,000
<OTHER-SE> 234,393,000 226,161,000 221,020,000 213,096,000
207,627,000
<TOTAL-LIABILITY-AND-EQUITY> 629,462,000 579,514,000 570,090,000 571,322,000
575,146,000
<SALES> 0 0 0 0
0
<TOTAL-REVENUES> 575,411,000 423,619,000 277,374,000 136,012,000
467,009,000
<CGS> 0 0 0 0
0
<TOTAL-COSTS> 518,910,000 380,337,000 248,479,000 121,637,000
411,556,000
<OTHER-EXPENSES> 12,064,000<F1> 8,250,000<F1> 0
0 11,614,000<F1>
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 2,823,000 2,356,000 1,641,000 809,000
3,737,000
<INCOME-PRETAX> 41,614,000 32,676,000 27,254,000 13,566,000
40,102,000
<INCOME-TAX> 10,471,000 8,234,000 6,879,000 3,402,000
12,198,000
<INCOME-CONTINUING> 31,143,000 24,442,000 20,375,000 10,164,000
27,904,000
<DISCONTINUED> 0 0 0 0
(6,600,000)
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 31,143,000 24,442,000 20,375,000 10,164,000
21,304,000
<EPS-PRIMARY> 1.76 1.39 1.16 0.58
1.22
<EPS-DILUTED> 1.72 1.34 1.12 0.56
1.20
<FN>
<F1>Merger, Restructuring and Start-up Expenses
</FN>
</TABLE>
EXHIBIT 3.3
AMENDED AND RESTATED BYLAWS
OF
SIERRA HEALTH SERVICES, INC.
(a Nevada Corporation)
47312.2
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page No.
ARTICLE I
<CAPTION>
Offices and Fiscal Year
<S> <C> <C>
SECTION 1.01. Principal Executive Office................................. 1
SECTION 1.02. Other Offices.............................................. 1
SECTION 1.03. Fiscal Year....................................... 1
</TABLE>
ARTICLE II
<TABLE>
<CAPTION>
Meetings of Stockholders
<S> <C> <C>
SECTION 2.01. Place of Meeting........................................... 1
SECTION 2.02. Annual Meeting.................................... 1
SECTION 2.03. Special Meetings.................................. 2
SECTION 2.04. Notice of Meetings................................ 2
SECTION 2.05. Quorum, Manner of Acting and
Adjournment.......... 2
SECTION 2.06. Organization...................................... 3
SECTION 2.07. Voting............................................ 3
SECTION 2.08. Voting Lists...................................... 5
SECTION 2.09. Ballots: Inspectors of Election..................
5
SECTION 2.10. Determination of Stockholders of
Record........... 5
SECTION 2.11. Consent of Stockholders in Lieu of
Meeting........ 6
SECTION 2.12 Participation by Telephone or Similar
Means................ 6
</TABLE>
<TABLE>
<CAPTION>
ARTICLE III
Directors and Management
<S> <C> <C>
SECTION 3.01. Powers............................................ 6
SECTION 3.02. Election, Number and Term of
Office............... 6
SECTION 3.03. Organization...................................... 7
SECTION 3.04. Resignations...................................... 7
SECTION 3.05. Vacancies......................................... 7
SECTION 3.06. Removal........................................... 7
SECTION 3.07. Place of Meeting.................................. 8
SECTION 3.08. Organization Meeting.............................. 8
SECTION 3.09. Regular Meetings.................................. 8
SECTION 3.10. Special Meetings.................................. 8
SECTION 3.11. Quorum, Manner of Acting, and
Adjournment......... 8
SECTION 3.12. Delegation of Board Authority to
Committees....... 8
SECTION 3.13. Interested Directors or Officers;
Quorum................... 9
SECTION 3.14. Fees.............................................. 10
SECTION 3.15. Participation by Telephone or Similar
Means..........................10
</TABLE>
<TABLE>
<CAPTION>
ARTICLE IV
Notice - Waivers
<S> <C> <C>
SECTION 4.01. Notice............................................ 10
SECTION 4.02. Waivers of Notice................................. 10
</TABLE>
47312.2
- i -
<PAGE>
<TABLE>
<CAPTION>
ARTICLE V
Officers
<S> <C> <C>
SECTION 5.01. Number, Qualifications and
Designation............ 11
SECTION 5.02. Election and Term of Office.......................
11
SECTION 5.03. Subordinate Officers, Committees and
Agents....... 11
SECTION 5.04. Resignations...................................... 11
SECTION 5.05. Removal.................................................... 11
SECTION 5.06. Vacancies.................................................. 12
SECTION 5.07. General Powers............................................. 12
SECTION 5.08. Chairman and Vice-Chairman of Board of
Directors........................................................... 12
SECTION 5.09. President.................................................. 12
SECTION 5.10. Vice-Presidents............................................ 12
SECTION 5.11. Secretary.................................................. 12
SECTION 5.12. Treasurer.................................................. 13
SECTION 5.13. Officers' Bonds............................................ 13
SECTION 5.14. Salaries................................................... 13
</TABLE>
<TABLE>
ARTICLE VI
<CAPTION>
Certificates of Stock, Transfer, Etc
<S> <C> <C>
SECTION 6.01. Issuance................................................... 13
SECTION 6.02. Transfer................................................... 13
SECTION 6.03. Share Certificates......................................... 14
SECTION 6.04. Record Holder of Shares....................................
14
SECTION 6.05. Lost, Destroyed or Mutilated
Certificates.................. 14
</TABLE>
<TABLE>
ARTICLE VII
<CAPTION>
Indemnification of Corporate Agents
<S> <C>
SECTION 7.01. Indemnification of Authorized Representatives in
Third Party Proceedings............................................. 14
SECTION 7.02. Indemnification of Authorized Representatives in
Corporate Proceedings............................................... 15
SECTION 7.03. Successful Defense......................................... 15
SECTION 7.04. Determination that Indemnification is
Proper............... 15
SECTION 7.05. Advance Payment of
Expenses................................ 15
SECTION 7.06. Preservation of Other Rights;
Survival..................... 16
SECTION 7.07. Severability............................................... 16
SECTION 7.08. Subrogation................................................ 16
SECTION 7.09. No Duplication of Payments.................................
16
SECTION 7.10. Insurance and Other Financial
Arrangements................. 16
SECTION 7.11. Nonapplicability to Fiduciaries of Employee
Benefit
Plan................................................................ 17
SECTION 7.12. Retroactive Effect......................................... 17
</TABLE>
<TABLE>
<CAPTION>
ARTICLE VIII
Corporate Records
<S> <C> <C>
SECTION 8.01. Access to Records of
Corporation........................... 17
SECTION 8.02. Stockholders' Rights of Inspection.........................
18
</TABLE>
47312.2
- ii -
<PAGE>
<TABLE>
<CAPTION>
ARTICLE IX
Director's Inspection of Records
<S> <C> <C>
SECTION 9.01. Absolute Right of Director to Inspect
Records.............. 18
ARTICLE X
Miscellaneous
SECTION 10.01. Corporate Seal............................................. 19
SECTION 10.02. Checks..................................................... 19
SECTION 10.03. Contracts.................................................. 19
SECTION 10.04. Deposits................................................... 19
SECTION 10.05. Reports.................................................... 19
SECTION 10.06. Amendment of Bylaws........................................
19
</TABLE>
47312.2
- iii -
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
SIERRA HEALTH SERVICES, INC.
(a Nevada Corporation)
...ooOoo...
ARTICLE I
Offices and Fiscal Year
SECTION 1.01. Principal Executive Office. The principal executive
office of the corporation in the State of Nevada shall be at 2724 North Tenaya
Way, Las Vegas, Nevada 89128, until otherwise established by a vote of a
majority of the board of directors in office, and a statement of such change is
filed with the Secretary of State.
SECTION 1.02. Other Offices. The corporation may also have offices at
such other places within or without the State of Nevada as the board of
directors may from time to time appoint or the business of the corporation
require.
SECTION 1.03. Fiscal Year. The fiscal year of the corporation shall be
established by a vote of a majority of the board of directors.
ARTICLE II
Meetings of Stockholders
SECTION 2.01. Place of Meeting. All meetings of the stockholders of the
corporation shall be held at the principal executive office of the corporation
unless another place is designated by the board of directors in the notice of
such meeting.
SECTION 2.02. Annual Meeting. The board of directors may fix the date
and time of the annual meeting of the stockholders, but if no such date and time
is fixed by the board, the meeting for any calendar year shall be held on the
second Tuesday of June in such year, if not a legal holiday under the laws of
Nevada, and, if a legal holiday, then on the next succeeding business day, not a
Saturday, at 10:00 a.m., and at said meeting the stockholders then entitled to
vote shall elect directors and shall transact such other business as may
properly be brought before the meeting; provided, however, that unless the
notice of meeting, or waiver of notice of such meeting, sets forth the general
nature of any proposal to (1) approve or ratify a contract or transaction with a
director or with a corporation, firm or association in which a director has an
interest; (2) amend the Articles of Incorporation of this corporation; (3)
approve a reorganization or merger involving this corporation; (4) elect to wind
up and dissolve this corporation; or (5) effect a plan of distribution upon
liquidation otherwise than in accordance with liquidation preferences
47312.2
<PAGE>
of outstanding shares with liquidation preferences, no such proposal may be
approved at an annual meeting.
SECTION 2.03. Special Meetings. Special meetings of the stockholders of
the corporation for any purpose or purposes may be called at any time by the
president or by the board of directors, or by stockholders entitled to cast at
least 10 percent of the votes which all stockholders are entitled to cast at the
particular meeting.
At any time, upon written request to the chairman of the board,
president, vice-president or secretary by any person (other than the board)
entitled to call a special meeting of stockholders, the officer forthwith shall
cause notice to be given to the stockholders entitled to vote that a meeting
will be held at a time requested by the person or persons calling the meeting,
not less than 35 nor more than 60 days after the receipt of the request. If the
notice is not given within 20 days after receipt of the request, the persons
entitled to call the meeting may give the notice.
SECTION 2.04. Notice of Meetings. Written notice of meetings of the
stockholders, whether annual or special, shall be given to each stockholder of
record entitled to vote at the meeting, not less than 10 days (or, if sent by
third-class mail, 30 days), nor more than 60 days, prior to the day named for
the meeting. Every notice of a special meeting shall state briefly the purpose
or purposes thereof, and no business, other than that specified in such notice
and matters germane thereto, shall be transacted at any special meeting. Every
notice of an annual meeting shall state those matters (including nominees to the
board of directors which management intends to present) which the board of
directors intends, at the time the notice is mailed, to present to the
stockholders for action, but, subject to Section 2.02 above, any proper matter
may be presented to the meeting for action.
SECTION 2.05. Quorum, Manner of Acting and Adjournment. The presence in
person or by proxy of stockholders holding at least a majority of the voting
power are necessary to constitute a quorum for the transaction of business.
Treasury shares shall not be counted in determining the total number of
outstanding shares for voting purposes. The stockholders present in person or by
proxy at a duly organized meeting may continue to do business until adjournment,
notwithstanding withdrawal of enough stockholders to leave less than a quorum,
if any action taken (other than adjournment) is approved by at least a majority
of the shares required to constitute a quorum.
If a meeting cannot be organized because a quorum has not attended, the
stockholders entitled to vote and present in person or represented by proxy may
adjourn the meeting to such time and place as they may determine. At any such
adjourned meeting at which a quorum may be present, such business may be
transacted as might have been transacted at the meeting as originally called.
No notice of any adjourned meeting of the stockholders of the
corporation shall be required to be given, except by announcement at the
meeting, unless the adjournment is for more than 45 days or unless after the
adjournment a new record date is fixed for the adjourned meeting.
47312.2
- 2 -
<PAGE>
Except as otherwise specified in the articles or these bylaws or by
statute, the vote, at a duly organized meeting at which a quorum is present in
person or by proxy, of the stockholders who hold at least a majority of the
voting power of the issued and outstanding stock entitled to voting power, shall
be the act of the stockholders.
SECTION 2.06. Organization. At every meeting of the stockholders, the
chairman of the board, if there be one, or in the case of vacancy in office or
absence of the chairman of the board, one of the following officers present in
the order stated: the vice-chairman of the board, if there be one, the
president, the vice-presidents in their order of rank and seniority, or a
chairman chosen by the stockholders entitled to cast a majority of the votes
which all stockholders present in person or by proxy are entitled to cast, shall
act as chairman, the secretary, or, in the absence of the secretary, an
assistant secretary, or in the absence of both the secretary and assistant
secretaries, a person appointed by the chairman, shall act as secretary.
SECTION 2.07. Voting. Every stockholder entitled to vote at a meeting
of stockholders or to express consent or dissent to corporate action in writing
without a meeting may designate another person or persons to act for the
stockholder by proxy. Without limiting the manner in which a stockholder may
authorize another person or persons to act for him as proxy, the following
constitute valid means by which a stockholder may grant such authority:
(a) A stockholder may execute a writing authorizing
another person or persons to act for him as proxy. Execution
may be accomplished by the signing of the writing by the
stockholder or his authorized officer, director, employee or
agent or by causing the signature of the stockholder to be
affixed to the writing by any reasonable means, including, but
not limited to, a facsimile signature.
(b) A stockholder may authorize another person or
persons to act for him as proxy by transmitting or authorizing
the transmission of a telegram, cablegram or other means of
electronic transmission to the person who will be the holder
of the proxy or to a firm which solicits proxies or like agent
who is authorized by the person who will be the holder of the
proxy to receive the transmission. Any such telegram,
cablegram or other means of electronic transmission must
either set forth or be submitted with information from which
it can be determined that the telegram, cablegram or other
electronic transmission was authorized by the stockholder. If
it is determined that the telegram, cablegram or other
electronic transmission is valid, the persons appointed by the
corporation to count the votes of stockholders and determine
the validity of proxies and ballots or other persons making
those determinations must specify the information upon which
they relied.
Any copy, communication by telecopier, or other reliable
reproduction of the writing or transmission created pursuant
to the foregoing, may be substituted for the original writing
or transmission for any purpose for which the original writing
or transmission could be used, if the copy, communication by
telecopier, or other reproduction is a complete reproduction
of the entire original writing or transmission.
47312.2
- 3 -
<PAGE>
Every proxy shall be filed with the secretary of the
corporation. No proxy shall be valid after 6 months from the
date of its creation, unless it is coupled with an interest,
or unless the stockholder specifies in it the length for which
it is to continue in force, which may not exceed 7 years from
the date of its creation. Subject to the restrictions set
forth herein, any proxy properly created is not revoked and
continues in full force and effect until another instrument or
transmission revoking it or a properly created proxy bearing a
later date is filed with or transmitted to the secretary of
the corporation or another person or persons appointed by the
corporation to count the votes of stockholders and determine
the validity of proxies and ballots, or unless the person
giving the proxy attends the meeting and votes in person. A
proxy which states on its face that it is irrevocable will be
irrevocable for the period of time specified in the proxy, if
held by a person (or nominee of a person) specified by law to
have sufficient interest to make such proxy irrevocable and
only so long as he shall have such interest. A proxy shall not
be revoked by the death or incapacity of the maker unless,
before the vote is counted or the authority is exercised,
written notice of such death or incapacity is received by the
corporation.
Except when a record date has been fixed, every stockholder of record
at the close of business on the business day next preceding the day on which
notice is given shall be entitled to notice of every stockholders' meeting, or,
if notice is waived, every stockholder of record at the close of business on the
business day next preceding the day on which the meeting is held shall be
entitled to vote at every stockholders' meeting.
Each stockholder entitled to vote is entitled to one vote for each
share except that at any election of directors, each stockholder possessing
voting power shall be entitled to as many votes as equal the number of his
shares of stock multiplied by the number of directors to be elected, and such
holder may cast all such votes for a single director or may distribute them
among the number to be voted for or any two or more of them, as such stockholder
may see fit. The stockholders and any proxyholders for such stockholders shall
be entitled to exercise the right of cumulative voting at any meeting held for
the election of directors if:
(1) Before the vote for election of directors, a
stockholder of the corporation shall have given
written notice to the president or secretary of the
corporation that the stockholder desires that the
voting for the election of directors be cumulative;
and
(2) The notice is given not less than 48 hours before the
time fixed for holding the meeting, if notice of the
meeting has not been given at least 10 days before
the date of the meeting, and otherwise not less than
24 hours before the meeting. At the meeting, before
the commencement of voting for the election of
directors, an announcement of the giving of notice
must be made by the chairman or the secretary of the
meeting or by or on behalf of the stockholder giving
the notice.
Notice to stockholders of the requirement of subparagraphs (1) and (2)
shall be contained in the notice calling the meeting or in the proxy material
accompanying such notice.
47312.2
- 4 -
<PAGE>
Any holder of shares entitled to vote on any matter may vote part of
his shares in favor of the proposal and refrain from voting the remaining shares
or vote them against the proposal. If a stockholder fails to specify the number
of shares that he is voting affirmatively, it will be conclusively presumed that
the stockholder's approving vote is with respect to all shares which such
stockholder is entitled to vote.
SECTION 2.08. Voting Lists. The officer or agent of the corporation
having charge of the transfer books for shares of the corporation shall make, at
least 5 days before each meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
with the address of and the number of shares held by each, which list shall be
kept on file at the registered office of the corporation, and shall be subject
to inspection by any stockholder at any time during usual business hours. The
original share ledger or transfer book, or a duplicate thereof, kept in Nevada,
shall be prima facie evidence as to who are the stockholders entitled to examine
such list or share ledger or transfer book, or to vote, in person or by proxy,
at any meeting of stockholders.
SECTION 2.09. Ballots: Inspectors of Election. The vote upon any matter
need not be by ballot, except that elections for directors shall be by ballot if
a stockholder so demands at the meeting and before the voting begins. In advance
of any meeting of stockholders, the board of directors may appoint inspectors of
election, who need not be stockholders, to act at such meeting or any
adjournment thereof. If inspectors of election are not so appointed, the
chairman of any such meeting may, and upon the demand of any stockholder or the
stockholder's proxy at the meeting and before voting begins shall appoint
inspectors of election. The number of inspectors shall be either one or three,
as determined, in the event that of inspectors appointed upon demand of a
stockholder, by stockholders present entitled to cast a majority of the votes
which all stockholders present are entitled to cast thereon. No person who is a
candidate for office shall act as an inspector. In case any person appointed as
inspector fails to appear or fails or refuses to act, the vacancy may be filled
by appointment made by the board of directors in advance of the convening of the
meeting, or at the meeting by the chairman of the meeting.
If inspectors of election are appointed as aforesaid, they shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, receive votes or ballots, hear and determine all
challenges and questions in any way arising in connection with the right to
vote, count and tabulate all votes, determine the result, and do such acts as
may be proper to conduct the election or vote with fairness to all stockholders.
If there be three inspectors of election, the decision, act or certificate of a
majority shall be effective in all respects as the decision, act or certificate
of all.
On request of the chairman of the meeting or of any stockholder or the
stockholder's proxy, the inspectors shall make a report in writing of any
challenge or question or matter determined by them, and executive a certificate
of any fact found by them.
47312.2
- 5 -
<PAGE>
SECTION 2.10. Determination of Stockholders of Record. The board of
directors may fix a date, not more than 60 nor less than 10 days prior to the
date of such meeting of stockholders, nor more than 60 days prior to the date
fixed for the payment of any dividend or distribution, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
shares will be made or go into effect, as a record date for the determination of
the stockholders entitled to notice of, or to vote at, any such meeting, or
entitled to receive payment of any such dividend or distribution, or to receive
any such allotment of rights, or to exercise the rights in respect to any such
change, conversion or exchange of shares; and in such case, if otherwise
entitled, all stockholders of record on the date so fixed, and no others, shall
be entitled to notice of, or to vote at, such meeting, or to receive payment of
such dividend or distribution or to receive such allotment of rights, or
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after any such record date fixed as
aforesaid.
In the event any meeting of stockholders is adjourned for more than 45
days, the board shall fix a new record date for purposes of giving notice of,
and determining the holders of shares entitled to vote at, such adjourned
meeting.
SECTION 2.11. Consent of Stockholders in Lieu of Meeting. Any action,
except for the election of directors, required or permitted to be taken at a
meeting of the stockholders may be taken without a meeting and without prior
notice if a consent or consents in writing, setting forth the action so taken,
shall be signed by stockholders holding at least a majority of the voting power,
except that if a different proportion of voting power is required for such an
action at a meeting, then that proportion of written consents is required.
SECTION 2.12 Participation by Telephone or Similar Means. Stockholders
may participate in a meeting of stockholders by means of a telephone conference
or similar method of communication by which all persons participating in the
meeting can hear each other. Participation in a meeting pursuant to this
subsection constitutes presence in person at the meeting.
ARTICLE III
Directors and Management
SECTION 3.01. Powers. The board of directors shall have full power to
conduct, manage, and direct the business and affairs of the corporation; and all
powers of the corporation, except those specifically reserved or granted to the
stockholders by statute or by the articles or these bylaws, are hereby granted
to and vested in the board of directors.
47312.2
- 6 -
<PAGE>
SECTION 3.02. Election, Number and Term of Office. The board of
directors shall be not less than 3 nor more than 7 directors; provided, however,
that in cases where all the shares of the corporation are owned beneficially and
of record by 1 or 2 stockholders, the number of directors may be less than 3 but
not less than the number of stockholders. The number of directors may be fixed
from time to time exclusively by the Board of Directors pursuant to a resolution
adopted by a majority of the directors. The number of directors is currently
fixed at five (5). The directors shall be divided into two (2) classes, as
nearly equal in number as possible, with the term of office of the first class
(to consist currently of Messrs. Anthony M. Marlon, Robert A. Mayer, and Bruce
D. Mansdorf) and the term of office of the second class (to consist currently of
Messrs. William J. Raggio and Charles L. Ruthe) each to expire at the 1992
annual meeting of stockholders. At the 1992 annual meeting of stockholders,
three (3) directors shall be elected to the first class, the term of which shall
expire at the 1993 annual meeting of stockholders, and two directors shall be
elected to the second class of directors, the term of which shall expire at the
1994 annual meeting of stockholders. At each annual meeting of stockholders
following the 1992 annual meeting, directors elected to succeed those directors
whose terms expire at such meeting shall be elected for a term of office to
expire at the second succeeding annual meeting of stockholders after this
election. Directors shall be elected to serve their respective terms and until a
successor shall have been elected and qualified, except in the event of death,
resignation or removal. Notwithstanding the foregoing, at least one-fourth in
number of the directors of the Corporation shall be elected annually.
SECTION 3.03. Organization. At every meeting of the board of directors,
the chairman of the board, if there be one, or, in the case of a vacancy in the
office or absence of the chairman of the board, one of the following officers
present in the order stated: vice-chairman of the board, if there be one, the
president, the vice-presidents in their order of rank and seniority, or a
chairman chosen by a majority of the directors present, shall preside, and the
secretary, or in the absence of the secretary, an assistant secretary, or in the
absence of the secretary and the assistant secretaries, any person appointed by
the chairman of the meeting, shall act as secretary.
SECTION 3.04. Resignations. Any director of the corporation may resign
effective upon giving written notice to the chairman of the board, the
president, the secretary, or the board of directors of the corporation, unless
the notice specifies a later time for the effectiveness of such resignation. If
the resignation is effective at a future time, a successor may be elected to
take office when the resignation becomes effective.
SECTION 3.05. Vacancies. A vacancy or vacancies in the board shall be
deemed to exist in the case of death, resignation, or removal of any director,
or if the authorized number of directors be increased, or if the stockholders
fail, at any annual or special meeting of stockholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at the meeting. The board may declare vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony.
47312.2
- 7 -
<PAGE>
Any vacancy or vacancies in the board of directors, except those
resulting from removal of a director, may be filled by a vote of the majority of
the remaining members of the board of directors though less than a quorum or by
the sole remaining director, at any regular or special meeting; and the director
or directors so elected shall continue in office until the next annual election
of directors of the corporation and until their successors shall have been
elected and qualified, or until their death, resignation or removal.
The stockholders may elect a director at any time to fill any vacancy
not filled by the directors. Any such election requires the affirmative vote of
the majority of the shares represented and voting at a duly held meeting at
which a quorum is present (which shares voting affirmatively also constitute at
least a majority of the required quorum).
SECTION 3.06. Removal. All or any of the directors may be removed from
office without assigning any cause, by the vote or written consent of
stockholders representing at least two-thirds of the voting power of the issued
and outstanding stock entitled to voting power, except that no individual
director may be removed under the provisions of this Section except upon the
vote of stockholders owning sufficient shares to have prevented his election to
office in the first instance. A director may not be removed prior to the
expiration of such director's term of office except as provided in Section 3.05
and in this Section 3.06. Any reduction of the authorized number of directors
does not remove any director prior to the expiration of such director's term of
office.
SECTION 3.07. Place of Meeting. The board of directors may hold its
meeting at such place or places within Nevada, or elsewhere as the board of
directors may from time to time appoint, or as may be designated in the notice
calling the meeting.
SECTION 3.08. Organization Meeting. Immediately after each annual
election of directors or other meeting at which the entire board of directors is
elected, the newly elected board of directors shall meet for the purpose of
organization, election of officers, and the transaction of other business, at
the place where said election of directors was held. Notice of such meeting need
not be given. Such organization meeting may be held at any other time or place
which shall be specified in a notice given as hereinafter provided for special
meeting of the board of directors.
SECTION 3.09. Regular Meetings. Regular meetings of the board of
directors shall be held at such time and place as shall be designated from time
to time by resolution of the board of directors. If the date fixed for any such
regular meeting be a legal holiday under the laws of the state where such
meeting is to be held, then the same shall be held on the next succeeding
business day, not a Saturday, or at such other time as may be determined by
resolution of the board of directors. At such meetings, the directors shall
transact such business as may properly be brought before the meeting. Notice of
regular meetings need not be given.
SECTION 3.10. Special Meetings. Special meetings of the board of
directors shall be held whenever called by the president or by 2 or more of the
directors. Notice of each such meeting shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice delivered
personally by telephone or by telegram) or 4 days (in the case of notice by
mail) before the time at which the meeting is to be held. Every such notice
shall state the time and place of the meeting.
47312.2
- 8 -
<PAGE>
SECTION 3.11. Quorum, Manner of Acting, and Adjournment. A majority of
the authorized number of directors shall be present at each meeting in order to
constitute a quorum for the transaction of business. Except as otherwise
specified in the articles or these bylaws or provided by statute, the act of the
directors holding a majority of the voting power of the directors, present at a
meeting at which a quorum is present shall be the act of the board of directors.
In the absence of a quorum, a majority of the directors present may adjourn the
meeting from time to time until a quorum is present, and no notice of any
adjourned meeting need be given, other than by announcement at the meeting. The
directors shall act only as a board and the individual directors shall have no
power as such; provided, however, that any action which may be taken at a
meeting of the board may be taken without a meeting if a consent or consents in
writing setting forth the action so taken shall be signed by all of the
directors and shall be filed with the minutes of the proceedings of the board.
SECTION 3.12. Delegation of Board Authority to Committees. The board of
directors may designate one or more committees, each of which must include at
least one director. The appointment of members of a committee requires the vote
of a majority of the whole board of directors.
Except as otherwise provided in this Section, the Executive Committee,
if any, shall have and exercise all of the authority of the board in the
management of the business and affairs of the corporation and any other
committee shall have and exercise the authority of the board to the extent
provided in the resolution designating the committee.
Any such committee of the board shall have the authority and powers of
the board in the management of the business and affairs of the corporation,
except with respect to the approval of any action which also requires
stockholders' approval or approval of outstanding shares.
A majority of the members designated to a committee, or alternates
designated to replace them as provided in this Section, shall constitute a
quorum for the transaction of business and the acts of a majority of the members
designated to a committee or their replacements shall be the acts of the
committee.
Each committee shall keep regular minutes of its proceedings and report
such proceedings periodically to the board of directors.
Sections 3.09, 3.10 and 3.11 shall apply mutatis mutandis to committees
of the board of directors.
SECTION 3.13. Interested Directors or Officers; Quorum.
47312.2
- 9 -
<PAGE>
(1) No contract or other transaction between the corporation and
one or more of its directors or officers, or between the
corporation and any corporation, firm or association in which
one or more of its directors or officers are directors or
officers or are financially interested, shall be void or
voidable solely for this reason or solely because any such
director or officer shall be present at the meeting of the
board of directors or a committee thereof which authorizes or
approves the contract or transaction, or because the vote or
votes of common or interested directors shall be counted for
that purpose, if the circumstances specified in any of the
following paragraphs exist:
(a) The fact of the common directorship, office or
financial interest is disclosed or known to the board
of directors or committee and noted in the minutes,
and the board or committee authorizes, approves or
ratifies the contract or transaction in good faith by
a vote sufficient for the purpose without counting
the vote or votes of the common or interested
director or directors;
(b) The fact of the common directorship, office or
financial interest is disclosed or known to the
stockholders, and they approve or ratify the contract
or transaction in good faith by a majority vote or
written consent of stockholders holding a majority of
the voting power. The votes of the common or
interested directors or officers shall be counted in
any such vote of stockholders;
(c) The fact of the common directorship, office or
financial interest is not disclosed or known to the
director or officer at the time the transaction is
brought before the board of directors of the
corporation for action; or
(d) The contract or transaction is fair as to the
corporation at the time it is authorized or approved.
(2) Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the board of
directors or a committee thereof which authorizes, approves or
ratifies a contract or transaction, and if the votes of the
common or interested directors are not counted at such
meeting, then a majority of the disinterested directors may
authorize, approve or ratify such contract or transaction.
SECTION 3.14. Fees. Each director shall be paid such reasonable fee, if
any, as shall be fixed by the board of directors for each meeting of the board
of directors or committee of directors which such director shall attend and may
be paid such other compensation for services as a director as may be fixed by
the board of directors.
47312.2
- 10 -
<PAGE>
SECTION 3.15. Participation by Telephone or Similar Means. Members of
the board or of any committee designated by such board may participate in a
meeting of the board, or committee of the board by means of conference telephone
or similar method of communication by which all persons participating in the
meeting can hear each other. Participation in a meeting pursuant to this Section
shall constitute presence in person at such meeting. Each person participating
in the meeting shall sign the minutes thereof.
ARTICLE IV
Notice - Waivers
SECTION 4.01. Notice. Whenever written notice is required to be given
to any person under the provisions of the articles, these bylaws, or the Nevada
Corporations Code, it may be given to such person, either personally or by
sending a copy thereof by first-class mail (or if the corporation has at least
500 stockholders of record, by third-class mail), or other means of written
communication, charges prepaid, to the address of such person appearing on the
books of the corporation, or supplied by such person to the corporation for the
purpose of notice. If the notice is sent by mail or by telegraph, it shall be
deemed to have been given to the person entitled thereto when deposited in the
United States mail or with a telegraph office for transmission to such person. A
notice of a meeting shall specify the place, day and hour of the meeting and in
the case of a special meeting of stockholders, the general nature of the
business to be transacted.
SECTION 4.02. Waivers of Notice. Whenever any written notice is
required to be given under the provisions of the articles, these bylaws, or the
Nevada Corporations Code, a waiver thereof, in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. All waivers
and consents shall be filed with the minutes of the meeting or the records of
the corporation.
Attendance of a person, either in person or by proxy, at any meeting,
shall constitute a waiver of notice of such meeting, except where a person
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting was not lawfully called or convened.
ARTICLE V
Officers
SECTION 5.01. Number, Qualifications and Designation. The officers of
the corporation shall be a chairman of the board, president, one or more
vice-presidents, a secretary, a treasurer, and such other officers as may be
elected in accordance with the provisions of Section 5.03 of this Article. The
chairman of the board and any vice-chairman of the board shall be elected by the
board of directors from among the members of the board. Any natural person may
hold more than one office. Officers may but need not be directors or
stockholders of the corporation. All officers of the corporation shall be
natural persons of full age.
47312.2
- 11 -
<PAGE>
SECTION 5.02. Election and Term of Office. The officers of the
corporation, except those elected by delegated authority pursuant to Section
5.03 of this Article, shall be elected annually by the board of directors, and
each such officer shall hold office after the expiration of his term until a
successor is chosen or until his resignation or removal before the expiration of
his term. A failure to elect officers shall not require the corporation to be
dissolved.
SECTION 5.03. Subordinate Officers, Committees and Agents. The board of
directors may from time to time elect such other officers and appoint such
committees, employees, or other agents as the business of the corporation may
require, including one or more assistant secretaries, and one or more assistant
treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws, or as the board of
directors may from time to time determine. The board of directors may delegate
to any officer or committee the power to elect subordinate officers and to
retain or appoint employees or other agents, or committees thereof, and to
prescribe the authority and duties of such subordinate officers, committees,
employees or other agents, but in no event shall this delegated power include
the power to expand upon the authority and duties of the vice-presidents as set
forth in Section 5.10.
SECTION 5.04. Resignations. Any officer or agent may resign at any time
by giving written notice to the board of directors, or to the president or the
secretary of the corporation without prejudice to the rights, if any, of the
corporation under any contract to which the officer is a party. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 5.05. Removal. Any officer, committee, employee or other agent
of the corporation may be removed, either for or without cause, by the board of
directors or other authority which elected or appointed such officer, committee,
or other agent whenever in the judgment of such authority, the best interests
of the corporation will be served thereby.
SECTION 5.06. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause, shall be filled by
the board of directors or by the officer or committee to which the power to fill
such office has been delegated pursuant to Section 5.03 of this Article, as the
case may be, and if the office is one for which these bylaws prescribe a term,
shall be filled for the unexpired portion of the term.
SECTION 5.07. General Powers. All officers of the corporation as
between themselves and the corporation, shall, respectively, have such authority
and perform such duties in the management of the property and affairs of the
corporation as may be determined by resolution of the board of directors, or in
the absence of controlling provisions in a resolution of the board of directors,
as may be provided in these bylaws.
SECTION 5.08. Chairman and Vice-Chairman of Board of Directors. The
chairman of the board or, in the absence of the chairman, the vice-chairman of
the board, shall preside at all meetings of the stockholders and of the board of
directors, and shall perform such other duties as may from time to time be
requested by the board of directors.
47312.2
- 12 -
<PAGE>
SECTION 5.09. President. The president shall be the chief executive
officer of the corporation and shall have general supervision over the business
and operations of the corporation, subject, however, to the control of the board
of directors. The president shall sign, execute and acknowledge, in the name of
the corporation, deeds, mortgages, bonds, contracts or other instruments,
authorized by the board of directors, except in cases where the signing and
execution thereof shall be expressly delegated by the board of directors, or by
these bylaws, to some other officer or agent of the corporation, and, in
general, shall perform all duties incident to the office of president and such
other duties as from time to time may be assigned by the board of directors.
SECTION 5.10. Vice-Presidents. The board of directors may appoint one
or more vice-presidents, as it shall deem proper. In the absence or disability
of the president, the vice-presidents, in order of rank as fixed by the board of
directors, shall perform all duties of the president, and when so acting, shall
have all of the powers of and be subject to all of the restrictions upon the
president. Vice-presidents shall have such powers and perform such duties as
from time to time may be prescribed for them by the board of directors.
SECTION 5.11. Secretary. The secretary or an assistant secretary shall
attend all meetings of the stockholders and of the board of directors and shall
record all the votes of the stockholders and of the directors and the minutes of
the meetings of the stockholders and of the board of directors and of committees
of the board in a book or books to be kept for that purpose; shall see that
notices are given and records and reports properly kept and filed by the
corporation as required by law; shall be the custodian of the seal of the
corporation and see that it is affixed to all documents to be executed on behalf
of the corporation under its seal; and, in general, shall perform all duties
incident to the office of secretary, and such other duties as may from time to
time be assigned by the board of directors or the president.
47312.2
- 13 -
<PAGE>
SECTION 5.12. Treasurer. The treasurer is the chief financial officer
of the corporation.The treasurer or an assistant treasurer shall have or provide
for the custody of the funds or other property of the corporation and shall keep
a separate book account of the same to his or her credit as treasurer; shall
collect and receive or provide for the collection and receipt of monies earned
by or in any manner due to or received by the corporation; shall deposit all
funds in his or her custody as treasurer in such banks or other places of
deposit as the board of directors may from time to time designate; shall,
whenever so required by the board of directors, render an account showing all
transactions as treasurer, and the financial condition of the corporation; and,
in general, shall discharge such other duties as may from time to time be
assigned by the board of directors or the president.
SECTION 5.13. Officers' Bonds. Any officer shall give a bond for the
faithful
discharge of the duties of the officer in such sum, if any, and with such
surety or sureties as the
board of directors shall require.
SECTION 5.14. Salaries. The salaries of the officers elected by the
board of directors shall be fixed from time to time by the board of directors or
by such officer as may be designated by resolution of the board. The salaries or
other compensation of any other officers, employees and other agents shall be
fixed from time to time by the officer or committee to which the power to elect
such officers or to retain or appoint such employees or other agents has been
delegated pursuant to Section 5.03 of this Article. No officer shall be
prevented from receiving such salary or other compensation by reason of the fact
that the officer is also a director of the corporation.
ARTICLE VI
Certificates of Stock, Transfer, Etc.
SECTION 6.01. Issuance. The share certificates of the corporation shall
be numbered and registered in the share ledger and transfer books of the
corporation as they are issued. They shall be signed by the president or a
vice-president and by the secretary or an assistant secretary or the treasurer
or an assistant treasurer, and shall bear the corporate seal, which may be a
facsimile, engraved or printed; provided, however, that where such certificate
is countersigned or otherwise authenticated by a transfer agent or a transfer
clerk and by a registrar, then a facsimile of the signatures of any corporate
officers or agents, the transfer agent or transfer clerk or the registrar of the
corporation may be printed or lithographed upon the certificate in lieu of the
actual signatures. In the event that any officer or officers who have signed, or
whose facsimile signatures have been used on any certificate or certificates for
stock cease to be an officer or officers because of death, resignation or other
reason, before the certificate or certificates for stock have been delivered by
the corporation, the certificate or certificates may nevertheless be adopted by
the corporation and be issued and delivered as though the person or persons who
signed the certificate or certificates, or whose facsimile signature or
signatures have been used thereon, had not ceased to be an officer or officers
of the corporation.
47312.2
- 14 -
<PAGE>
SECTION 6.02. Transfer. Transfers of shares shall be made on the books
of the corporation upon surrender of the certificates therefore, endorsed by the
person named in the certificate or by attorney lawfully constituted in writing.
No transfer shall be made inconsistent with the provisions of the Uniform
Commercial Code of the State of Nevada and its amendments and supplements.
SECTION 6.03. Share Certificates. Certificates for shares of the
corporation shall be in such form as provided by statute and approved by the
board of directors. The share record books and the blank share certificate books
shall be kept by the secretary or by any agent designated by the board of
directors for that purpose. Every certificate exchanged or returned to the
corporation shall be marked "Canceled," with the date of cancellation.
SECTION 6.04. Record Holder of Shares. The corporation shall be
entitled to treat the person in whose name any share or shares of the
corporation stand on the books of the corporation as the absolute owner thereof,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share or shares on the part of any other person.
SECTION 6.05. Lost, Destroyed or Mutilated Certificates. The holder of
any shares of the corporation shall immediately notify the corporation of any
loss, destruction or mutilation of the certificate therefore, and the board of
directors may, in its discretion, cause a new certificate or certificates to be
issued to such holder, in case of mutilation of the certificate, upon the
surrender of the mutilated certificate, or, in case of loss or destruction of
the certificate, upon satisfactory proof of such loss or destruction, and, if
the board of directors shall so determine, the deposit of a bond in such form
and in such sum, and with such surety or sureties, as it may direct.
ARTICLE VII
Indemnification of Corporate Agents
SECTION 7.01. Indemnification of Authorized Representatives in Third
Party Proceedings. The corporation shall indemnify any person who was or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with the action, suit or proceeding if such person acted in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, does not, of itself, create a presumption that such person did
not act in good faith and in a manner which such person reasonably believed to
be in or not opposed to the best interests of the corporation, and that, with
respect to any criminal action or proceeding, such person had reasonable cause
to believe that such person's conduct was unlawful.
47312.2
- 15 -
<PAGE>
SECTION 7.02. Indemnification of Authorized Representatives in
Corporate Proceedings. The corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses, including amounts paid in settlement and attorneys' fees
actually and reasonably incurred by such person in connection with the defense
or settlement of the action or suit if such person acted in good faith and in a
manner which such person reasonably believed to be in or not opposed to the best
interests of the corporation. Indemnification may not be made for any claim,
issue or matter as to which such person has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the corporation or for amounts paid in settlement to the corporation, unless
and only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
SECTION 7.03. Successful Defense. To the extent that a director,
officer, employee or agent of the corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
Sections 7.01 and 7.02, or in defense of any claim, issue or matter therein,
such person must be indemnified by the corporation against expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
with the defense.
SECTION 7.04. Determination that Indemnification is Proper. Any
indemnification under Sections 7.01 and 7.02, unless ordered by a court or
advanced pursuant to Section 7.05, must be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances. The
determination must be made:
(a) By the stockholders;
(b) By the board of directors by a majority vote of a
quorum consisting of directors who were not parties to the
act, suit or proceeding;
(c) If a majority vote of a quorum consisting of
directors who were not parties to the act, suit or proceeding
so orders, by independent legal counsel in a written opinion;
or
(d) If a quorum consisting of directors who were not
parties to the act, suit or proceeding cannot be obtained, by
independent legal counsel in a written opinion.
47312.2
- 16 -
<PAGE>
SECTION 7.05. Advance Payment of Expenses. The expenses of officers and
directors incurred in defending a civil or criminal action, suit or proceeding
must be paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an undertaking by
or on behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that such person is not entitled
to be indemnified by the corporation. The provisions of this subsection do not
affect any rights to advancement of expenses to which corporate personnel other
than directors or officers may be entitled under any contract or otherwise by
law.
SECTION 7.06. Preservation of Other Rights; Survival. The indemnification
and
advancement of expenses authorized in or ordered by a court pursuant to
this Article VII:
(a) Does not exclude any other rights to which a
person seeking indemnification or advancement of expenses may
be entitled under the articles of incorporation or any
agreement, vote of stockholders or disinterested directors or
otherwise, for either an action in such person's official
capacity or an action in another capacity while holding such
person's office, except that indemnification, unless ordered
by a court pursuant to Section 7.02 or for the advancement of
expenses made pursuant to Section 7.05, may not be made to or
on behalf of any director or officer if a final adjudication
establishes that his acts or omissions involved intentional
misconduct, fraud or a knowing violation of the law and was
material to the cause of action; and
(b) Continues for a person who has ceased to be a
director, officer, employee or agent and inures to the benefit
of the heirs, executors and administrators of such a person.
SECTION 7.07. Severability. If this Article VII or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each employee or agent of the
corporation as to costs, charges and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the corporation, to the fullest extent
permitted by any applicable portion of this Article VII that shall not have been
invalidated and to the fullest extent permitted by applicable law.
SECTION 7.08. Subrogation. In the event of payment of indemnification
to a person described in Sections 7.01 and 7.02, the corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
corporation, shall execute all documents and do all things that the corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the corporation effectively to
enforce any such recovery.
47312.2
- 17 -
<PAGE>
SECTION 7.09. No Duplication of Payments. The corporation shall not be
liable under this Article VII to make any payment in connection with any claim
made against a person described in Sections 7.01 and 7.02 to the extent such
person has otherwise received payment (under any insurance policy, bylaw or
otherwise) of the amounts otherwise payable as indemnity hereunder.
SECTION 7.10. Insurance and Other Financial Arrangements. The
corporation may purchase and maintain insurance or make other financial
arrangements on behalf of any person described in Sections 7.01 and 7.02 against
any liability asserted against, and liability and expenses incurred by, such
person in such person's capacity as a director, officer, employee or agent or
arising out of such person's status as such, whether or not the corporation
would have the power to indemnify such person against such liability and
expenses.
The other financial arrangements made by the corporation pursuant to
this Section may include (a) the creation of a trust fund; (b) the establishment
of a program of self-insurance; (c) the securing of the corporation's obligation
of indemnification by granting a security interest or other lien in any assets
of the corporation; (d) the establishment of a letter of credit, guaranty or
surety; or (e) any other arrangement legally available to the corporation.
No financial arrangement made pursuant to this Section may provide
protection for a person adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable for intentional misconduct,
fraud or a knowing violation of law, except with respect to the advancement of
expenses or indemnification ordered by a court.
Any insurance or other financial arrangement made on behalf of a person
pursuant to this Section may be provided by the corporation or any other person
approved by the Board of Directors, even if all or part of the other person's
stock or other securities is owned by the corporation.
In the absence of fraud, (a) the decision of the Board of Directors as
to the propriety of the terms and conditions of any insurance or other financial
arrangement made pursuant to this Section and the choice of the person to
provide the insurance or other financial arrangement is conclusive; and (b) the
insurance or other financial arrangement (i) is not void or voidable; and (ii)
does not subject any director approving it to personal liability for his action,
even if a director approving the insurance or other financial arrangement is a
beneficiary of the insurance or other financial arrangement.
SECTION 7.11. Nonapplicability to Fiduciaries of Employee Benefit Plan.
This Article does not apply to any proceeding against any trustee, investment
manager, or other fiduciary of an employee benefit plan in such person's
capacity as such, even though such person may also be an authorized
representative of the corporation. The corporation shall have power to indemnify
such trustee, investment manager or other fiduciary to the extent permitted by
the Nevada Corporations Code.
SECTION 7.12. Retroactive Effect. To the extent permitted by applicable
law, the rights and powers granted pursuant to this Article VII shall apply to
acts, actions, suits and proceedings occurring or in progress prior to the
adoption of these amended and restated bylaws.
47312.2
- 18 -
<PAGE>
ARTICLE VIII
Corporate Records
SECTION 8.01. Access to Records of Corporation. The accounting books
and records and minutes of proceedings of the stockholders and the board and
committees of the board shall be open to inspection upon the written demand on
the corporation of any stockholder or holder of a voting trust certificate at
any reasonable time during usual business hours, for a purpose reasonably
related to such holder's interests as a stockholder or as the holder of such
voting trust certificate. Such inspection by a stockholder or holder of a voting
trust certificate may be made in person or by agent or attorney, and the right
of inspection includes the right to copy and make extracts.
SECTION 8.02. Stockholders' Rights of Inspection. A stockholder or
stockholders holding at least fifteen (15) percent in the aggregate of the
outstanding voting shares of the corporation shall have an absolute right to do
either or both of the following:
(1) Inspect and copy the record of stockholders' names and
addresses and shareholdings during usual business hours upon
five (5) business days' prior written demand upon the
corporation; or
(2) Obtain from the transfer agent for the corporation upon
written demand and upon the tender of its usual charges for
such a list (the amount of which charges shall be stated to
the stockholder by the transfer agent upon request) a list of
the names and addresses of stockholders who are entitled to
vote for the election of directors, and their shareholdings as
of the most recent record date for which it has been compiled
or as of the date specified by the stockholder subsequent to
the date of demand. The list shall be made available on or
before the later of five (5) business days after the demand is
received or the date specified therein as the date as of which
the list is to be compiled. The corporation shall have the
responsibility to cause its transfer agent to comply with this
Section.
Any delay by the corporation or the transfer agent in complying with a
demand under this Section beyond the time limits specified therein shall give
the stockholder or the stockholders properly making the demand a right to obtain
from the proper court, upon the filing of a verified complaint in the proper
county and after a hearing, notice of which shall be given to such person and in
such manner as the court may direct, an order postponing any stockholders'
meeting previously noticed for a period equal to the period of such delay. Such
right shall be in addition to any other legal or equitable remedies to which the
stockholder may be entitled.
The record of the stockholders shall also be open to inspection and
copying by any stockholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for a
purpose reasonably related to such holder's interests as a stockholder or holder
of a voting trust certificate. Any inspection and copying under this Section may
be made in person or by agent or attorney.
47312.2
- 19 -
<PAGE>
ARTICLE IX
Director's Inspection of Records
SECTION 9.01. Absolute Right of Director to Inspect Records. Every
director shall have the absolute right at any reasonable time to inspect and
copy all books, records and documents of every kind and to inspect the physical
properties of the corporation and also of its subsidiary corporations, domestic
or foreign. Such inspection by a director may be made in person or by agent or
attorney and the right of inspection includes the right to copy and make
extracts.
ARTICLE X
Miscellaneous
SECTION 10.01. Corporate Seal. The corporation shall have a corporate
seal in the form of a circle containing the name of the corporation, the year of
incorporation, and the word "Nevada," but failure to affix such seal to any
instrument shall not affect the validity thereof.
SECTION 10.02. Checks. All checks, notes, bills of exchange or other orders
in writing shall be signed by such person or persons as the board of directors
may from time to time designate.
SECTION 10.03. Contracts. Except as otherwise provided in these bylaws,
the board of directors may authorize any officer or officers, agent or agents,
to enter into any contract or to execute or deliver any instrument on behalf of
the corporation and such authority may be general or confined to specific
instances.
SECTION 10.04. Deposits. All funds of the corporation shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies, or other depositories as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the board of directors shall from time to
time determine.
SECTION 10.05. Reports. The board of directors shall present at the
annual meeting of stockholders a report of the financial condition of the
corporation as of the closing date of the preceding fiscal year. Such report
shall be in such form as shall be approved by the board of directors and shall
be available for inspection by the stockholders at the annual meeting. The board
of directors may, but shall not be required to, have such report prepared and
verified by an independent certified public accountant or by a firm of
practicing accountants.
SECTION 10.06. Amendment of Bylaws. These bylaws may be amended or
repealed, or new bylaws may be adopted, by the vote or written consent of the
stockholders who hold at least a majority of the voting power of the issued and
outstanding stock entitled to voting power at any duly organized annual or
special meeting of stockholders; provided, however, that subject to the right of
stockholders to adopt, amend or repeal bylaws, bylaws (other than a bylaw or
amendment thereof changing the authorized number of directors) may be adopted,
amended or repealed by the board of directors.
47312.2
- 20 -
<PAGE>
Amendment No. 1 to
AMENDED AND RESTATED BYLAWS
OF
SIERRA HEALTH SERVICES, INC.
The Amended and Restated bylaws of Sierra Health Services, Inc., a
Nevada corporation (the "Corporation"), are hereby amended as follows effective
August 10, 1994:
1. The fourth sentence of Section 3.02 is hereby amended by deleting
the word "currently" as it appears twice therein.
2. Section 5.08 is hereby amended to read as follows:
SECTION 5.08. Chairman and Vice Chairman of the Board of Directors. The
chairman of the board of directors or, in the absence of the chairman, the
vice-chairman of the board, shall be the chief executive officer of the
corporation. Subject to the provisions of these bylaws and to the direction of
the board of directors, the chairman shall have the ultimate responsibility for
the management and control of the affairs and business of the corporation and
shall perform all duties and have all powers which are commonly incident to the
office of chief executive officer or which are delegated to him or her by the
board of directors.
The chairman of the board, or in the absence of the chairman, the
vice-chairman of the board, shall preside at all meetings of the stockholders
and of the board of directors.
The chairman of the board, or in the absence of the chairman, the
vice-chairman of the board, shall have power to execute and acknowledge, in the
name of the corporation, all stock certificates, mortgages, bonds, contracts and
other instruments of the corporation which are authorized by the board of
directors, except in cases where the execution thereof shall be expressly
delegated by the board of directors, or by these bylaws, to some other officer
or agent of the corporation. The chairman shall have general supervision and
direction of all of the other officers and agents of the corporation.
2. Section 5.09 is hereby amended to read as follows:
SECTION 5.09. President. The president shall be the chief operating
officer of the corporation, shall be in charge of day to day operations of the
corporation and shall have such duties and powers as may from time to time be
delegated to the president by the board of directors or by the chairman of the
board of directors. In the absence or disability of the chairman and
vice-chairman of the board of directors, or during a period of vacancy in such
offices, the president shall act as the chief executive officer of the
corporation and shall have the duties and powers of the chairman.
Except as amended hereby, the Amended and Restated Bylaws of the
Company shall remain in full force and effect.
47312.2
- 21 -
<PAGE>
Amendment No. 2 to
AMENDED AND RESTATED BYLAWS
OF
SIERRA HEALTH SERVICES, INC.
The Amended and Restated Bylaws, as amended, of Sierra Health
Services, Inc., a Nevada corporation (the "Corporation"), are hereby amended as
follows effective March 22, 1995:
Section 2.05 is hereby amended by deleting the last paragraph
thereof in its entirety.
Except as amended hereby, the Amended and Restated Bylaws, as
amended, of the Company shall remain in full force and effect.
47312.2
- 22 -
<PAGE>
AMENDMENT NO. 3 TO
THE AMENDED AND RESTATED BYLAWS
OF
SIERRA HEALTH SERVICES, INC.
The Amended and Restated bylaws, as amended, of Sierra Health Services,
Inc., a Nevada corporation (the "Corporation"), are hereby amended as follows
effective December 12, 1997:
Article III, Section 3.02, of the Corporation's Bylaws be amended to
read as follows:
Section 3.02. Election, Number and Term of Office. The board of
directors shall be not less than 3 nor more than 7 directors; provided, however,
that in cases where all the shares of the corporation are owned beneficially and
of record by 1 or 2 stockholders, the number of directors may be less than 3 but
not less than the number of stockholders. The number of directors may be fixed
from time to time exclusively by the Board of Directors pursuant to a resolution
adopted by a majority of the directors. The number of directors is currently
fixed at five (5). The directors shall be divided into two (2) classes, as
nearly equal in number as possible, with the term of office of the first class
and the term of office of the second class each to expire in alternating years.
At each annual meeting of stockholders, directors elected to succeed those
directors whose terms expire at such meeting shall be elected for a term of
office to expire at the second succeeding annual meeting of stockholders after
this election. Directors shall be elected to serve their respective terms and
until a successor shall have been elected and qualified, except in the event of
death, resignation or removal. No director will be eligible to be elected to the
Board after reaching the age of 75. Notwithstanding the foregoing, at
least one-fourth in number of the directors of the Corporation shall be elected
annually.
Except as amended hereby, the Amended and Restated Bylaws, as amended
of the Company shall remain in full force and effect.
47312.2
- 23 -
<PAGE>
EXHIBIT 10.6 (1)
EMPLOYMENT AGREEMENT
This Agreement is made this 15th day of November 1997, by and between SIERRA
HEALTH SERVICES,Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter
referred to as "Employer"), and Jonathon W. Bunker , (hereinafter referred to as
"Employee").
WITNESSETH
WHEREAS, Employer is a publicly traded company engaged in the
business of providing managed health care services through subsidiary companies;
WHEREAS, Employee has expertise and experience in providing managed health care
services; and,
WHEREAS, Employee has made and is expected to continue to make
a major contribution to the profitability, growth and financial strength of
Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements hereinafter set forth, Employer and Employee agree as follows:
ARTICLE I
EMPLOYMENT/DUTIES AND POWERS
1. Employer hereby employs, engages and hires Employee as Vice
President, HMO and Insurance Operations , and Employee hereby accepts and agrees
to such hiring, engagement and employment, subject to the general supervision
and direction of Employer.
2. Employee shall perform such duties as are assigned by the President of
Employer or his/her designee, and shall at all times faithfully and to the best
of his/her ability perform all the duties that may be required of Employee to
the reasonable satisfaction of Employer. Employee shall exercise only those
powers for signing contracts and conveyances in the ordinary course of business
as are expressly authorized by Employer's President or the appropriate Board of
Directors. Employee further agrees to participate in and assist in the
development of quality improvement programs offered by Employer.
ARTICLE II
TERM OF EMPLOYMENT - TERM OF AGREEMENT
1. The term of employment governed by this Agreement shall be for
approximately a 1 year period starting November 15, 1997 and terminating
December 31, 1998 subject, however, to prior termination as hereinafter provided
in Article VII. Unless earlier terminated by the mutual agreement of the parties
hereto, this Agreement shall terminate at December 31, 1998 or, if Employee has
become entitled to any benefit under Article VII due to termination of
employment on or before December 31, 1998,
1
<PAGE>
at such date as Employer has no further obligations to Employee under Article
VII; provided, however, that the provisions of Article V and Article VI (and
this clause of Article II) shall survive any termination of this Agreement.
ARTICLE III
COMPENSATION AND REVIEW
1. Employer shall pay Employee and Employee shall accept from Employer as
payment for Employee's services hereunder, compensation in the form of base
salary in the amount as set forth in Attachment A of this Agreement, payable at
such times as are deemed appropriate by Employer, but not less than twice a
month, and other compensation payable under this Agreement.
2. (a) Employer shall reimburse Employee for all necessary and reasonable
business expenses incurred by Employee while performing services pursuant to
Employer's direction.
(b) Employee agrees to maintain adequate records of expenses, in
such detail as Employer may reasonably request.
3. (a) Employee shall also be eligible for those Employee fringe benefit
programs, bonus plans, and stock option plans as are made available to other
employees of the corporation at the same organizational level, and as approved
by the Board of Directors.
(b) Except for Employee's vested benefits under the Supplemental
Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole
discretion, amend any fringe benefit programs, bonus programs, or stock option
programs without prior notice to Employee even though such an amendment may
decrease the future benefits available under said programs.
4. Employee's performance shall be reviewed at least annually based on
established job duties, goals and objectives and other reasonable standards as
deemed necessary and appropriate by Employer.
ARTICLE IV
OTHER EMPLOYMENT
Employee shall devote all of his time, attention, knowledge, and
skills solely to the business and interest of Employer, unless otherwise
authorized by Employer, and Employer shall be entitled to all of the income,
benefits, or profits arising from or incident to all work, work associations,
services, or advice of Employee, unless otherwise authorized in writing by
Employer. Employee shall not, during the term hereof, be interested in any
manner, as partner, officer, director, advisor, employee or in any other
capacity in any other business similar to Employer's business or any allied
trade, or obtain any interest adverse to Employer; provided, however, that
Employee may provide advice and consultation to other entities with the written
approval of Employer, and further provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest
any of his/her surplus funds in the capital stock or other securities of any
corporation whose stock or securities are publicly owned or are regularly traded
on any public
2
<PAGE>
exchange, nor shall anything herein contained be deemed to prevent Employee from
investing or limit Employee's right to invest his/her surplus funds in real
estate. Employee shall complete a Conflict of Interest form by February 15 of
each calendar year and submit it to Employer for review. All conflicts of
interest or any potential conflicts of interest which arise during the year must
be immediately reported to Employer. All conflict of interest concerns must be
resolved to the reasonable satisfaction of Employer as a condition of
continuation of employment.
ARTICLE V
BUSINESS SECRETS
1. Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or corporation,
in any manner whatsoever, any proprietary or confidential information concerning
any matter affecting or relating to the business of Employer or its
subsidiaries, including without limiting the generality of the foregoing, any of
their customers, the prices they obtain from providers or have obtained from the
sale of, or at which they sell or have sold, its services, or any other
information concerning the business of Employer or its subsidiaries, their
manner of operation, or their plans, if such a disclosure would be detrimental
to the business interests of Employer or its subsidiaries.
2. If Employee's employment hereunder is terminated by either party at any
time hereafter, then Employee agrees to turn over to Employer all papers,
documents, working papers, correspondence, memos and any and all other documents
in Employee's possession relating to or concerning any matter affecting or
relating to the business of Employer or its subsidiaries.
ARTICLE VI
NONCOMPETITION AGREEMENT
1. Employee acknowledges that in Employee's employment hereunder, Employee
will have continual contacts with the groups, members, and providers who are
covered by or associated with the managed health care programs offered by
Employer or its subsidiaries in Nevada and other states. In all of Employee's
activities, Employee, through the nature of Employee's work, will have access to
and will acquire confidential information related to the business and operations
of Employer and its subsidiaries, including, without limiting the generality of
the foregoing, member and group lists, and confidential information relating to
processes, plans, methods of doing business and special needs of doctors,
hospitals, members, groups, pharmacies, or other health care providers who
contract with Employer or its subsidiaries. Employee acknowledges that all such
information is the property of Employer or its subsidiaries solely and
constitutes confidential information of such parties; that the disclosure
thereof would cause substantial loss to the goodwill of Employer and its
subsidiaries; that disclosure thereof to Employee is being made only because of
the position of trust and confidence which Employee will occupy and because of
Employee's agreement to the restrictions herein contained; that his knowledge of
these matters would enable him, on termination of this
3
<PAGE>
Agreement, to compete with Employer or its subsidiaries in a manner likely to
cause Employer and its subsidiaries irreparable harm, and disclosure of such
matters would, likewise, cause such harm; and that the restrictions imposed upon
Employee herein would not prohibit Employee in earning a living.
2. It is understood and agreed by Employee and Employer that the essence
of this Employment Agreement is the mutual covenants of the parties herein made,
that the present and future members and groups of Employer or its subsidiaries
will remain Employer's or its subsidiaries' members and groups during the term
of this Agreement and following its termination for any reason. In consideration
for the employment and continued employment of Employee by Employer, and also
for the amount received by Employee as compensation, Employee hereby irrevocably
warrants, covenants, and agrees as follows:
(a) during the term of Employee's employment and after leaving
the employment of Employer for any reason, whether involuntary or voluntary,
Employee will not take any action whatsoever which may or might disturb any
existing business relationship of Employer or its subsidiaries with any doctors,
groups, members, hospitals, pharmacies or other health care providers in Nevada
who contract with Employer or its subsidiaries;
(b) for a period of one (1) year after leaving the employment of
Employer, Employee will not solicit business from the members or groups of
Employer or its subsidiaries in Nevada, or in any manner disrupt any business
relationship Employer or its subsidiaries has with any contracted health care
provider in Nevada with whom Employee came in contact as an employee of
Employer.
(c) for a period of one (1) year after leaving the employment of
Employer, Employee will not, either directly or indirectly, work for any present
or future competitors of Employer operating in the state of Nevada who in any
manner offer any managed health care programs, insurance coverage, or administer
health care claims for employers. Such competitors shall include, but are not
limited to, HMOs, PPOs, insurance companies, utilization management companies,
or third party administrators.
3. The one (1) year period specified in this Article will be tolled during
any period of breach of any of the terms of Article VI by Employee.
4. Employee agrees that in the event of a breach of any term of this
Agreement, and more particularly, in the event of a breach of any of the terms
and provisions of Article VI, Employer shall be entitled to secure an order in
any suit brought for that purpose to enjoin Employee from violating any of the
provisions of the Agreement and that, pending the hearing and the decision on
the application for such order, Employer shall be entitled to a temporary
restraining order without prejudice to any other remedy available to Employer,
all at the expense of Employee should Employer prevail in such action. Employee
understands that the covenants of this Article are the essence of this
Employment Agreement, and without which no Employment Agreement with Employee
would be entered into by Employer.
5. The provisions of Article VI shall in no event be construed to be an
exclusive remedy and such remedy shall be held and construed to be cumulative
and not exclusive of any rights or remedies, whether
4
<PAGE>
in law or equity, otherwise available under the terms of this Agreement or under
the laws of the United States or the state of Nevada.
6. The covenants and agreements made by Employee in this Article VI shall
be construed as an agreement independent of any other provision in the Agreement
and the existence of any claim or cause of action by Employee against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer, by injunctive relief or otherwise, of
the provisions of Article VI. The invalidity of all or any part of any section
or paragraph of this Article VI shall not render invalid the remainder of this
Article or any section hereof.
7. No failure or failures on the part of Employer to enforce any violation
by Employee of this Noncompetition agreement, shall constitute a waiver of
Employer's rights thereafter to enforce all of the terms, covenants, provisions
and agreements herein contained.
ARTICLE VII
TERMINATION OF EMPLOYMENT
1. Termination of employment by either Employer or Employee shall follow
established Sierra Health Services Policies and Procedures including appropriate
notice, except as otherwise specifically set forth in this Article.
2. Employee may terminate employment hereunder with sixty (60) days prior
written notice. If Employee shall voluntarily terminate employment all eligible
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level, shall be paid or made
available to Employee. 3. If Employer shall terminate Employee's employment
hereunder without cause, except as otherwise set forth in Paragraph 7 of this
Article, Employee shall be entitled to six (6) months salary and all other
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level. 4. In the event
Employee's employment hereunder terminates for any reason other than for cause,
including those reasons set forth in Paragraph 6 of this Article, Employee and
his/her family shall be eligible to remain covered under Employer's health care
coverage program, at no expense, for a period of time equal to Employee's length
of service or until Medicare eligible, whichever occurs first, following
termination of such employment.
5. Notwithstanding any other provision in this Agreement to the
contrary, Employee hereby agrees that any separation compensation due to
Employee, other than accrued vacation, shall be paid out 25% after the first 90
days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of
365 days, except in the event of a change in control. Payment of such amounts
shall fully release Employer from any and all liability of Employer relating to
this Agreement or the employment hereunder. Any payments of such amounts which
would otherwise be payable after a change in control, or arising as a result of
a change in control, shall
5
<PAGE>
be made in a lump sum within five (5) business days following the date of the
change in control and shall, except as otherwise provided in any other benefit
program or in this Agreement, fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
6. If Employer shall terminate Employee's employment due to Employee's
conduct that is materially detrimental to the Company's reputation, business
relationships, or for misappropriation of Employer's funds, Employee shall be
eligible for four (4) weeks salary and any other separation compensation and
benefits as are routinely made available to other employees of Employer at the
same organizational level, as full and final payment under this Agreement.
Payment of such amounts shall fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
7. (a) If Employee is unable to perform Employee's duties hereunder, by
reason of illness or incapacity of any kind, for a period of more than three (3)
months in excess of accrued sick leave, Employee's employment hereunder may be
terminated by Employer at its absolute discretion with one week of prior written
notice.
(b) If Employee's illness or incapacity shall have ended, and
Employee shall have assumed Employee's duties hereunder, prior to the date
specified in the notice of termination, Employee shall be entitled to resume
Employee's employment hereunder as if such notice had not been given.
8. In the event of a change in control of Employer, whereby any
"person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control was not approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (2.0) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level. Employee's
right to terminate under this Paragraph 8 may be exercised at the time of the
change in control or at any time within two years after the change in control,
including upon receipt of any notice that Employer has elected to terminate
Employee's employment without cause during such two-year period. Payment of such
amounts shall be made in a lump sum within five (5) business days following the
date such amounts become payable hereunder and shall, except as otherwise
provided in any other benefit program or in this Agreement, fully release
Employer from any and all liability of Employer relating to this Agreement or
the employment hereunder.
9. In the event of a change in control of Employer, whereby any "person"
(as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control is approved by a majority of the Board
6
<PAGE>
of Directors of Employer, Employee, at his/her sole option, shall be entitled to
terminate his/her employment hereunder and, upon such termination, will be
entitled to a cash amount equal to (2.0) times Employee's current salary and the
target annual bonus for which Employee is eligible in the year of termination,
together with any other separation compensation and benefits as are routinely
made available to other employees of Employer at the same organizational level,
if, within two (2) years after the effective date of the change in control any
one of the following occurs: (a) the assignment to Employee of any duties
inconsistent with Employee's position (including status, offices, titles, and
reporting requirements), authority, duties, or responsibilities or any other
action by the Company that results in a material diminution in such position,
authority, duties, or responsibilities, excluding for this purpose an action not
taken in bad faith and that is remedied by the Company within 10 days after
receipt of written notice by Employee; (b) a reduction in Employee's annual base
salary or target bonus; (c) the relocation of the Company's principle executive
offices to a location more than 75 miles from the current location of such
offices or (d), in the event such change in control occurs within the final two
years prior to the calendar date stated as the termination date of the Agreement
in Article II, and if, prior to such stated termination date and prior to
termination of Employee's employment, the Company has not offered to enter into
an extension of this employment agreement or a new employment agreement
providing benefits substantially equal to those under this agreement for a term
to extend until at least two years after the date of such change in control. In
addition, if Employee's employment hereunder is terminated for reasons other
than those set forth in Paragraph 6 of this Article within two (2) years after
the effective date of a change in control which was approved by a majority of
Employer's Board of Directors, Employee shall be entitled to a cash amount equal
to (2.0) times Employee's current salary and the target annual bonus for which
Employee is eligible in the year of termination, together with all other
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level. Payment of such amounts
shall be made in a lump sum within five (5) business days following the date
such amounts become payable hereunder, and shall, except as otherwise provided
in any other benefit program or in this Agreement, fully release Employer from
any and all liability of Employer relating to this Agreement or the employment
hereunder.
10. Anything contained herein to the contrary notwithstanding in the event
that Employer shall discontinue operation of Employer other than as a result of
a merger, consolidation or acquisition, then this Agreement shall terminate and
the provisions of Article VI shall terminate as of the last day of the month in
which Employer ceases operation with the same force and effect as if such last
day of the month were originally set as the termination date hereof.
11. Any amounts payable under this Article VII shall also be payable to
Employee in the event Employee is terminated without cause during the 90-day
period prior to a Change in Control.
12. Whether or not Employee becomes entitled to any payments under
Paragraphs 1 through 11 of this Article VII, if any payments or benefits
received, or to be received, by Employee (including the
7
<PAGE>
vesting of any option and other non-cash benefits and property), whether
pursuant to any provision of this Agreement or any other plan, arrangement or
agreement with Employer or any affiliated company, excluding the Gross-Up
Payment described herein (such payments and benefits being the "Total
Payments"), will be subject to any excise tax imposed under section 4999 of the
Internal Revenue Code of 1986, as amended (such excise tax, including penalties
and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an
additional amount (the "Gross-Up Payment") such that the net amount retained by
Employee, after reduction for any Excise Tax on the Total Payments and any
federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i)
the Total Payments plus (ii) any deductions disallowed for federal income tax
purposes because of the inclusion of the Gross-Up Payment in Executive's
adjusted gross income multiplied by the Executive's highest marginal rate of
federal income taxation for the calendar year in which the Gross-Up Payment is
to be made.
ARTICLE VIII
EFFECT OF WAIVER
The waiver by either party of a breach of any provision of this agreement
shall not operate or be construed as a waiver of any subsequent breach thereof.
ARTICLE IX
ACTUAL ATTORNEY'S FEES EXPENDED
Employer and Employee agree that all attorneys fees expended by either
party in any dispute, arbitration or litigation concerning this Agreement will
be paid by the losing party in that dispute, arbitration or litigation.
ARTICLE X
NOTICE
Any and all notices referred to herein shall be sufficient if furnished in
writing, sent by registered mail to the representative parties at the addresses
subscribed below their signatures to this Agreement.
ARTICLE XI
ASSIGNMENT
The rights, benefits and obligations of Employee under this Agreement
shall be assignable, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against Employer's successors or
assigns.
ARTICLE XII
ENTIRE AGREEMENT
This Agreement contains the entire Agreement between the parties, and the
parties hereby agree that no other oral representations or agreements have been
entered into in connection with this transaction.
8
<PAGE>
ARTICLE XIII
AMENDMENT
No amendment or modification of this Agreement shall be deemed effective,
unless or until, it is executed in writing by the parties hereto.
ARTICLE XIV
VALIDITY
This Agreement, having been executed and delivered in the State of Nevada,
its validity, interpretation, performance and enforcement will be governed by
the laws of that state.
ARTICLE XV
SEVERABILITY
It is mutually agreed that all of the terms, covenants, provisions, and
agreements contained herein are severable and that, in the event any of them
shall be held to be invalid by any competent court, this Agreement shall be
interpreted as if such invalid term, covenant, provision, or agreement were not
contained herein.
ARTICLE XVI
FORUM
The parties hereto consent and agree that any action to enforce this
Agreement or any provision therein or any rights hereunder or any action
relating to the employment of Employee with Employer shall be brought in the
State of Nevada.
ARTICLE XVII
INDEMNIFICATION
Employer shall indemnify Employee whether or not then in
office, to the fullest extent provided for in Employer's Articles of
Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified
or revised from time to time (collectively, "Employer's Articles"), or permitted
under the law of Nevada or such other state in which Employer may hereafter be
domiciled, against any and all costs, claims, judgments, fines, settlements,
liabilities, and fees or expenses (including, without limitation, reasonable
attorneys' fees) incurred in connection with any proceedings (including without
limitation, threatened actions, suits or investigations) arising out of, or
relating to, Employee's actions or in actions as a director, officer or employee
of Employer at any point during his employment by or service to Employer,
whether under this Agreement, any prior employment agreements or otherwise. The
indemnification contemplated under this Section shall be provided
9
<PAGE>
to Employee unless, at the time indemnification is sought, such indemnification
would be prohibited under the law of Nevada or of the state in which Employer
may then be domiciled; Employer may rely on the advice of its counsel in
determining whether indemnification is so prohibited.
IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas,
Nevada, on the day of , 19 .
SIERRA HEALTH SERVICES, INC.
By:______________________________
President
P. O. Box 15645
Las Vegas, NV 89114-5645
EMPLOYEE
By:______________________________
Jonathon W. Bunker
2021 Alberti Court
Las Vegas, NV 89117
10
<PAGE>
EXHIBIT 10.6 (2)
EMPLOYMENT AGREEMENT
This Agreement is made this 15th day of November 1997, by and between
SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada
(hereinafter referred to as "Employer"), and Frank E. Collins , (hereinafter
referred to as "Employee").
WITNESSETH
WHEREAS, Employer is a publicly traded company engaged in the
business of providing managed health care services through subsidiary companies;
WHEREAS, Employee has expertise and experience in providing
managed health care services; and,
WHEREAS, Employee has made and is expected to continue to make
a major contribution to the profitability, growth and financial strength of
Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements hereinafter set forth, Employer and Employee agree as follows:
ARTICLE I
EMPLOYMENT/DUTIES AND POWERS
1. Employer hereby employs, engages and hires Employee as Executive
Vice President, Secretary and General Counsel , and Employee hereby accepts and
agrees to such hiring, engagement and employment, subject to the general
supervision and direction of Employer.
2. Employee shall perform such duties as are assigned by the CEO of
Employer or his/her designee, and shall at all times faithfully and to the best
of his/her ability perform all the duties that may be required of Employee to
the reasonable satisfaction of Employer. Employee shall exercise only those
powers for signing contracts and conveyances in the ordinary course of business
as are expressly authorized by Employer's CEO or the appropriate Board of
Directors. Employee further agrees to participate in and assist in the
development of quality improvement programs offered by Employer.
ARTICLE II
TERM OF EMPLOYMENT - TERM OF AGREEMENT
1. The term of employment governed by this Agreement shall be for
approximately a 4 year period starting November 15, 1997 and terminating
December 31, 2001 subject, however, to prior termination as hereinafter provided
in Article VII. Unless earlier terminated by the mutual agreement of the parties
hereto, this Agreement shall terminate at December 31, 2001 or, if Employee has
become entitled to any benefit under Article VII due to termination of
employment on or before December 31, 2001,
1
<PAGE>
at such date as Employer has no further obligations to Employee under Article
VII; provided, however, that the provisions of Article V and Article VI (and
this clause of Article II) shall survive any termination of this Agreement.
ARTICLE III
COMPENSATION AND REVIEW
1. Employer shall pay Employee and Employee shall accept from Employer as
payment for Employee's services hereunder, compensation in the form of base
salary in the amount as set forth in Attachment A of this Agreement, payable at
such times as are deemed appropriate by Employer, but not less than twice a
month, and other compensation payable under this Agreement.
2. (a) Employer shall reimburse Employee for all necessary and reasonable
business expenses incurred by Employee while performing services pursuant to
Employer's direction.
(b) Employee agrees to maintain adequate records of expenses, in
such detail as Employer may reasonably request.
3. (a) Employee shall also be eligible for those Employee fringe benefit
programs, bonus plans, and stock option plans as are made available to other
employees of the corporation at the same organizational level, and as approved
by the Board of Directors.
(b) Except for Employee's vested benefits under the Supplemental
Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole
discretion, amend any fringe benefit programs, bonus programs, or stock option
programs without prior notice to Employee even though such an amendment may
decrease the future benefits available under said programs.
4. Employee's performance shall be reviewed at least annually based on
established job duties, goals and objectives and other reasonable standards as
deemed necessary and appropriate by Employer.
ARTICLE IV
OTHER EMPLOYMENT
Employee shall devote all of his time, attention, knowledge, and
skills solely to the business and interest of Employer, unless otherwise
authorized by Employer, and Employer shall be entitled to all of the income,
benefits, or profits arising from or incident to all work, work associations,
services, or advice of Employee, unless otherwise authorized in writing by
Employer. Employee shall not, during the term hereof, be interested in any
manner, as partner, officer, director, advisor, employee or in any other
capacity in any other business similar to Employer's business or any allied
trade, or obtain any interest adverse to Employer; provided, however, that
Employee may provide advice and consultation to other entities with the written
approval of Employer, and further provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest
any of his/her surplus funds in the capital stock or other securities of any
corporation whose stock or securities are publicly owned or are regularly traded
on any public
2
<PAGE>
exchange, nor shall anything herein contained be deemed to prevent Employee from
investing or limit Employee's right to invest his/her surplus funds in real
estate. Employee shall complete a Conflict of Interest form by February 15 of
each calendar year and submit it to Employer for review. All conflicts of
interest or any potential conflicts of interest which arise during the year must
be immediately reported to Employer. All conflict of interest concerns must be
resolved to the reasonable satisfaction of Employer as a condition of
continuation of employment.
ARTICLE V
BUSINESS SECRETS
1. Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or corporation,
in any manner whatsoever, any proprietary or confidential information concerning
any matter affecting or relating to the business of Employer or its
subsidiaries, including without limiting the generality of the foregoing, any of
their customers, the prices they obtain from providers or have obtained from the
sale of, or at which they sell or have sold, its services, or any other
information concerning the business of Employer or its subsidiaries, their
manner of operation, or their plans, if such a disclosure would be detrimental
to the business interests of Employer or its subsidiaries.
2. If Employee's employment hereunder is terminated by either party at any
time hereafter, then Employee agrees to turn over to Employer all papers,
documents, working papers, correspondence, memos and any and all other documents
in Employee's possession relating to or concerning any matter affecting or
relating to the business of Employer or its subsidiaries.
ARTICLE VI
NONCOMPETITION AGREEMENT
1. Employee acknowledges that in Employee's employment hereunder, Employee
will have continual contacts with the groups, members, and providers who are
covered by or associated with the managed health care programs offered by
Employer or its subsidiaries in Nevada and other states. In all of Employee's
activities, Employee, through the nature of Employee's work, will have access to
and will acquire confidential information related to the business and operations
of Employer and its subsidiaries, including, without limiting the generality of
the foregoing, member and group lists, and confidential information relating to
processes, plans, methods of doing business and special needs of doctors,
hospitals, members, groups, pharmacies, or other health care providers who
contract with Employer or its subsidiaries. Employee acknowledges that all such
information is the property of Employer or its subsidiaries solely and
constitutes confidential information of such parties; that the disclosure
thereof would cause substantial loss to the goodwill of Employer and its
subsidiaries; that disclosure thereof to Employee is being made only because of
the position of trust and confidence which Employee will occupy and because of
Employee's agreement to the restrictions herein contained; that his knowledge of
these matters would enable him, on termination of this
3
<PAGE>
Agreement, to compete with Employer or its subsidiaries in a manner likely to
cause Employer and its subsidiaries irreparable harm, and disclosure of such
matters would, likewise, cause such harm; and that the restrictions imposed upon
Employee herein would not prohibit Employee in earning a living.
2. It is understood and agreed by Employee and Employer that the essence
of this Employment Agreement is the mutual covenants of the parties herein made,
that the present and future members and groups of Employer or its subsidiaries
will remain Employer's or its subsidiaries' members and groups during the term
of this Agreement and following its termination for any reason. In consideration
for the employment and continued employment of Employee by Employer, and also
for the amount received by Employee as compensation, Employee hereby irrevocably
warrants, covenants, and agrees as follows:
(a) during the term of Employee's employment and after leaving
the employment of Employer for any reason, whether involuntary or voluntary,
Employee will not take any action whatsoever which may or might disturb any
existing business relationship of Employer or its subsidiaries with any doctors,
groups, members, hospitals, pharmacies or other health care providers in Nevada
who contract with Employer or its subsidiaries;
(b) for a period of one (1) year after leaving the employment of
Employer, Employee will not solicit business from the members or groups of
Employer or its subsidiaries in Nevada, or in any manner disrupt any business
relationship Employer or its subsidiaries has with any contracted health care
provider in Nevada with whom Employee came in contact as an employee of
Employer.
(c) for a period of one (1) year after leaving the employment of
Employer, Employee will not, either directly or indirectly, work for any present
or future competitors of Employer operating in the state of Nevada who in any
manner offer any managed health care programs, insurance coverage, or administer
health care claims for employers. Such competitors shall include, but are not
limited to, HMOs, PPOs, insurance companies, utilization management companies,
or third party administrators.
3. The one (1) year period specified in this Article will be tolled during
any period of breach of any of the terms of Article VI by Employee.
4. Employee agrees that in the event of a breach of any term of this
Agreement, and more particularly, in the event of a breach of any of the terms
and provisions of Article VI, Employer shall be entitled to secure an order in
any suit brought for that purpose to enjoin Employee from violating any of the
provisions of the Agreement and that, pending the hearing and the decision on
the application for such order, Employer shall be entitled to a temporary
restraining order without prejudice to any other remedy available to Employer,
all at the expense of Employee should Employer prevail in such action. Employee
understands that the covenants of this Article are the essence of this
Employment Agreement, and without which no Employment Agreement with Employee
would be entered into by Employer.
5. The provisions of Article VI shall in no event be construed to be an
exclusive remedy and such remedy shall be held and construed to be cumulative
and not exclusive of any rights or remedies, whether
4
<PAGE>
in law or equity, otherwise available under the terms of this Agreement or under
the laws of the United States or the state of Nevada.
6. The covenants and agreements made by Employee in this Article VI shall
be construed as an agreement independent of any other provision in the Agreement
and the existence of any claim or cause of action by Employee against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer, by injunctive relief or otherwise, of
the provisions of Article VI. The invalidity of all or any part of any section
or paragraph of this Article VI shall not render invalid the remainder of this
Article or any section hereof.
7. No failure or failures on the part of Employer to enforce any violation
by Employee of this Noncompetition agreement, shall constitute a waiver of
Employer's rights thereafter to enforce all of the terms, covenants, provisions
and agreements herein contained.
ARTICLE VII
TERMINATION OF EMPLOYMENT
1. Termination of employment by either Employer or Employee shall follow
established Sierra Health Services Policies and Procedures including appropriate
notice, except as otherwise specifically set forth in this Article.
2. Employee may terminate employment hereunder with sixty (60) days prior
written notice. If Employee shall voluntarily terminate employment all eligible
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level, shall be paid or made
available to Employee. 3. If Employer shall terminate Employee's employment
hereunder without cause, except as otherwise set forth in Paragraph 7 of this
Article, Employee shall be entitled to twelve (12) months salary and all other
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level. 4. In the event
Employee's employment hereunder terminates for any reason other than for cause,
including those reasons set forth in Paragraph 6 of this Article, Employee and
his/her family shall be eligible to remain covered under Employer's health care
coverage program, at no expense, for a period of time equal to Employee's length
of service or until Medicare eligible, whichever occurs first, following
termination of such employment.
5. Notwithstanding any other provision in this Agreement to the
contrary, Employee hereby agrees that any separation compensation due to
Employee, other than accrued vacation, shall be paid out 25% after the first 90
days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of
365 days, except in the event of a change in control. Payment of such amounts
shall fully release Employer from any and all liability of Employer relating to
this Agreement or the employment hereunder. Any payments of such amounts which
would otherwise be payable after a change in control, or arising as a result of
a change in control, shall
5
<PAGE>
be made in a lump sum within five (5) business days following the date of the
change in control and shall, except as otherwise provided in any other benefit
program or in this Agreement, fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
6. If Employer shall terminate Employee's employment due to Employee's
conduct that is materially detrimental to the Company's reputation, business
relationships, or for misappropriation of Employer's funds, Employee shall be
eligible for four (4) weeks salary and any other separation compensation and
benefits as are routinely made available to other employees of Employer at the
same organizational level, as full and final payment under this Agreement.
Payment of such amounts shall fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
7. (a) If Employee is unable to perform Employee's duties hereunder, by
reason of illness or incapacity of any kind, for a period of more than twelve
(12) months in excess of accrued sick leave, Employee's employment hereunder may
be terminated by Employer at its absolute discretion with one week of prior
written notice.
(b) If Employee's illness or incapacity shall have ended, and
Employee shall have assumed Employee's duties hereunder, prior to the date
specified in the notice of termination, Employee shall be entitled to resume
Employee's employment hereunder as if such notice had not been given.
8. In the event of a change in control of Employer, whereby any
"person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control was not approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (2.99) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level. Employee's
right to terminate under this Paragraph 8 may be exercised at the time of the
change in control or at any time within two years after the change in control,
including upon receipt of any notice that Employer has elected to terminate
Employee's employment without cause during such two-year period. Payment of such
amounts shall be made in a lump sum within five (5) business days following the
date such amounts become payable hereunder and shall, except as otherwise
provided in any other benefit program or in this Agreement, fully release
Employer from any and all liability of Employer relating to this Agreement or
the employment hereunder.
9. In the event of a change in control of Employer, whereby any "person"
(as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control is approved by a majority of the Board
6
<PAGE>
of Directors of Employer, Employee, at his/her sole option, shall be entitled to
terminate his/her employment hereunder and, upon such termination, will be
entitled to a cash amount equal to (2.99) times Employee's current salary and
the target annual bonus for which Employee is eligible in the year of
termination, together with any other separation compensation and benefits as are
routinely made available to other employees of Employer at the same
organizational level, if, within two (2) years after the effective date of the
change in control any one of the following occurs: (a) the assignment to
Employee of any duties inconsistent with Employee's position (including status,
offices, titles, and reporting requirements), authority, duties, or
responsibilities or any other action by the Company that results in a material
diminution in such position, authority, duties, or responsibilities, excluding
for this purpose an action not taken in bad faith and that is remedied by the
Company within 10 days after receipt of written notice by Employee; (b) a
reduction in Employee's annual base salary or target bonus; (c) the relocation
of the Company's principle executive offices to a location more than 75 miles
from the current location of such offices or (d), in the event such change in
control occurs within the final two years prior to the calendar date stated as
the termination date of the Agreement in Article II, and if, prior to such
stated termination date and prior to termination of Employee's employment, the
Company has not offered to enter into an extension of this employment agreement
or a new employment agreement providing benefits substantially equal to those
under this agreement for a term to extend until at least two years after the
date of such change in control. In addition, if Employee's employment hereunder
is terminated for reasons other than those set forth in Paragraph 6 of this
Article within two (2) years after the effective date of a change in control
which was approved by a majority of Employer's Board of Directors, Employee
shall be entitled to a cash amount equal to (2.99) times Employee's current
salary and the target annual bonus for which Employee is eligible in the year of
termination, together with all other separation compensation and benefits as are
routinely made available to other employees of Employer at the same
organizational level. Payment of such amounts shall be made in a lump sum within
five (5) business days following the date such amounts become payable hereunder,
and shall, except as otherwise provided in any other benefit program or in this
Agreement, fully release Employer from any and all liability of Employer
relating to this Agreement or the employment hereunder.
10. Anything contained herein to the contrary notwithstanding in the event
that Employer shall discontinue operation of Employer other than as a result of
a merger, consolidation or acquisition, then this Agreement shall terminate and
the provisions of Article VI shall terminate as of the last day of the month in
which Employer ceases operation with the same force and effect as if such last
day of the month were originally set as the termination date hereof.
11. Any amounts payable under this Article VII shall also be payable to
Employee in the event Employee is terminated without cause during the 90-day
period prior to a Change in Control.
12. Whether or not Employee becomes entitled to any payments under
Paragraphs 1 through 11 of this Article VII, if any payments or benefits
received, or to be received, by Employee (including the
7
<PAGE>
vesting of any option and other non-cash benefits and property), whether
pursuant to any provision of this Agreement or any other plan, arrangement or
agreement with Employer or any affiliated company, excluding the Gross-Up
Payment described herein (such payments and benefits being the "Total
Payments"), will be subject to any excise tax imposed under section 4999 of the
Internal Revenue Code of 1986, as amended (such excise tax, including penalties
and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an
additional amount (the "Gross-Up Payment") such that the net amount retained by
Employee, after reduction for any Excise Tax on the Total Payments and any
federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i)
the Total Payments plus (ii) any deductions disallowed for federal income tax
purposes because of the inclusion of the Gross-Up Payment in Executive's
adjusted gross income multiplied by the Executive's highest marginal rate of
federal income taxation for the calendar year in which the Gross-Up Payment is
to be made.
ARTICLE VIII
EFFECT OF WAIVER
The waiver by either party of a breach of any provision of this agreement
shall not operate or be construed as a waiver of any subsequent breach thereof.
ARTICLE IX
ACTUAL ATTORNEY'S FEES EXPENDED
Employer and Employee agree that all attorneys fees expended by either
party in any dispute, arbitration or litigation concerning this Agreement will
be paid by the losing party in that dispute, arbitration or litigation.
ARTICLE X
NOTICE
Any and all notices referred to herein shall be sufficient if furnished in
writing, sent by registered mail to the representative parties at the addresses
subscribed below their signatures to this Agreement.
ARTICLE XI
ASSIGNMENT
The rights, benefits and obligations of Employee under this Agreement
shall be assignable, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against Employer's successors or
assigns.
ARTICLE XII
ENTIRE AGREEMENT
This Agreement contains the entire Agreement between the parties, and the
parties hereby agree that no other oral representations or agreements have been
entered into in connection with this transaction.
ARTICLE XIII
8
<PAGE>
AMENDMENT
No amendment or modification of this Agreement shall be deemed effective,
unless or until, it is executed in writing by the parties hereto.
ARTICLE XIV
VALIDITY
This Agreement, having been executed and delivered in the State of Nevada,
its validity, interpretation, performance and enforcement will be governed by
the laws of that state.
ARTICLE XV
SEVERABILITY
It is mutually agreed that all of the terms, covenants, provisions, and
agreements contained herein are severable and that, in the event any of them
shall be held to be invalid by any competent court, this Agreement shall be
interpreted as if such invalid term, covenant, provision, or agreement were not
contained herein.
ARTICLE XVI
FORUM
The parties hereto consent and agree that any action to enforce this
Agreement or any provision therein or any rights hereunder or any action
relating to the employment of Employee with Employer shall be brought in the
State of Nevada.
ARTICLE XVII
INDEMNIFICATION
Employer shall indemnify Employee whether or not then in
office, to the fullest extent provided for in Employer's Articles of
Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified
or revised from time to time (collectively, "Employer's Articles"), or permitted
under the law of Nevada or such other state in which Employer may hereafter be
domiciled, against any and all costs, claims, judgments, fines, settlements,
liabilities, and fees or expenses (including, without limitation, reasonable
attorneys' fees) incurred in connection with any proceedings (including without
limitation, threatened actions, suits or investigations) arising out of, or
relating to, Employee's actions or in actions as a director, officer or employee
of Employer at any point during his employment by or service to Employer,
whether under this Agreement, any prior employment agreements or otherwise. The
indemnification contemplated under this Section shall be provided to Employee
unless, at the time indemnification is sought, such indemnification would be
prohibited under the law of Nevada or of the state in which Employer may then be
domiciled; Employer may rely on the advice of its counsel in determining whether
indemnification is so prohibited.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas,
Nevada, on the day of , 19 .
---- ------------------ ----
SIERRA HEALTH SERVICES, INC.
By:______________________________
Chief Executive Officer
P. O. Box 15645
Las Vegas, NV 89114-5645
EMPLOYEE
By:______________________________
Frank E. Collins
2641 Barbaradale
Las Vegas, NV 89102
10
<PAGE>
EXHIBIT 10.6 (3)
EMPLOYMENT AGREEMENT
This Agreement is made this 15th day of November 1997, by and between
SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada
(hereinafter referred to as "Employer"), and William R. Godfrey , (hereinafter
referred to as "Employee").
WITNESSETH
WHEREAS, Employer is a publicly traded company engaged in the
business of providing managed health care services through subsidiary companies;
WHEREAS, Employee has expertise and experience in providing
managed health care services; and,
WHEREAS, Employee has made and is expected to continue to make
a major contribution to the profitability, growth and financial strength of
Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements hereinafter set forth, Employer and Employee agree as follows:
ARTICLE I
EMPLOYMENT/DUTIES AND POWERS
1. Employer hereby employs, engages and hires Employee as Executive
Vice President, Administrative Services , and Employee hereby accepts and agrees
to such hiring, engagement and employment, subject to the general supervision
and direction of Employer.
2. Employee shall perform such duties as are assigned by the President of
Employer or his/her designee, and shall at all times faithfully and to the best
of his/her ability perform all the duties that may be required of Employee to
the reasonable satisfaction of Employer. Employee shall exercise only those
powers for signing contracts and conveyances in the ordinary course of business
as are expressly authorized by Employer's President or the appropriate Board of
Directors. Employee further agrees to participate in and assist in the
development of quality improvement programs offered by Employer.
ARTICLE II
TERM OF EMPLOYMENT - TERM OF AGREEMENT
1. The term of employment governed by this Agreement shall be for
approximately a 2 year period starting November 15, 1997 and terminating
December 31, 1999 subject, however, to prior termination as hereinafter provided
in Article VII. Unless earlier terminated by the mutual agreement of the parties
hereto, this Agreement shall terminate at December 31, 1999 or, if Employee has
become entitled to any benefit under Article VII due to termination of
employment on or before December 31, 1999,
1
<PAGE>
at such date as Employer has no further obligations to Employee under Article
VII; provided, however, that the provisions of Article V and Article VI (and
this clause of Article II) shall survive any termination of this Agreement.
ARTICLE III
COMPENSATION AND REVIEW
1. Employer shall pay Employee and Employee shall accept from Employer as
payment for Employee's services hereunder, compensation in the form of base
salary in the amount as set forth in Attachment A of this Agreement, payable at
such times as are deemed appropriate by Employer, but not less than twice a
month, and other compensation payable under this Agreement.
2. (a) Employer shall reimburse Employee for all necessary and reasonable
business expenses incurred by Employee while performing services pursuant to
Employer's direction.
(b) Employee agrees to maintain adequate records of expenses, in
such detail as Employer may reasonably request.
3. (a) Employee shall also be eligible for those Employee fringe benefit
programs, bonus plans, and stock option plans as are made available to other
employees of the corporation at the same organizational level, and as approved
by the Board of Directors.
(b) Except for Employee's vested benefits under the Supplemental
Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole
discretion, amend any fringe benefit programs, bonus programs, or stock option
programs without prior notice to Employee even though such an amendment may
decrease the future benefits available under said programs.
4. Employee's performance shall be reviewed at least annually based on
established job duties, goals and objectives and other reasonable standards as
deemed necessary and appropriate by Employer.
ARTICLE IV
OTHER EMPLOYMENT
Employee shall devote all of his time, attention, knowledge, and
skills solely to the business and interest of Employer, unless otherwise
authorized by Employer, and Employer shall be entitled to all of the income,
benefits, or profits arising from or incident to all work, work associations,
services, or advice of Employee, unless otherwise authorized in writing by
Employer. Employee shall not, during the term hereof, be interested in any
manner, as partner, officer, director, advisor, employee or in any other
capacity in any other business similar to Employer's business or any allied
trade, or obtain any interest adverse to Employer; provided, however, that
Employee may provide advice and consultation to other entities with the written
approval of Employer, and further provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest
any of his/her surplus funds in the capital stock or other securities of any
corporation whose stock or securities are publicly owned or are regularly traded
on any public exchange, nor shall anything herein contained be deemed to prevent
Employee from investing or limit
2
<PAGE>
Employee's right to invest his/her surplus funds in real estate. Employee shall
complete a Conflict of Interest form by February 15 of each calendar year and
submit it to Employer for review. All conflicts of interest or any potential
conflicts of interest which arise during the year must be immediately reported
to Employer. All conflict of interest concerns must be resolved to the
reasonable satisfaction of Employer as a condition of continuation of
employment.
ARTICLE V
BUSINESS SECRETS
1. Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or corporation,
in any manner whatsoever, any proprietary or confidential information concerning
any matter affecting or relating to the business of Employer or its
subsidiaries, including without limiting the generality of the foregoing, any of
their customers, the prices they obtain from providers or have obtained from the
sale of, or at which they sell or have sold, its services, or any other
information concerning the business of Employer or its subsidiaries, their
manner of operation, or their plans, if such a disclosure would be detrimental
to the business interests of Employer or its subsidiaries.
2. If Employee's employment hereunder is terminated by either party at any
time hereafter, then Employee agrees to turn over to Employer all papers,
documents, working papers, correspondence, memos and any and all other documents
in Employee's possession relating to or concerning any matter affecting or
relating to the business of Employer or its subsidiaries.
ARTICLE VI
NONCOMPETITION AGREEMENT
1. Employee acknowledges that in Employee's employment hereunder, Employee
will have continual contacts with the groups, members, and providers who are
covered by or associated with the managed health care programs offered by
Employer or its subsidiaries in Nevada and other states. In all of Employee's
activities, Employee, through the nature of Employee's work, will have access to
and will acquire confidential information related to the business and operations
of Employer and its subsidiaries, including, without limiting the generality of
the foregoing, member and group lists, and confidential information relating to
processes, plans, methods of doing business and special needs of doctors,
hospitals, members, groups, pharmacies, or other health care providers who
contract with Employer or its subsidiaries. Employee acknowledges that all such
information is the property of Employer or its subsidiaries solely and
constitutes confidential information of such parties; that the disclosure
thereof would cause substantial loss to the goodwill of Employer and its
subsidiaries; that disclosure thereof to Employee is being made only because of
the position of trust and confidence which Employee will occupy and because of
Employee's agreement to the restrictions herein contained; that his knowledge of
these matters would enable him, on termination of this Agreement, to compete
with Employer or its subsidiaries in a manner likely to cause Employer and its
3
<PAGE>
subsidiaries irreparable harm, and disclosure of such matters would, likewise,
cause such harm; and that the restrictions imposed upon Employee herein would
not prohibit Employee in earning a living.
2. It is understood and agreed by Employee and Employer that the essence
of this Employment Agreement is the mutual covenants of the parties herein made,
that the present and future members and groups of Employer or its subsidiaries
will remain Employer's or its subsidiaries' members and groups during the term
of this Agreement and following its termination for any reason. In consideration
for the employment and continued employment of Employee by Employer, and also
for the amount received by Employee as compensation, Employee hereby irrevocably
warrants, covenants, and agrees as follows:
(a) during the term of Employee's employment and after leaving
the employment of Employer for any reason, whether involuntary or voluntary,
Employee will not take any action whatsoever which may or might disturb any
existing business relationship of Employer or its subsidiaries with any doctors,
groups, members, hospitals, pharmacies or other health care providers in Nevada
who contract with Employer or its subsidiaries;
(b) for a period of one (1) year after leaving the employment of
Employer, Employee will not solicit business from the members or groups of
Employer or its subsidiaries in Nevada, or in any manner disrupt any business
relationship Employer or its subsidiaries has with any contracted health care
provider in Nevada with whom Employee came in contact as an employee of
Employer.
(c) for a period of one (1) year after leaving the employment of
Employer, Employee will not, either directly or indirectly, work for any present
or future competitors of Employer operating in the state of Nevada who in any
manner offer any managed health care programs, insurance coverage, or administer
health care claims for employers. Such competitors shall include, but are not
limited to, HMOs, PPOs, insurance companies, utilization management companies,
or third party administrators.
3. The one (1) year period specified in this Article will be tolled during
any period of breach of any of the terms of Article VI by Employee.
4. Employee agrees that in the event of a breach of any term of this
Agreement, and more particularly, in the event of a breach of any of the terms
and provisions of Article VI, Employer shall be entitled to secure an order in
any suit brought for that purpose to enjoin Employee from violating any of the
provisions of the Agreement and that, pending the hearing and the decision on
the application for such order, Employer shall be entitled to a temporary
restraining order without prejudice to any other remedy available to Employer,
all at the expense of Employee should Employer prevail in such action. Employee
understands that the covenants of this Article are the essence of this
Employment Agreement, and without which no Employment Agreement with Employee
would be entered into by Employer.
5. The provisions of Article VI shall in no event be construed to be an
exclusive remedy and such remedy shall be held and construed to be cumulative
and not exclusive of any rights or remedies, whether
4
<PAGE>
in law or equity, otherwise available under the terms of this Agreement or under
the laws of the United States or the state of Nevada.
6. The covenants and agreements made by Employee in this Article VI shall
be construed as an agreement independent of any other provision in the Agreement
and the existence of any claim or cause of action by Employee against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer, by injunctive relief or otherwise, of
the provisions of Article VI. The invalidity of all or any part of any section
or paragraph of this Article VI shall not render invalid the remainder of this
Article or any section hereof.
7. No failure or failures on the part of Employer to enforce any violation
by Employee of this Noncompetition agreement, shall constitute a waiver of
Employer's rights thereafter to enforce all of the terms, covenants, provisions
and agreements herein contained.
ARTICLE VII
TERMINATION OF EMPLOYMENT
1. Termination of employment by either Employer or Employee shall follow
established Sierra Health Services Policies and Procedures including appropriate
notice, except as otherwise specifically set forth in this Article.
2. Employee may terminate employment hereunder with sixty (60) days prior
written notice. If Employee shall voluntarily terminate employment all eligible
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level, shall be paid or made
available to Employee. 3. If Employer shall terminate Employee's employment
hereunder without cause, except as otherwise set forth in Paragraph 7 of this
Article, Employee shall be entitled to twelve (12) months salary and all other
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level. 4. In the event
Employee's employment hereunder terminates for any reason other than for cause,
including those reasons set forth in Paragraph 6 of this Article, Employee and
his/her family shall be eligible to remain covered under Employer's health care
coverage program, at no expense, for a period of time equal to Employee's length
of service or until Medicare eligible, whichever occurs first, following
termination of such employment.
5. Notwithstanding any other provision in this Agreement to the
contrary, Employee hereby agrees that any separation compensation due to
Employee, other than accrued vacation, shall be paid out 25% after the first 90
days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of
365 days, except in the event of a change in control. Payment of such amounts
shall fully release Employer from any and all liability of Employer relating to
this Agreement or the employment hereunder. Any payments of such amounts which
would otherwise be payable after a change in control, or arising as a result of
a change in control, shall
5
<PAGE>
be made in a lump sum within five (5) business days following the date of the
change in control and shall, except as otherwise provided in any other benefit
program or in this Agreement, fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
6. If Employer shall terminate Employee's employment due to Employee's
conduct that is materially detrimental to the Company's reputation, business
relationships, or for misappropriation of Employer's funds, Employee shall be
eligible for four (4) weeks salary and any other separation compensation and
benefits as are routinely made available to other employees of Employer at the
same organizational level, as full and final payment under this Agreement.
Payment of such amounts shall fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
7. (a) If Employee is unable to perform Employee's duties hereunder, by
reason of illness or incapacity of any kind, for a period of more than twelve
(12) months in excess of accrued sick leave, Employee's employment hereunder may
be terminated by Employer at its absolute discretion with one week of prior
written notice.
(b) If Employee's illness or incapacity shall have ended, and
Employee shall have assumed Employee's duties hereunder, prior to the date
specified in the notice of termination, Employee shall be entitled to resume
Employee's employment hereunder as if such notice had not been given.
8. In the event of a change in control of Employer, whereby any
"person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control was not approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (2.99) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level. Employee's
right to terminate under this Paragraph 8 may be exercised at the time of the
change in control or at any time within two years after the change in control,
including upon receipt of any notice that Employer has elected to terminate
Employee's employment without cause during such two-year period. Payment of such
amounts shall be made in a lump sum within five (5) business days following the
date such amounts become payable hereunder and shall, except as otherwise
provided in any other benefit program or in this Agreement, fully release
Employer from any and all liability of Employer relating to this Agreement or
the employment hereunder.
9. In the event of a change in control of Employer, whereby any "person"
(as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control is approved by a majority of the Board
6
<PAGE>
of Directors of Employer, Employee, at his/her sole option, shall be entitled to
terminate his/her employment hereunder and, upon such termination, will be
entitled to a cash amount equal to (2.99) times Employee's current salary and
the target annual bonus for which Employee is eligible in the year of
termination, together with any other separation compensation and benefits as are
routinely made available to other employees of Employer at the same
organizational level, if, within two (2) years after the effective date of the
change in control any one of the following occurs: (a) the assignment to
Employee of any duties inconsistent with Employee's position (including status,
offices, titles, and reporting requirements), authority, duties, or
responsibilities or any other action by the Company that results in a material
diminution in such position, authority, duties, or responsibilities, excluding
for this purpose an action not taken in bad faith and that is remedied by the
Company within 10 days after receipt of written notice by Employee; (b) a
reduction in Employee's annual base salary or target bonus; (c) the relocation
of the Company's principle executive offices to a location more than 75 miles
from the current location of such offices or (d), in the event such change in
control occurs within the final two years prior to the calendar date stated as
the termination date of the Agreement in Article II, and if, prior to such
stated termination date and prior to termination of Employee's employment, the
Company has not offered to enter into an extension of this employment agreement
or a new employment agreement providing benefits substantially equal to those
under this agreement for a term to extend until at least two years after the
date of such change in control. In addition, if Employee's employment hereunder
is terminated for reasons other than those set forth in Paragraph 6 of this
Article within two (2) years after the effective date of a change in control
which was approved by a majority of Employer's Board of Directors, Employee
shall be entitled to a cash amount equal to (2.99) times Employee's current
salary and the target annual bonus for which Employee is eligible in the year of
termination, together with all other separation compensation and benefits as are
routinely made available to other employees of Employer at the same
organizational level. Payment of such amounts shall be made in a lump sum within
five (5) business days following the date such amounts become payable hereunder,
and shall, except as otherwise provided in any other benefit program or in this
Agreement, fully release Employer from any and all liability of Employer
relating to this Agreement or the employment hereunder.
10. Anything contained herein to the contrary notwithstanding in the event
that Employer shall discontinue operation of Employer other than as a result of
a merger, consolidation or acquisition, then this Agreement shall terminate and
the provisions of Article VI shall terminate as of the last day of the month in
which Employer ceases operation with the same force and effect as if such last
day of the month were originally set as the termination date hereof.
11. Any amounts payable under this Article VII shall also be payable to
Employee in the event Employee is terminated without cause during the 90-day
period prior to a Change in Control.
12. Whether or not Employee becomes entitled to any payments under
Paragraphs 1 through 11 of this Article VII, if any payments or benefits
received, or to be received, by Employee (including the
7
<PAGE>
vesting of any option and other non-cash benefits and property), whether
pursuant to any provision of this Agreement or any other plan, arrangement or
agreement with Employer or any affiliated company, excluding the Gross-Up
Payment described herein (such payments and benefits being the "Total
Payments"), will be subject to any excise tax imposed under section 4999 of the
Internal Revenue Code of 1986, as amended (such excise tax, including penalties
and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an
additional amount (the "Gross-Up Payment") such that the net amount retained by
Employee, after reduction for any Excise Tax on the Total Payments and any
federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i)
the Total Payments plus (ii) any deductions disallowed for federal income tax
purposes because of the inclusion of the Gross-Up Payment in Executive's
adjusted gross income multiplied by the Executive's highest marginal rate of
federal income taxation for the calendar year in which the Gross-Up Payment is
to be made.
ARTICLE VIII
EFFECT OF WAIVER
The waiver by either party of a breach of any provision of this agreement
shall not operate or be construed as a waiver of any subsequent breach thereof.
ARTICLE IX
ACTUAL ATTORNEY'S FEES EXPENDED
Employer and Employee agree that all attorneys fees expended by either
party in any dispute, arbitration or litigation concerning this Agreement will
be paid by the losing party in that dispute, arbitration or litigation.
ARTICLE X
NOTICE
Any and all notices referred to herein shall be sufficient if furnished in
writing, sent by registered mail to the representative parties at the addresses
subscribed below their signatures to this Agreement.
ARTICLE XI
ASSIGNMENT
The rights, benefits and obligations of Employee under this Agreement
shall be assignable, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against Employer's successors or
assigns.
ARTICLE XII
ENTIRE AGREEMENT
This Agreement contains the entire Agreement between the parties, and the
parties hereby agree that no other oral representations or agreements have been
entered into in connection with this transaction.
8
<PAGE>
ARTICLE XIII
AMENDMENT
No amendment or modification of this Agreement shall be deemed effective,
unless or until, it is executed in writing by the parties hereto.
ARTICLE XIV
VALIDITY
This Agreement, having been executed and delivered in the State of Nevada,
its validity, interpretation, performance and enforcement will be governed by
the laws of that state.
ARTICLE XV
SEVERABILITY
It is mutually agreed that all of the terms, covenants, provisions, and
agreements contained herein are severable and that, in the event any of them
shall be held to be invalid by any competent court, this Agreement shall be
interpreted as if such invalid term, covenant, provision, or agreement were not
contained herein.
ARTICLE XVI
FORUM
The parties hereto consent and agree that any action to enforce this
Agreement or any provision therein or any rights hereunder or any action
relating to the employment of Employee with Employer shall be brought in the
State of Nevada.
ARTICLE XVII
INDEMNIFICATION
Employer shall indemnify Employee whether or not then in
office, to the fullest extent provided for in Employer's Articles of
Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified
or revised from time to time (collectively, "Employer's Articles"), or permitted
under the law of Nevada or such other state in which Employer may hereafter be
domiciled, against any and all costs, claims, judgments, fines, settlements,
liabilities, and fees or expenses (including, without limitation, reasonable
attorneys' fees) incurred in connection with any proceedings (including without
limitation, threatened actions, suits or investigations) arising out of, or
relating to, Employee's actions or in actions as a director, officer or employee
of Employer at any point during his employment by or service to Employer,
whether under this Agreement, any prior employment agreements or otherwise. The
indemnification contemplated under this Section shall be provided to Employee
unless, at the time indemnification is sought, such indemnification would be
prohibited under the law of Nevada or of the state in which Employer may then be
domiciled; Employer may rely on the advice of its counsel in determining whether
indemnification is so prohibited.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas,
Nevada, on the day of , 19 .
SIERRA HEALTH SERVICES, INC.
By:______________________________
President
P. O. Box 15645
Las Vegas, NV 89114-5645
EMPLOYEE
By:______________________________
William R. Godfrey
9517 Coral Way
Las Vegas, NV 89117
10
<PAGE>
EXHIBIT 10.6 (4)
EMPLOYMENT AGREEMENT
This Agreement is made this 15th day of November 1997, by and between
SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada
(hereinafter referred to as "Employer"), and Laurence S. Howard, (hereinafter
referred to as "Employee").
WITNESSETH
WHEREAS, Employer is a publicly traded company engaged in the
business of providing managed health care services through subsidiary companies;
WHEREAS, Employee has expertise and experience in providing
managed health care services; and,
WHEREAS, Employee has made and is expected to continue to make
a major contribution to the profitability, growth and financial strength of
Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements hereinafter set forth, Employer and Employee agree as follows:
ARTICLE I
EMPLOYMENT/DUTIES AND POWERS
1. Employer hereby employs, engages and hires Employee as Sr. Vice
President, HMO and Insurance Operations , and Employee hereby accepts and agrees
to such hiring, engagement and employment, subject to the general supervision
and direction of Employer.
2. Employee shall perform such duties as are assigned by the President of
Employer or his/her designee, and shall at all times faithfully and to the best
of his/her ability perform all the duties that may be required of Employee to
the reasonable satisfaction of Employer. Employee shall exercise only those
powers for signing contracts and conveyances in the ordinary course of business
as are expressly authorized by Employer's President or the appropriate Board of
Directors. Employee further agrees to participate in and assist in the
development of quality improvement programs offered by Employer.
ARTICLE II
TERM OF EMPLOYMENT - TERM OF AGREEMENT
1. The term of employment governed by this Agreement shall be for
approximately a 2 year period starting November 15, 1997 and terminating
December 31, 1999 subject, however, to prior termination as hereinafter provided
in Article VII. Unless earlier terminated by the mutual agreement of the parties
hereto, this Agreement shall terminate at December 31, 1999 or, if Employee has
become entitled to any benefit under Article VII due to termination of
employment on or before December 31, 1999,
1
<PAGE>
at such date as Employer has no further obligations to Employee under Article
VII; provided, however, that the provisions of Article V and Article VI (and
this clause of Article II) shall survive any termination of this Agreement.
ARTICLE III
COMPENSATION AND REVIEW
1. Employer shall pay Employee and Employee shall accept from Employer as
payment for Employee's services hereunder, compensation in the form of base
salary in the amount as set forth in Attachment A of this Agreement, payable at
such times as are deemed appropriate by Employer, but not less than twice a
month, and other compensation payable under this Agreement.
2. (a) Employer shall reimburse Employee for all necessary and reasonable
business expenses incurred by Employee while performing services pursuant to
Employer's direction.
(b) Employee agrees to maintain adequate records of expenses, in
such detail as Employer may reasonably request.
3. (a) Employee shall also be eligible for those Employee fringe benefit
programs, bonus plans, and stock option plans as are made available to other
employees of the corporation at the same organizational level, and as approved
by the Board of Directors.
(b) Except for Employee's vested benefits under the Supplemental
Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole
discretion, amend any fringe benefit programs, bonus programs, or stock option
programs without prior notice to Employee even though such an amendment may
decrease the future benefits available under said programs.
4. Employee's performance shall be reviewed at least annually based on
established job duties, goals and objectives and other reasonable standards as
deemed necessary and appropriate by Employer.
ARTICLE IV
OTHER EMPLOYMENT
Employee shall devote all of his time, attention, knowledge, and
skills solely to the business and interest of Employer, unless otherwise
authorized by Employer, and Employer shall be entitled to all of the income,
benefits, or profits arising from or incident to all work, work associations,
services, or advice of Employee, unless otherwise authorized in writing by
Employer. Employee shall not, during the term hereof, be interested in any
manner, as partner, officer, director, advisor, employee or in any other
capacity in any other business similar to Employer's business or any allied
trade, or obtain any interest adverse to Employer; provided, however, that
Employee may provide advice and consultation to other entities with the written
approval of Employer, and further provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest
any of his/her surplus funds in the capital stock or other securities of any
corporation whose stock or securities are publicly owned or are regularly traded
on any public
2
<PAGE>
exchange, nor shall anything herein contained be deemed to prevent Employee from
investing or limit Employee's right to invest his/her surplus funds in real
estate. Employee shall complete a Conflict of Interest form by February 15 of
each calendar year and submit it to Employer for review. All conflicts of
interest or any potential conflicts of interest which arise during the year must
be immediately reported to Employer. All conflict of interest concerns must be
resolved to the reasonable satisfaction of Employer as a condition of
continuation of employment.
ARTICLE V
BUSINESS SECRETS
1. Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or corporation,
in any manner whatsoever, any proprietary or confidential information concerning
any matter affecting or relating to the business of Employer or its
subsidiaries, including without limiting the generality of the foregoing, any of
their customers, the prices they obtain from providers or have obtained from the
sale of, or at which they sell or have sold, its services, or any other
information concerning the business of Employer or its subsidiaries, their
manner of operation, or their plans, if such a disclosure would be detrimental
to the business interests of Employer or its subsidiaries.
2. If Employee's employment hereunder is terminated by either party at any
time hereafter, then Employee agrees to turn over to Employer all papers,
documents, working papers, correspondence, memos and any and all other documents
in Employee's possession relating to or concerning any matter affecting or
relating to the business of Employer or its subsidiaries.
ARTICLE VI
NONCOMPETITION AGREEMENT
1. Employee acknowledges that in Employee's employment hereunder, Employee
will have continual contacts with the groups, members, and providers who are
covered by or associated with the managed health care programs offered by
Employer or its subsidiaries in Nevada and other states. In all of Employee's
activities, Employee, through the nature of Employee's work, will have access to
and will acquire confidential information related to the business and operations
of Employer and its subsidiaries, including, without limiting the generality of
the foregoing, member and group lists, and confidential information relating to
processes, plans, methods of doing business and special needs of doctors,
hospitals, members, groups, pharmacies, or other health care providers who
contract with Employer or its subsidiaries. Employee acknowledges that all such
information is the property of Employer or its subsidiaries solely and
constitutes confidential information of such parties; that the disclosure
thereof would cause substantial loss to the goodwill of Employer and its
subsidiaries; that disclosure thereof to Employee is being made only because of
the position of trust and confidence which Employee will occupy and because of
Employee's agreement to the restrictions herein contained; that his knowledge of
these matters would enable him, on termination of this
3
<PAGE>
Agreement, to compete with Employer or its subsidiaries in a manner likely to
cause Employer and its subsidiaries irreparable harm, and disclosure of such
matters would, likewise, cause such harm; and that the restrictions imposed upon
Employee herein would not prohibit Employee in earning a living.
2. It is understood and agreed by Employee and Employer that the essence
of this Employment Agreement is the mutual covenants of the parties herein made,
that the present and future members and groups of Employer or its subsidiaries
will remain Employer's or its subsidiaries' members and groups during the term
of this Agreement and following its termination for any reason. In consideration
for the employment and continued employment of Employee by Employer, and also
for the amount received by Employee as compensation, Employee hereby irrevocably
warrants, covenants, and agrees as follows:
(a) during the term of Employee's employment and after leaving
the employment of Employer for any reason, whether involuntary or voluntary,
Employee will not take any action whatsoever which may or might disturb any
existing business relationship of Employer or its subsidiaries with any doctors,
groups, members, hospitals, pharmacies or other health care providers in Nevada
who contract with Employer or its subsidiaries;
(b) for a period of one (1) year after leaving the employment of
Employer, Employee will not solicit business from the members or groups of
Employer or its subsidiaries in Nevada, or in any manner disrupt any business
relationship Employer or its subsidiaries has with any contracted health care
provider in Nevada with whom Employee came in contact as an employee of
Employer.
(c) for a period of one (1) year after leaving the employment of
Employer, Employee will not, either directly or indirectly, work for any present
or future competitors of Employer operating in the state of Nevada who in any
manner offer any managed health care programs, insurance coverage, or administer
health care claims for employers. Such competitors shall include, but are not
limited to, HMOs, PPOs, insurance companies, utilization management companies,
or third party administrators.
3. The one (1) year period specified in this Article will be tolled during
any period of breach of any of the terms of Article VI by Employee.
4. Employee agrees that in the event of a breach of any term of this
Agreement, and more particularly, in the event of a breach of any of the terms
and provisions of Article VI, Employer shall be entitled to secure an order in
any suit brought for that purpose to enjoin Employee from violating any of the
provisions of the Agreement and that, pending the hearing and the decision on
the application for such order, Employer shall be entitled to a temporary
restraining order without prejudice to any other remedy available to Employer,
all at the expense of Employee should Employer prevail in such action. Employee
understands that the covenants of this Article are the essence of this
Employment Agreement, and without which no Employment Agreement with Employee
would be entered into by Employer.
5. The provisions of Article VI shall in no event be construed to be an
exclusive remedy and such remedy shall be held and construed to be cumulative
and not exclusive of any rights or remedies, whether
4
<PAGE>
in law or equity, otherwise available under the terms of this Agreement or under
the laws of the United States or the state of Nevada.
6. The covenants and agreements made by Employee in this Article VI shall
be construed as an agreement independent of any other provision in the Agreement
and the existence of any claim or cause of action by Employee against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer, by injunctive relief or otherwise, of
the provisions of Article VI. The invalidity of all or any part of any section
or paragraph of this Article VI shall not render invalid the remainder of this
Article or any section hereof.
7. No failure or failures on the part of Employer to enforce any violation
by Employee of this Noncompetition agreement, shall constitute a waiver of
Employer's rights thereafter to enforce all of the terms, covenants, provisions
and agreements herein contained.
ARTICLE VII
TERMINATION OF EMPLOYMENT
1. Termination of employment by either Employer or Employee shall follow
established Sierra Health Services Policies and Procedures including appropriate
notice, except as otherwise specifically set forth in this Article.
2. Employee may terminate employment hereunder with sixty (60) days prior
written notice. If Employee shall voluntarily terminate employment all eligible
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level, shall be paid or made
available to Employee. 3. If Employer shall terminate Employee's employment
hereunder without cause, except as otherwise set forth in Paragraph 7 of this
Article, Employee shall be entitled to twelve (12) months salary and all other
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level. 4. In the event
Employee's employment hereunder terminates for any reason other than for cause,
including those reasons set forth in Paragraph 6 of this Article, Employee and
his/her family shall be eligible to remain covered under Employer's health care
coverage program, at no expense, for a period of time equal to Employee's length
of service or until Medicare eligible, whichever occurs first, following
termination of such employment.
5. Notwithstanding any other provision in this Agreement to the
contrary, Employee hereby agrees that any separation compensation due to
Employee, other than accrued vacation, shall be paid out 25% after the first 90
days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of
365 days, except in the event of a change in control. Payment of such amounts
shall fully release Employer from any and all liability of Employer relating to
this Agreement or the employment hereunder. Any payments or such amounts which
would otherwise be payable after a change in control, or arising as a result of
a change in control, shall
5
<PAGE>
be made in a lump sum within five (5) business days following the date of the
change in control and shall, except as otherwise provided in any other benefit
program or in this Agreement, fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
6. If Employer shall terminate Employee's employment due to Employee's
conduct that is materially detrimental to the Company's reputation, business
relationships, or for misappropriation of Employer's funds, Employee shall be
eligible for four (4) weeks salary and any other separation compensation and
benefits as are routinely made available to other employees of Employer at the
same organizational level, as full and final payment under this Agreement.
Payment of such amounts shall fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
7. (a) If Employee is unable to perform Employee's duties hereunder, by
reason of illness or incapacity of any kind, for a period of more than twelve
(12) months in excess of accrued sick leave, Employee's employment hereunder may
be terminated by Employer at its absolute discretion with one week of prior
written notice.
(b) If Employee's illness or incapacity shall have ended, and
Employee shall have assumed Employee's duties hereunder, prior to the date
specified in the notice of termination, Employee shall be entitled to resume
Employee's employment hereunder as if such notice had not been given.
8. In the event of a change in control of Employer, whereby any
"person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control was not approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (2.99) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level. Employee's
right to terminate under this Paragraph 8 may be exercised at the time of the
change in control or at any time within two years after the change in control,
including upon receipt of any notice that Employer has elected to terminate
Employee's employment without cause during such two-year period. Payment of such
amounts shall be made in a lump sum within five (5) business days following the
date such amounts become payable hereunder and shall, except as otherwise
provided in any other benefit program or in this Agreement, fully release
Employer from any and all liability of Employer relating to this Agreement or
the employment hereunder.
9. In the event of a change in control of Employer, whereby any "person"
(as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control is approved by a majority of the Board
6
<PAGE>
of Directors of Employer, Employee, at his/her sole option, shall be entitled to
terminate his/her employment hereunder and, upon such termination, will be
entitled to a cash amount equal to (2.99) times Employee's current salary and
the target annual bonus for which Employee is eligible in the year of
termination, together with any other separation compensation and benefits as are
routinely made available to other employees of Employer at the same
organizational level, if, within two (2) years after the effective date of the
change in control any one of the following occurs: (a) the assignment to
Employee of any duties inconsistent with Employee's position (including status,
offices, titles, and reporting requirements), authority, duties, or
responsibilities or any other action by the Company that results in a material
diminution in such position, authority, duties, or responsibilities, excluding
for this purpose an action not taken in bad faith and that is remedied by the
Company within 10 days after receipt of written notice by Employee; (b) a
reduction in Employee's annual base salary or target bonus; (c) the relocation
of the Company's principle executive offices to a location more than 75 miles
from the current location of such offices or (d), in the event such change in
control occurs within the final two years prior to the calendar date stated as
the termination date of the Agreement in Article II, and if, prior to such
stated termination date and prior to termination of Employee's employment, the
Company has not offered to enter into an extension of this employment agreement
or a new employment agreement providing benefits substantially equal to those
under this agreement for a term to extend until at least two years after the
date of such change in control. In addition, if Employee's employment hereunder
is terminated for reasons other than those set forth in Paragraph 6 of this
Article within two (2) years after the effective date of a change in control
which was approved by a majority of Employer's Board of Directors, Employee
shall be entitled to a cash amount equal to (2.99) times Employee's current
salary and the target annual bonus for which Employee is eligible in the year of
termination, together with all other separation compensation and benefits as are
routinely made available to other employees of Employer at the same
organizational level. Payment of such amounts shall be made in a lump sum within
five (5) business days following the date such amounts become payable hereunder,
and shall, except as otherwise provided in any other benefit program or in this
Agreement, fully release Employer from any and all liability of Employer
relating to this Agreement or the employment hereunder.
10. Anything contained herein to the contrary notwithstanding in the event
that Employer shall discontinue operation of Employer other than as a result of
a merger, consolidation or acquisition, then this Agreement shall terminate and
the provisions of Article VI shall terminate as of the last day of the month in
which Employer ceases operation with the same force and effect as if such last
day of the month were originally set as the termination date hereof.
11. Any amounts payable under this Article VII shall also be payable to
Employee in the event Employee is terminated without cause during the 90-day
period prior to a Change in Control.
12. Whether or not Employee becomes entitled to any payments under
Paragraphs 1 through 11 of this Article VII, if any payments or benefits
received, or to be received, by Employee (including the
7
<PAGE>
vesting of any option and other non-cash benefits and property), whether
pursuant to any provision of this Agreement or any other plan, arrangement or
agreement with Employer or any affiliated company, excluding the Gross-Up
Payment described herein (such payments and benefits being the "Total
Payments"), will be subject to any excise tax imposed under section 4999 of the
Internal Revenue Code of 1986, as amended (such excise tax, including penalties
and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an
additional amount (the "Gross-Up Payment") such that the net amount retained by
Employee, after reduction for any Excise Tax on the Total Payments and any
federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i)
the Total Payments plus (ii) any deductions disallowed for federal income tax
purposes because of the inclusion of the Gross-Up Payment in Executive's
adjusted gross income multiplied by the Executive's highest marginal rate of
federal income taxation for the calendar year in which the Gross-Up Payment is
to be made.
ARTICLE VIII
EFFECT OF WAIVER
The waiver by either party of a breach of any provision of this agreement
shall not operate or be construed as a waiver of any subsequent breach thereof.
ARTICLE IX
ACTUAL ATTORNEY'S FEES EXPENDED
Employer and Employee agree that all attorneys fees expended by either
party in any dispute, arbitration or litigation concerning this Agreement will
be paid by the losing party in that dispute, arbitration or litigation.
ARTICLE X
NOTICE
Any and all notices referred to herein shall be sufficient if furnished in
writing, sent by registered mail to the representative parties at the addresses
subscribed below their signatures to this Agreement.
ARTICLE XI
ASSIGNMENT
The rights, benefits and obligations of Employee under this Agreement
shall be assignable, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against Employer's successors or
assigns.
ARTICLE XII
ENTIRE AGREEMENT
This Agreement contains the entire Agreement between the parties, and the
parties hereby agree that no other oral representations or agreements have been
entered into in connection with this transaction.
ARTICLE XIII
8
<PAGE>
AMENDMENT
No amendment or modification of this Agreement shall be deemed effective,
unless or until, it is executed in writing by the parties hereto.
ARTICLE XIV
VALIDITY
This Agreement, having been executed and delivered in the State of Nevada,
its validity, interpretation, performance and enforcement will be governed by
the laws of that state.
ARTICLE XV
SEVERABILITY
It is mutually agreed that all of the terms, covenants, provisions, and
agreements contained herein are severable and that, in the event any of them
shall be held to be invalid by any competent court, this Agreement shall be
interpreted as if such invalid term, covenant, provision, or agreement were not
contained herein.
ARTICLE XVI
FORUM
The parties hereto consent and agree that any action to enforce this
Agreement or any provision therein or any rights hereunder or any action
relating to the employment of Employee with Employer shall be brought in the
State of Nevada.
ARTICLE XVII
INDEMNIFICATION
Employer shall indemnify Employee whether or not then in
office, to the fullest extent provided for in Employer's Articles of
Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified
or revised from time to time (collectively, "Employer's Articles"), or permitted
under the law of Nevada or such other state in which Employer may hereafter be
domiciled, against any and all costs, claims, judgments, fines, settlements,
liabilities, and fees or expenses (including, without limitation, reasonable
attorneys' fees) incurred in connection with any proceedings (including without
limitation, threatened actions, suits or investigations) arising out of, or
relating to, Employee's actions or in actions as a director, officer or employee
of Employer at any point during his employment by or service to Employer,
whether under this Agreement, any prior employment agreements or otherwise. The
indemnification contemplated under this Section shall be provided to Employee
unless, at the time indemnification is sought, such indemnification would be
prohibited under the
9
<PAGE>
law of Nevada or of the state in which Employer may then be domiciled; Employer
may rely on the advice of its counsel in determining whether indemnification is
so prohibited.
IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas,
Nevada, on the day of , 19 .
SIERRA HEALTH SERVICES, INC.
By:______________________________
President
P. O. Box 15645
Las Vegas, NV 89114-5645
EMPLOYEE
By:______________________________
Laurence S. Howard
7429 Bush Garden
Las Vegas, NV 89129
10
<PAGE>
EXHIBIT 10.6 (5)
EMPLOYMENT AGREEMENT
This Agreement is made this 15th day of November 1997, by and between
SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada
(hereinafter referred to as "Employer"), and Anthony M. Marlon, M.D. ,
(hereinafter referred to as "Employee").
WITNESSETH
WHEREAS, Employer is a publicly traded company engaged in the
business of providing managed health care services through subsidiary companies;
WHEREAS, Employee has expertise and experience in providing
managed health care services; and,
WHEREAS, Employee has made and is expected to continue to make
a major contribution to the profitability, growth and financial strength of
Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements hereinafter set forth, Employer and Employee agree as follows:
ARTICLE I
EMPLOYMENT/DUTIES AND POWERS
1. Employer hereby employs, engages and hires Employee as Chief
Executive Officer , and Employee hereby accepts and agrees to such hiring,
engagement and employment, subject to the general supervision and direction of
Employer.
2. Employee shall perform such duties as are assigned by the Board of
Directors, and shall at all times faithfully and to the best of his/her ability
perform all the duties that may be required of Employee to the reasonable
satisfaction of Employer. Employee shall exercise only those powers for signing
contracts and conveyances in the ordinary course of business as are expressly
authorized by the Board of Directors. Employee further agrees to participate in
and assist in the development of quality improvement programs offered by
Employer.
ARTICLE II
TERM OF EMPLOYMENT - TERM OF AGREEMENT
1. The term of employment governed by this Agreement shall be for
approximately a 5 year period starting November 15, 1997 and terminating
December 31, 2002 subject, however, to prior termination as hereinafter provided
in Article VII. Unless earlier terminated by the mutual agreement of the parties
hereto, this Agreement shall terminate at December 31, 2002 or, if Employee has
become entitled to any benefit under Article VII due to termination of
employment on or before December 31, 2002, at such date as Employer has no
further obligations to Employee under Article VII; provided, however, that
1
<PAGE>
the provisions of Article V and Article VI (and this clause of Article II) shall
survive any termination of this Agreement.
ARTICLE III
COMPENSATION AND REVIEW
1. Employer shall pay Employee and Employee shall accept from Employer as
payment for Employee's services hereunder, compensation in the form of base
salary in the amount as set forth in Attachment A of this Agreement, payable at
such times as are deemed appropriate by Employer, but not less than twice a
month, and other compensation payable under this Agreement.
2. (a) Employer shall reimburse Employee for all necessary and reasonable
business expenses incurred by Employee while performing services pursuant to
Employer's direction.
(b) Employee agrees to maintain adequate records of expenses, in
such detail as Employer may reasonably request.
3. (a) Employee shall also be eligible for those Employee fringe benefit
programs, bonus plans, and stock option plans as are made available to other
employees of the corporation at the same organizational level, and as approved
by the Board of Directors.
(b) Except for Employee's vested benefits under the Supplemental
Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole
discretion, amend any fringe benefit programs, bonus programs, or stock option
programs without prior notice to Employee even though such an amendment may
decrease the future benefits available under said programs.
4. Employee's performance shall be reviewed at least annually based on
established job duties, goals and objectives and other reasonable standards as
deemed necessary and appropriate by Employer.
ARTICLE IV
OTHER EMPLOYMENT
Employee shall devote all of his time, attention, knowledge, and
skills solely to the business and interest of Employer, unless otherwise
authorized by Employer, and Employer shall be entitled to all of the income,
benefits, or profits arising from or incident to all work, work associations,
services, or advice of Employee, unless otherwise authorized in writing by
Employer. Employee shall not, during the term hereof, be interested in any
manner, as partner, officer, director, advisor, employee or in any other
capacity in any other business similar to Employer's business or any allied
trade, or obtain any interest adverse to Employer; provided, however, that
Employee may provide advice and consultation to other entities with the written
approval of Employer, and further provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest
any of his/her surplus funds in the capital stock or other securities of any
corporation whose stock or securities are publicly owned or are regularly traded
on any public exchange, nor shall anything herein contained be deemed to prevent
Employee from investing or limit Employee's right to invest his/her surplus
funds in real estate. Employee shall complete a Conflict of
2
<PAGE>
Interest form by February 15 of each calendar year and submit it to Employer for
review. All conflicts of interest or any potential conflicts of interest which
arise during the year must be immediately reported to Employer. All conflict of
interest concerns must be resolved to the reasonable satisfaction of Employer as
a condition of continuation of employment.
ARTICLE V
BUSINESS SECRETS
1. Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or corporation,
in any manner whatsoever, any proprietary or confidential information concerning
any matter affecting or relating to the business of Employer or its
subsidiaries, including without limiting the generality of the foregoing, any of
their customers, the prices they obtain from providers or have obtained from the
sale of, or at which they sell or have sold, its services, or any other
information concerning the business of Employer or its subsidiaries, their
manner of operation, or their plans, if such a disclosure would be detrimental
to the business interests of Employer or its subsidiaries.
2. If Employee's employment hereunder is terminated by either party at any
time hereafter, then Employee agrees to turn over to Employer all papers,
documents, working papers, correspondence, memos and any and all other documents
in Employee's possession relating to or concerning any matter affecting or
relating to the business of Employer or its subsidiaries.
ARTICLE VI
NONCOMPETITION AGREEMENT
1. Employee acknowledges that in Employee's employment hereunder, Employee
will have continual contacts with the groups, members, and providers who are
covered by or associated with the managed health care programs offered by
Employer or its subsidiaries in Nevada and other states. In all of Employee's
activities, Employee, through the nature of Employee's work, will have access to
and will acquire confidential information related to the business and operations
of Employer and its subsidiaries, including, without limiting the generality of
the foregoing, member and group lists, and confidential information relating to
processes, plans, methods of doing business and special needs of doctors,
hospitals, members, groups, pharmacies, or other health care providers who
contract with Employer or its subsidiaries. Employee acknowledges that all such
information is the property of Employer or its subsidiaries solely and
constitutes confidential information of such parties; that the disclosure
thereof would cause substantial loss to the goodwill of Employer and its
subsidiaries; that disclosure thereof to Employee is being made only because of
the position of trust and confidence which Employee will occupy and because of
Employee's agreement to the restrictions herein contained; that his knowledge of
these matters would enable him, on termination of this Agreement, to compete
with Employer or its subsidiaries in a manner likely to cause Employer and its
subsidiaries irreparable harm, and disclosure of such matters would, likewise,
cause such
3
<PAGE>
harm; and that the restrictions imposed upon Employee herein would not prohibit
Employee in earning a living.
2. It is understood and agreed by Employee and Employer that the essence
of this Employment Agreement is the mutual covenants of the parties herein made,
that the present and future members and groups of Employer or its subsidiaries
will remain Employer's or its subsidiaries' members and groups during the term
of this Agreement and following its termination for any reason. In consideration
for the employment and continued employment of Employee by Employer, and also
for the amount received by Employee as compensation, Employee hereby irrevocably
warrants, covenants, and agrees as follows:
(a) during the term of Employee's employment and after leaving
the employment of Employer for any reason, whether involuntary or voluntary,
Employee will not take any action whatsoever which may or might disturb any
existing business relationship of Employer or its subsidiaries with any doctors,
groups, members, hospitals, pharmacies or other health care providers in Nevada
who contract with Employer or its subsidiaries;
(b) for a period of one (1) year after leaving the employment of
Employer, Employee will not solicit business from the members or groups of
Employer or its subsidiaries in Nevada, or in any manner disrupt any business
relationship Employer or its subsidiaries has with any contracted health care
provider in Nevada with whom Employee came in contact as an employee of
Employer.
(c) for a period of one (1) year after leaving the employment of
Employer, Employee will not, either directly or indirectly, work for any present
or future competitors of Employer operating in the state of Nevada who in any
manner offer any managed health care programs, insurance coverage, or administer
health care claims for employers. Such competitors shall include, but are not
limited to, HMOs, PPOs, insurance companies, utilization management companies,
or third party administrators.
3. The one (1) year period specified in this Article will be tolled during
any period of breach of any of the terms of Article VI by Employee.
4. Employee agrees that in the event of a breach of any term of this
Agreement, and more particularly, in the event of a breach of any of the terms
and provisions of Article VI, Employer shall be entitled to secure an order in
any suit brought for that purpose to enjoin Employee from violating any of the
provisions of the Agreement and that, pending the hearing and the decision on
the application for such order, Employer shall be entitled to a temporary
restraining order without prejudice to any other remedy available to Employer,
all at the expense of Employee should Employer prevail in such action. Employee
understands that the covenants of this Article are the essence of this
Employment Agreement, and without which no Employment Agreement with Employee
would be entered into by Employer.
5. The provisions of Article VI shall in no event be construed to be an
exclusive remedy and such remedy shall be held and construed to be cumulative
and not exclusive of any rights or remedies, whether
4
<PAGE>
in law or equity, otherwise available under the terms of this Agreement or under
the laws of the United States or the state of Nevada.
6. The covenants and agreements made by Employee in this Article VI shall
be construed as an agreement independent of any other provision in the Agreement
and the existence of any claim or cause of action by Employee against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer, by injunctive relief or otherwise, of
the provisions of Article VI. The invalidity of all or any part of any section
or paragraph of this Article VI shall not render invalid the remainder of this
Article or any section hereof.
7. No failure or failures on the part of Employer to enforce any violation
by Employee of this Noncompetition agreement, shall constitute a waiver of
Employer's rights thereafter to enforce all of the terms, covenants, provisions
and agreements herein contained.
ARTICLE VII
TERMINATION OF EMPLOYMENT
1. Termination of employment by either Employer or Employee shall follow
established Sierra Health Services Policies and Procedures including appropriate
notice, except as otherwise specifically set forth in this Article.
2. Employee may terminate employment hereunder with sixty (60) days prior
written notice. If Employee shall voluntarily terminate employment, all eligible
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level, shall be paid or made
available to Employee. 3. If Employer shall terminate Employee's employment
hereunder without cause, except as otherwise set forth in Paragraph 7 of this
Article, Employee shall be entitled to twenty-four (24) months salary and all
other separation compensation and benefits as are routinely made available to
other employees of Employer at the same organizational level. 4. In the event
Employee's employment hereunder terminates for any reason other than for cause,
including those reasons set forth in Paragraph 6 of this Article, Employee and
his/her family shall be eligible to remain covered under Employer's health care
coverage program, at no expense, for a period of time equal to Employee's length
of service or until Medicare eligible, whichever occurs first, following
termination of such employment.
5. Notwithstanding any other provision in this Agreement to the
contrary, Employee hereby agrees that any separation compensation due to
Employee, other than accrued vacation, shall be paid out 25% after the first 90
days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of
365 days, except in the event of a change in control. Payment of such amounts
shall fully release Employer from any and all liability of Employer relating to
this Agreement or the employment hereunder. Any payments of such amounts which
would otherwise be payable after a change in control or arising as a result
5
<PAGE>
of a change in control shall be made in a lump sum within five (5) business days
following the date of the change in control and shall, except as otherwise
provided in any other benefit program or in this Agreement, fully release
Employer from any and all liability of Employer relating to this Agreement or
the employment hereunder.
6. If Employer shall terminate Employee's employment due to Employee's
conduct that is materially detrimental to the Company's reputation, business
relationships, or for misappropriation of Employer's funds, Employee shall be
eligible for four (4) weeks salary and any other separation compensation and
benefits as are routinely made available to other employees of Employer at the
same organizational level, as full and final payment under this Agreement.
Payment of such amounts shall fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
7. (a) If Employee is unable to perform Employee's duties hereunder, by
reason of illness or incapacity of any kind, for a period of more than twelve
(12) months in excess of accrued sick leave, Employee's employment hereunder may
be terminated by Employer at its absolute discretion with one week of prior
written notice.
(b) If Employee's illness or incapacity shall have ended, and
Employee shall have assumed Employee's duties hereunder, prior to the date
specified in the notice of termination, Employee shall be entitled to resume
Employee's employment hereunder as if such notice had not been given.
8. In the event of a change in control of Employer, whereby any
"person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, Employee, at
his/her sole option, shall be entitled to terminate his/her employment hereunder
and will be entitled to a cash amount equal to (4.0) times Employee's current
salary and the target annual bonus for which Employee is eligible in the year of
termination and any other separation compensation and benefits as are routinely
made available to other employees of Employer at the same organizational level.
Employee's right to terminate under this Paragraph 8 may be exercised at the
time of the change in control or at any time within two years after the change
in control, including upon receipt of any notice that Employer has elected to
terminate Employee's employment without cause during such two-year period.
Payment of such amounts shall be made in a lump sum within five (5) business
days following termination of Employee's employment and shall, except as
otherwise provided in any other benefit program or in this Agreement, fully
release Employer from any and all liability of Employer relating to this
Agreement or the employment hereunder, other than benefits under the SERP and
other employee benefit plans of the Company.
9. Anything contained herein to the contrary notwithstanding in the event
that Employer shall discontinue operation of Employer other than as a result of
a merger, consolidation or acquisition, then this
6
<PAGE>
Agreement shall terminate and the provisions of Article VI shall terminate as of
the last day of the month in which Employer ceases operation with the same force
and effect as if such last day of the month were originally set as the
termination date hereof.
10. Any amounts payable under this Article VII shall also be payable to
Employee in the event Employee is terminated without cause during the 90-day
period prior to a Change in Control.
11. Whether or not Employee becomes entitled to any payments under
Paragraphs 1 through 10 of this Article VII, if any payments or benefits
received, or to be received, by Employee (including the vesting of any option
and other non-cash benefits and property), whether pursuant to any provision of
this Agreement or any other plan, arrangement or agreement with Employer or any
affiliated company, excluding the Gross-Up Payment described herein (such
payments and benefits being the "Total Payments"), will be subject to any excise
tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended
(such excise tax, including penalties and interest thereon, being the "Excise
Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up
Payment") such that the net amount retained by Employee, after reduction for any
Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up
Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any
deductions disallowed for federal income tax purposes because of the inclusion
of the Gross-Up Payment in Executive's adjusted gross income multiplied by the
Executive's highest marginal rate of federal income taxation for the calendar
year in which the Gross-Up Payment is to be made.
ARTICLE VIII
EFFECT OF WAIVER
The waiver by either party of a breach of any provision of this agreement
shall not operate or be construed as a waiver of any subsequent breach thereof.
ARTICLE IX
ACTUAL ATTORNEY'S FEES EXPENDED
Employer and Employee agree that all attorneys fees expended by either
party in any dispute, arbitration or litigation concerning this Agreement will
be paid by the losing party in that dispute, arbitration or litigation.
ARTICLE X
NOTICE
Any and all notices referred to herein shall be sufficient if furnished in
writing, sent by registered mail to the representative parties at the addresses
subscribed below their signatures to this Agreement.
ARTICLE XI
ASSIGNMENT
7
<PAGE>
The rights, benefits and obligations of Employee under this Agreement
shall be assignable, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against Employer's successors or
assigns.
ARTICLE XII
ENTIRE AGREEMENT
This Agreement contains the entire Agreement between the parties, and the
parties hereby agree that no other oral representations or agreements have been
entered into in connection with this transaction.
ARTICLE XIII
AMENDMENT
No amendment or modification of this Agreement shall be deemed effective,
unless or until, it is executed in writing by the parties hereto.
ARTICLE XIV
VALIDITY
This Agreement, having been executed and delivered in the State of Nevada,
its validity, interpretation, performance and enforcement will be governed by
the laws of that state.
ARTICLE XV
SEVERABILITY
It is mutually agreed that all of the terms, covenants, provisions, and
agreements contained herein are severable and that, in the event any of them
shall be held to be invalid by any competent court, this Agreement shall be
interpreted as if such invalid term, covenant, provision, or agreement were not
contained herein.
ARTICLE XVI
FORUM
The parties hereto consent and agree that any action to enforce this
Agreement or any provision therein or any rights hereunder or any action
relating to the employment of Employee with Employer shall be brought in the
State of Nevada.
ARTICLE XVII
INDEMNIFICATION
Employer shall indemnify Employee whether or not then in
office, to the fullest extent provided for in Employer's Articles of
Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified
or revised from time to time (collectively, "Employer's Articles"), or permitted
under the law of Nevada or such other state in which Employer may hereafter be
domiciled, against any and all costs, claims, judgments, fines, settlements,
liabilities, and fees or expenses (including, without limitation, reasonable
attorneys' fees) incurred in connection with any proceedings (including without
limitation,
8
<PAGE>
threatened actions, suits or investigations) arising out of, or relating to,
Employee's actions or in actions as a director, officer or employee of Employer
at any point during his employment by or service to Employer, whether under this
Agreement, any prior employment agreements or otherwise. The indemnification
contemplated under this Section shall be provided to Employee unless, at the
time indemnification is sought, such indemnification would be prohibited under
the law of Nevada or of the state in which Employer may then be domiciled;
Employer may rely on the advice of its counsel in determining whether
indemnification is so prohibited.
IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas,
Nevada, on the day of , 19 .
SIERRA HEALTH SERVICES, INC.
By:______________________________
President
P. O. Box 15645
Las Vegas, NV 89114-5645
EMPLOYEE
By:______________________________
Anthony M. Marlon, M.D.
1909 Corta Bella
Las Vegas, NV 89134
9
<PAGE>
EXHIBIT 10.6 (6)
EMPLOYMENT AGREEMENT
This Agreement is made this 15th day of November 1997, by and between
SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada
(hereinafter referred to as "Employer"), and Erin E. MacDonald, (hereinafter
referred to as "Employee").
WITNESSETH
WHEREAS, Employer is a publicly traded company engaged in the
business of providing managed health care services through subsidiary companies;
WHEREAS, Employee has expertise and experience in providing
managed health care services; and,
WHEREAS, Employee has made and is expected to continue to make
a major contribution to the profitability, growth and financial strength of
Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements hereinafter set forth, Employer and Employee agree as follows:
ARTICLE I
EMPLOYMENT/DUTIES AND POWERS
1. Employer hereby employs, engages and hires Employee as President and
Chief Operating Officer, and Employee hereby accepts and agrees to such hiring,
engagement and employment, subject to the general supervision and direction of
Employer.
2. Employee shall perform such duties as are assigned by the CEO of
Employer or his/her designee, and shall at all times faithfully and to the best
of his/her ability perform all the duties that may be required of Employee to
the reasonable satisfaction of Employer. Employee shall exercise only those
powers for signing contracts and conveyances in the ordinary course of business
as are expressly authorized by Employer's CEO or the appropriate Board of
Directors. Employee further agrees to participate in and assist in the
development of quality improvement programs offered by Employer.
ARTICLE II
TERM OF EMPLOYMENT - TERM OF AGREEMENT
1. The term of employment governed by this Agreement shall be for
approximately a 5 year period starting November 15, 1997 and terminating
December 31, 2002 subject, however, to prior termination as hereinafter provided
in Article VII. Unless earlier terminated by the mutual agreement of the parties
hereto, this Agreement shall terminate at December 31, 2002 or, if Employee has
become entitled to any benefit under Article VII due to termination of
employment on or before December 31, 2002,
1
<PAGE>
at such date as Employer has no further obligations to Employee under Article
VII; provided, however, that the provisions of Article V and Article VI (and
this clause of Article II) shall survive any termination of this Agreement.
ARTICLE III
COMPENSATION AND REVIEW
1. Employer shall pay Employee and Employee shall accept from Employer as
payment for Employee's services hereunder, compensation in the form of base
salary in the amount as set forth in Attachment A of this Agreement, payable at
such times as are deemed appropriate by Employer, but not less than twice a
month, and other compensation payable under this Agreement.
2. (a) Employer shall reimburse Employee for all necessary and reasonable
business expenses incurred by Employee while performing services pursuant to
Employer's direction.
(b) Employee agrees to maintain adequate records of expenses, in
such detail as Employer may reasonably request.
3. (a) Employee shall also be eligible for those Employee fringe benefit
programs, bonus plans, and stock option plans as are made available to other
employees of the corporation at the same organizational level, and as approved
by the Board of Directors.
(b) Except for Employee's vested benefits under the Supplemental
Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole
discretion, amend any fringe benefit programs, bonus programs, or stock option
programs without prior notice to Employee even though such an amendment may
decrease the future benefits available under said programs.
4. Employee's performance shall be reviewed at least annually based on
established job duties, goals and objectives and other reasonable standards as
deemed necessary and appropriate by Employer.
ARTICLE IV
OTHER EMPLOYMENT
Employee shall devote all of his time, attention, knowledge, and
skills solely to the business and interest of Employer, unless otherwise
authorized by Employer, and Employer shall be entitled to all of the income,
benefits, or profits arising from or incident to all work, work associations,
services, or advice of Employee, unless otherwise authorized in writing by
Employer. Employee shall not, during the term hereof, be interested in any
manner, as partner, officer, director, advisor, employee or in any other
capacity in any other business similar to Employer's business or any allied
trade, or obtain any interest adverse to Employer; provided, however, that
Employee may provide advice and consultation to other entities with the written
approval of Employer, and further provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest
any of his/her surplus funds in the capital stock or other securities of any
corporation whose stock or securities are publicly owned or are regularly traded
on any
2
<PAGE>
public exchange, nor shall anything herein contained be deemed to prevent
Employee from investing or limit Employee's right to invest his/her surplus
funds in real estate. Employee shall complete a Conflict of Interest form by
February 15 of each calendar year and submit it to Employer for review. All
conflicts of interest or any potential conflicts of interest which arise during
the year must be immediately reported to Employer. All conflict of interest
concerns must be resolved to the reasonable satisfaction of Employer as a
condition of continuation of employment.
ARTICLE V
BUSINESS SECRETS
1. Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or corporation,
in any manner whatsoever, any proprietary or confidential information concerning
any matter affecting or relating to the business of Employer or its
subsidiaries, including without limiting the generality of the foregoing, any of
their customers, the prices they obtain from providers or have obtained from the
sale of, or at which they sell or have sold, its services, or any other
information concerning the business of Employer or its subsidiaries, their
manner of operation, or their plans, if such a disclosure would be detrimental
to the business interests of Employer or its subsidiaries.
2. If Employee's employment hereunder is terminated by either party at any
time hereafter, then Employee agrees to turn over to Employer all papers,
documents, working papers, correspondence, memos and any and all other documents
in Employee's possession relating to or concerning any matter affecting or
relating to the business of Employer or its subsidiaries.
ARTICLE VI
NONCOMPETITION AGREEMENT
1. Employee acknowledges that in Employee's employment hereunder, Employee
will have continual contacts with the groups, members, and providers who are
covered by or associated with the managed health care programs offered by
Employer or its subsidiaries in Nevada and other states. In all of Employee's
activities, Employee, through the nature of Employee's work, will have access to
and will acquire confidential information related to the business and operations
of Employer and its subsidiaries, including, without limiting the generality of
the foregoing, member and group lists, and confidential information relating to
processes, plans, methods of doing business and special needs of doctors,
hospitals, members, groups, pharmacies, or other health care providers who
contract with Employer or its subsidiaries. Employee acknowledges that all such
information is the property of Employer or its subsidiaries solely and
constitutes confidential information of such parties; that the disclosure
thereof would cause substantial loss to the goodwill of Employer and its
subsidiaries; that disclosure thereof to Employee is being made only because of
the position of trust and confidence which Employee will occupy and because of
Employee's
3
<PAGE>
agreement to the restrictions herein contained; that his knowledge of these
matters would enable him, on termination of this Agreement, to compete with
Employer or its subsidiaries in a manner likely to cause Employer and its
subsidiaries irreparable harm, and disclosure of such matters would, likewise,
cause such harm; and that the restrictions imposed upon Employee herein would
not prohibit Employee in earning a living.
2. It is understood and agreed by Employee and Employer that the essence
of this Employment Agreement is the mutual covenants of the parties herein made,
that the present and future members and groups of Employer or its subsidiaries
will remain Employer's or its subsidiaries' members and groups during the term
of this Agreement and following its termination for any reason. In consideration
for the employment and continued employment of Employee by Employer, and also
for the amount received by Employee as compensation, Employee hereby irrevocably
warrants, covenants, and agrees as follows:
(a) during the term of Employee's employment and after leaving
the employment of Employer for any reason, whether involuntary or voluntary,
Employee will not take any action whatsoever which may or might disturb any
existing business relationship of Employer or its subsidiaries with any doctors,
groups, members, hospitals, pharmacies or other health care providers in Nevada
who contract with Employer or its subsidiaries;
(b) for a period of one (1) year after leaving the employment of
Employer, Employee will not solicit business from the members or groups of
Employer or its subsidiaries in Nevada, or in any manner disrupt any business
relationship Employer or its subsidiaries has with any contracted health care
provider in Nevada with whom Employee came in contact as an employee of
Employer.
(c) for a period of one (1) year after leaving the employment of
Employer, Employee will not, either directly or indirectly, work for any present
or future competitors of Employer operating in the state of Nevada who in any
manner offer any managed health care programs, insurance coverage, or administer
health care claims for employers. Such competitors shall include, but are not
limited to, HMOs, PPOs, insurance companies, utilization management companies,
or third party administrators.
3. The one (1) year period specified in this Article will be tolled during
any period of breach of any of the terms of Article VI by Employee.
4. Employee agrees that in the event of a breach of any term of this
Agreement, and more particularly, in the event of a breach of any of the terms
and provisions of Article VI, Employer shall be entitled to secure an order in
any suit brought for that purpose to enjoin Employee from violating any of the
provisions of the Agreement and that, pending the hearing and the decision on
the application for such order, Employer shall be entitled to a temporary
restraining order without prejudice to any other remedy available to Employer,
all at the expense of Employee should Employer prevail in such action. Employee
understands that the covenants of this Article are the essence of this
Employment Agreement, and without which no Employment Agreement with Employee
would be entered into by Employer.
4
<PAGE>
5. The provisions of Article VI shall in no event be construed to be an
exclusive remedy and such remedy shall be held and construed to be cumulative
and not exclusive of any rights or remedies, whether in law or equity, otherwise
available under the terms of this Agreement or under the laws of the United
States or the state of Nevada.
6. The covenants and agreements made by Employee in this Article VI shall
be construed as an agreement independent of any other provision in the Agreement
and the existence of any claim or cause of action by Employee against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer, by injunctive relief or otherwise, of
the provisions of Article VI. The invalidity of all or any part of any section
or paragraph of this Article VI shall not render invalid the remainder of this
Article or any section hereof.
7. No failure or failures on the part of Employer to enforce any violation
by Employee of this Noncompetition agreement, shall constitute a waiver of
Employer's rights thereafter to enforce all of the terms, covenants, provisions
and agreements herein contained.
ARTICLE VII
TERMINATION OF EMPLOYMENT
1. Termination of employment by either Employer or Employee shall follow
established Sierra Health Services Policies and Procedures including appropriate
notice, except as otherwise specifically set forth in this Article.
2. Employee may terminate employment hereunder with sixty (60) days prior
written notice. If Employee shall voluntarily terminate employment all eligible
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level, shall be paid or made
available to Employee. 3. If Employer shall terminate Employee's employment
hereunder without cause, except as otherwise set forth in Paragraph 7 of this
Article, Employee shall be entitled to eighteen (18) months salary and all other
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level. 4. In the event
Employee's employment hereunder terminates for any reason other than for cause,
including those reasons set forth in Paragraph 6 of this Article, Employee and
his/her family shall be eligible to remain covered under Employer's health care
coverage program, at no expense, for a period of time equal to Employee's length
of service or until Medicare eligible, whichever occurs first, following
termination of such employment.
5. Notwithstanding any other provision in this Agreement to the
contrary, Employee hereby agrees that any separation compensation due to
Employee, other than accrued vacation, shall be paid out 25% after the first 90
days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of
365 days, except in the event of a change in control. Payment of such amounts
shall fully release Employer
5
<PAGE>
from any and all liability of Employer relating to this Agreement or the
employment hereunder. Any payments of such amounts which would otherwise be
payable after a change in control or arising as a result of a change in control
shall be made in a lump sum within five (5) business days following the date of
the change in control and shall, except as otherwise provided in any other
benefit program or in this Agreement, fully release Employer from any and all
liability of Employer relating to this Agreement or the employment hereunder.
6. If Employer shall terminate Employee's employment due to Employee's
conduct that is materially detrimental to the Company's reputation, business
relationships, or for misappropriation of Employer's funds, Employee shall be
eligible for four (4) weeks salary and any other separation compensation and
benefits as are routinely made available to other employees of Employer at the
same organizational level, as full and final payment under this Agreement.
Payment of such amounts shall fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
7. (a) If Employee is unable to perform Employee's duties hereunder, by
reason of illness or incapacity of any kind, for a period of more than twelve
(12) months in excess of accrued sick leave, Employee's employment hereunder may
be terminated by Employer at its absolute discretion with one week of prior
written notice.
(b) If Employee's illness or incapacity shall have ended, and
Employee shall have assumed Employee's duties hereunder, prior to the date
specified in the notice of termination, Employee shall be entitled to resume
Employee's employment hereunder as if such notice had not been given.
8. In the event of a change in control of Employer, whereby any
"person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control was not approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (4.0) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level. Employee's
right to terminate under this Paragraph 8 may be exercised at the time of the
change in control or at any time within two years after the change in control,
including upon receipt of any notice that Employer has elected to terminate
Employee's employment without cause during such two-year period. Payment of such
amounts shall be made in a lump sum within five (5) business days following the
date such amounts become payable hereunder and shall, except as otherwise
provided in any other benefit program or in this Agreement, fully release
Employer from any and all liability of Employer relating to this Agreement or
the employment hereunder.
6
<PAGE>
9. In the event of a change in control of Employer, whereby any "person"
(as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control is approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (4.0) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level, if, within two
(2) years after the effective date of the change in control any one of the
following occurs: (a) the assignment to Employee of any duties inconsistent with
Employee's position (including status, offices, titles, and reporting
requirements), authority, duties, or responsibilities or any other action by the
Company that results in a material diminution in such position, authority,
duties, or responsibilities, excluding for this purpose an action not taken in
bad faith and that is remedied by the Company within 10 days after receipt of
written notice by Employee; (b) a reduction in Employee's annual base salary or
target bonus; (c) the relocation of the Company's principle executive offices to
a location more than 75 miles from the current location of such offices or (d),
in the event such change in control occurs within the final two years prior to
the calendar date stated as the termination date of the Agreement in Article II,
and if, prior to such stated termination date and prior to termination of
Employee's employment, the Company has not offered to enter into an extension of
this employment agreement or a new employment agreement providing benefits
substantially equal to those under this agreement for a term to extend until at
least two years after the date of such change in control. In addition, if
Employee's employment hereunder is terminated for reasons other than those set
forth in Paragraph 6 of this Article within two (2) years after the effective
date of a change in control which was approved by a majority of Employer's Board
of Directors, Employee shall be entitled to a cash amount equal to (4.0) times
Employee's current salary and the target annual bonus for which Employee is
eligible in the year of termination, together with all other separation
compensation and benefits as are routinely made available to other employees of
Employer at the same organizational level. Payment of such amounts shall be made
in a lump sum within five (5) business days following the date such amounts
become payable hereunder, and shall, except as otherwise provided in any other
benefit program or in this Agreement, fully release Employer from any and all
liability of Employer relating to this Agreement or the employment hereunder.
10. Anything contained herein to the contrary notwithstanding in the event
that Employer shall discontinue operation of Employer other than as a result of
a merger, consolidation or acquisition, then this Agreement shall terminate and
the provisions of Article VI shall terminate as of the last day of the month in
which Employer ceases operation with the same force and effect as if such last
day of the month were originally set as the termination date hereof.
7
<PAGE>
11. Any amounts payable under this Article VII shall also be payable to
Employee in the event Employee is terminated without cause during the 90-day
period prior to a Change in Control.
12. Whether or not Employee becomes entitled to any payments under
Paragraphs 1 through 11 of this Article VII, if any payments or benefits
received, or to be received, by Employee (including the vesting of any option
and other non-cash benefits and property), whether pursuant to any provision of
this Agreement or any other plan, arrangement or agreement with Employer or any
affiliated company, excluding the Gross-Up Payment described herein (such
payments and benefits being the "Total Payments"), will be subject to any excise
tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended
(such excise tax, including penalties and interest thereon, being the "Excise
Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up
Payment") such that the net amount retained by Employee, after reduction for any
Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up
Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any
deductions disallowed for federal income tax purposes because of the inclusion
of the Gross-Up Payment in Executive's adjusted gross income multiplied by the
Executive's highest marginal rate of federal income taxation for the calendar
year in which the Gross-Up Payment is to be made.
ARTICLE VIII
EFFECT OF WAIVER
The waiver by either party of a breach of any provision of this agreement
shall not operate or be construed as a waiver of any subsequent breach thereof.
ARTICLE IX
ACTUAL ATTORNEY'S FEES EXPENDED
Employer and Employee agree that all attorneys fees expended by either
party in any dispute, arbitration or litigation concerning this Agreement will
be paid by the losing party in that dispute, arbitration or litigation.
ARTICLE X
NOTICE
Any and all notices referred to herein shall be sufficient if furnished in
writing, sent by registered mail to the representative parties at the addresses
subscribed below their signatures to this Agreement.
ARTICLE XI
ASSIGNMENT
The rights, benefits and obligations of Employee under this Agreement
shall be assignable, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against Employer's successors or
assigns.
8
<PAGE>
ARTICLE XII
ENTIRE AGREEMENT
This Agreement contains the entire Agreement between the parties, and the
parties hereby agree that no other oral representations or agreements have been
entered into in connection with this transaction.
ARTICLE XIII
AMENDMENT
No amendment or modification of this Agreement shall be deemed effective,
unless or until, it is executed in writing by the parties hereto.
ARTICLE XIV
VALIDITY
This Agreement, having been executed and delivered in the State of Nevada,
its validity, interpretation, performance and enforcement will be governed by
the laws of that state.
ARTICLE XV
SEVERABILITY
It is mutually agreed that all of the terms, covenants, provisions, and
agreements contained herein are severable and that, in the event any of them
shall be held to be invalid by any competent court, this Agreement shall be
interpreted as if such invalid term, covenant, provision, or agreement were not
contained herein.
ARTICLE XVI
FORUM
The parties hereto consent and agree that any action to enforce this
Agreement or any provision therein or any rights hereunder or any action
relating to the employment of Employee with Employer shall be brought in the
State of Nevada.
ARTICLE XVII
INDEMNIFICATION
Employer shall indemnify Employee whether or not then in
office, to the fullest extent provided for in Employer's Articles of
Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified
or revised from time to time (collectively, "Employer's Articles"), or permitted
under the law of Nevada or such other state in which Employer may hereafter be
domiciled, against any and all costs, claims, judgments, fines, settlements,
liabilities, and fees or expenses (including, without limitation, reasonable
attorneys' fees) incurred in connection with any proceedings (including without
limitation, threatened actions, suits or investigations) arising out of, or
relating to, Employee's actions or in actions as a director, officer or employee
of Employer at any point during his employment by or service to Employer,
9
<PAGE>
whether under this Agreement, any prior employment agreements or otherwise. The
indemnification contemplated under this Section shall be provided to Employee
unless, at the time indemnification is sought, such indemnification would be
prohibited under the law of Nevada or of the state in which Employer may then be
domiciled; Employer may rely on the advice of its counsel in determining whether
indemnification is so prohibited.
IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas,
Nevada, on the day of , 19 .
SIERRA HEALTH SERVICES, INC.
By:______________________________
Chief Executive Officer
P. O. Box 15645
Las Vegas, NV 89114-5645
EMPLOYEE
By:______________________________
Erin E. MacDonald
9029 Grove Crest Lane
Las Vegas, NV 89134
10
<PAGE>
EXHIBIT 10.6 (7)
EMPLOYMENT AGREEMENT
This Agreement is made this 15th day of November 1997, by and between
SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada
(hereinafter referred to as "Employer"), and Michael A. Montalvo , (hereinafter
referred to as "Employee").
WITNESSETH
WHEREAS, Employer is a publicly traded company engaged in the
business of providing managed health care services through subsidiary companies;
WHEREAS, Employee has expertise and experience in providing
managed health care services; and,
WHEREAS, Employee has made and is expected to continue to make
a major contribution to the profitability, growth and financial strength of
Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements hereinafter set forth, Employer and Employee agree as follows:
ARTICLE I
EMPLOYMENT/DUTIES AND POWERS
1. Employer hereby employs, engages and hires Employee as Vice
President, Marketing, Sales and Underwriting Operations , and Employee hereby
accepts and agrees to such hiring, engagement and employment, subject to the
general supervision and direction of Employer.
2. Employee shall perform such duties as are assigned by the President of
Employer or his/her designee, and shall at all times faithfully and to the best
of his/her ability perform all the duties that may be required of Employee to
the reasonable satisfaction of Employer. Employee shall exercise only those
powers for signing contracts and conveyances in the ordinary course of business
as are expressly authorized by Employer's President or the appropriate Board of
Directors. Employee further agrees to participate in and assist in the
development of quality improvement programs offered by Employer.
ARTICLE II
TERM OF EMPLOYMENT - TERM OF AGREEMENT
1. The term of employment governed by this Agreement shall be for
approximately a 1 year period starting November 15, 1997 and terminating
December 31, 1998 subject, however, to prior termination as hereinafter provided
in Article VII. Unless earlier terminated by the mutual agreement of the parties
hereto, this Agreement shall terminate at December 31, 1998 or, if Employee has
become entitled to any benefit under Article VII due to termination of
employment on or before December 31, 1998,
1
<PAGE>
at such date as Employer has no further obligations to Employee under Article
VII; provided, however, that the provisions of Article V and Article VI (and
this clause of Article II) shall survive any termination of this Agreement.
ARTICLE III
COMPENSATION AND REVIEW
1. Employer shall pay Employee and Employee shall accept from Employer as
payment for Employee's services hereunder, compensation in the form of base
salary in the amount as set forth in Attachment A of this Agreement, payable at
such times as are deemed appropriate by Employer, but not less than twice a
month, and other compensation payable under this Agreement.
2. (a) Employer shall reimburse Employee for all necessary and reasonable
business expenses incurred by Employee while performing services pursuant to
Employer's direction.
(b) Employee agrees to maintain adequate records of expenses, in
such detail as Employer may reasonably request.
3. (a) Employee shall also be eligible for those Employee fringe benefit
programs, bonus plans, and stock option plans as are made available to other
employees of the corporation at the same organizational level, and as approved
by the Board of Directors.
(b) Except for Employee's vested benefits under the Supplemental
Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole
discretion, amend any fringe benefit programs, bonus programs, or stock option
programs without prior notice to Employee even though such an amendment may
decrease the future benefits available under said programs.
4. Employee's performance shall be reviewed at least annually based on
established job duties, goals and objectives and other reasonable standards as
deemed necessary and appropriate by Employer.
ARTICLE IV
OTHER EMPLOYMENT
Employee shall devote all of his time, attention, knowledge, and
skills solely to the business and interest of Employer, unless otherwise
authorized by Employer, and Employer shall be entitled to all of the income,
benefits, or profits arising from or incident to all work, work associations,
services, or advice of Employee, unless otherwise authorized in writing by
Employer. Employee shall not, during the term hereof, be interested in any
manner, as partner, officer, director, advisor, employee or in any other
capacity in any other business similar to Employer's business or any allied
trade, or obtain any interest adverse to Employer; provided, however, that
Employee may provide advice and consultation to other entities with the written
approval of Employer, and further provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest
any of his/her surplus funds in the capital stock or other securities of any
corporation whose stock or securities are publicly owned or are regularly traded
on any
2
<PAGE>
public exchange, nor shall anything herein contained be deemed to prevent
Employee from investing or limit Employee's right to invest his/her surplus
funds in real estate. Employee shall complete a Conflict of Interest form by
February 15 of each calendar year and submit it to Employer for review. All
conflicts of interest or any potential conflicts of interest which arise during
the year must be immediately reported to Employer. All conflict of interest
concerns must be resolved to the reasonable satisfaction of Employer as a
condition of continuation of employment.
ARTICLE V
BUSINESS SECRETS
1. Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or corporation,
in any manner whatsoever, any proprietary or confidential information concerning
any matter affecting or relating to the business of Employer or its
subsidiaries, including without limiting the generality of the foregoing, any of
their customers, the prices they obtain from providers or have obtained from the
sale of, or at which they sell or have sold, its services, or any other
information concerning the business of Employer or its subsidiaries, their
manner of operation, or their plans, if such a disclosure would be detrimental
to the business interests of Employer or its subsidiaries.
2. If Employee's employment hereunder is terminated by either party at any
time hereafter, then Employee agrees to turn over to Employer all papers,
documents, working papers, correspondence, memos and any and all other documents
in Employee's possession relating to or concerning any matter affecting or
relating to the business of Employer or its subsidiaries.
ARTICLE VI
NONCOMPETITION AGREEMENT
1. Employee acknowledges that in Employee's employment hereunder, Employee
will have continual contacts with the groups, members, and providers who are
covered by or associated with the managed health care programs offered by
Employer or its subsidiaries in Nevada and other states. In all of Employee's
activities, Employee, through the nature of Employee's work, will have access to
and will acquire confidential information related to the business and operations
of Employer and its subsidiaries, including, without limiting the generality of
the foregoing, member and group lists, and confidential information relating to
processes, plans, methods of doing business and special needs of doctors,
hospitals, members, groups, pharmacies, or other health care providers who
contract with Employer or its subsidiaries. Employee acknowledges that all such
information is the property of Employer or its subsidiaries solely and
constitutes confidential information of such parties; that the disclosure
thereof would cause substantial loss to the goodwill of Employer and its
subsidiaries; that disclosure thereof to Employee is being made only because of
the position of trust and confidence which Employee will occupy and because of
Employee's
3
<PAGE>
agreement to the restrictions herein contained; that his knowledge of these
matters would enable him, on termination of this Agreement, to compete with
Employer or its subsidiaries in a manner likely to cause Employer and its
subsidiaries irreparable harm, and disclosure of such matters would, likewise,
cause such harm; and that the restrictions imposed upon Employee herein would
not prohibit Employee in earning a living.
2. It is understood and agreed by Employee and Employer that the essence
of this Employment Agreement is the mutual covenants of the parties herein made,
that the present and future members and groups of Employer or its subsidiaries
will remain Employer's or its subsidiaries' members and groups during the term
of this Agreement and following its termination for any reason. In consideration
for the employment and continued employment of Employee by Employer, and also
for the amount received by Employee as compensation, Employee hereby irrevocably
warrants, covenants, and agrees as follows:
(a) during the term of Employee's employment and after leaving
the employment of Employer for any reason, whether involuntary or voluntary,
Employee will not take any action whatsoever which may or might disturb any
existing business relationship of Employer or its subsidiaries with any doctors,
groups, members, hospitals, pharmacies or other health care providers in Nevada
who contract with Employer or its subsidiaries;
(b) for a period of one (1) year after leaving the employment of
Employer, Employee will not solicit business from the members or groups of
Employer or its subsidiaries in Nevada, or in any manner disrupt any business
relationship Employer or its subsidiaries has with any contracted health care
provider in Nevada with whom Employee came in contact as an employee of
Employer.
(c) for a period of one (1) year after leaving the employment of
Employer, Employee will not, either directly or indirectly, work for any present
or future competitors of Employer operating in the state of Nevada who in any
manner offer any managed health care programs, insurance coverage, or administer
health care claims for employers. Such competitors shall include, but are not
limited to, HMOs, PPOs, insurance companies, utilization management companies,
or third party administrators.
3. The one (1) year period specified in this Article will be tolled during
any period of breach of any of the terms of Article VI by Employee.
4. Employee agrees that in the event of a breach of any term of this
Agreement, and more particularly, in the event of a breach of any of the terms
and provisions of Article VI, Employer shall be entitled to secure an order in
any suit brought for that purpose to enjoin Employee from violating any of the
provisions of the Agreement and that, pending the hearing and the decision on
the application for such order, Employer shall be entitled to a temporary
restraining order without prejudice to any other remedy available to Employer,
all at the expense of Employee should Employer prevail in such action. Employee
understands that the covenants of this Article are the essence of this
Employment Agreement, and without which no Employment Agreement with Employee
would be entered into by Employer.
4
<PAGE>
5. The provisions of Article VI shall in no event be construed to be an
exclusive remedy and such remedy shall be held and construed to be cumulative
and not exclusive of any rights or remedies, whether in law or equity, otherwise
available under the terms of this Agreement or under the laws of the United
States or the state of Nevada.
6. The covenants and agreements made by Employee in this Article VI shall
be construed as an agreement independent of any other provision in the Agreement
and the existence of any claim or cause of action by Employee against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer, by injunctive relief or otherwise, of
the provisions of Article VI. The invalidity of all or any part of any section
or paragraph of this Article VI shall not render invalid the remainder of this
Article or any section hereof.
7. No failure or failures on the part of Employer to enforce any violation
by Employee of this Noncompetition agreement, shall constitute a waiver of
Employer's rights thereafter to enforce all of the terms, covenants, provisions
and agreements herein contained.
ARTICLE VII
TERMINATION OF EMPLOYMENT
1. Termination of employment by either Employer or Employee shall follow
established Sierra Health Services Policies and Procedures including appropriate
notice, except as otherwise specifically set forth in this Article.
2. Employee may terminate employment hereunder with sixty (60) days prior
written notice. If Employee shall voluntarily terminate employment all eligible
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level, shall be paid or made
available to Employee. 3. If Employer shall terminate Employee's employment
hereunder without cause, except as otherwise set forth in Paragraph 7 of this
Article, Employee shall be entitled to six (6) months salary and all other
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level. 4. In the event
Employee's employment hereunder terminates for any reason other than for cause,
including those reasons set forth in Paragraph 6 of this Article, Employee and
his/her family shall be eligible to remain covered under Employer's health care
coverage program, at no expense, for a period of time equal to Employee's length
of service or until Medicare eligible, whichever occurs first, following
termination of such employment.
5. Notwithstanding any other provision in this Agreement to the
contrary, Employee hereby agrees that any separation compensation due to
Employee, other than accrued vacation, shall be paid out 25% after the first 90
days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of
365 days, except in the event of a change in control. Payment of such amounts
shall fully release Employer
5
<PAGE>
from any and all liability of Employer relating to this Agreement or the
employment hereunder. Any payments of such amounts which would otherwise be
payable after a change in control, or arising as a result of a change in
control, shall be made in a lump sum within five (5) business days following the
date of the change in control and shall, except as otherwise provided in any
other benefit program or in this Agreement, fully release Employer from any and
all liability of Employer relating to this Agreement or the employment
hereunder.
6. If Employer shall terminate Employee's employment due to Employee's
conduct that is materially detrimental to the Company's reputation, business
relationships, or for misappropriation of Employer's funds, Employee shall be
eligible for four (4) weeks salary and any other separation compensation and
benefits as are routinely made available to other employees of Employer at the
same organizational level, as full and final payment under this Agreement.
Payment of such amounts shall fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
7. (a) If Employee is unable to perform Employee's duties hereunder, by
reason of illness or incapacity of any kind, for a period of more than three (3)
months in excess of accrued sick leave, Employee's employment hereunder may be
terminated by Employer at its absolute discretion with one week of prior written
notice.
(b) If Employee's illness or incapacity shall have ended, and
Employee shall have assumed Employee's duties hereunder, prior to the date
specified in the notice of termination, Employee shall be entitled to resume
Employee's employment hereunder as if such notice had not been given.
8. In the event of a change in control of Employer, whereby any
"person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control was not approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (2.0) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level. Employee's
right to terminate under this Paragraph 8 may be exercised at the time of the
change in control or at any time within two years after the change in control,
including upon receipt of any notice that Employer has elected to terminate
Employee's employment without cause during such two-year period. Payment of such
amounts shall be made in a lump sum within five (5) business days following the
date such amounts become payable hereunder and shall, except as otherwise
provided in any other benefit program or in this Agreement, fully release
Employer from any and all liability of Employer relating to this Agreement or
the employment hereunder.
6
<PAGE>
9. In the event of a change in control of Employer, whereby any "person"
(as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control is approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (2.0) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level, if, within two
(2) years after the effective date of the change in control any one of the
following occurs: (a) the assignment to Employee of any duties inconsistent with
Employee's position (including status, offices, titles, and reporting
requirements), authority, duties, or responsibilities or any other action by the
Company that results in a material diminution in such position, authority,
duties, or responsibilities, excluding for this purpose an action not taken in
bad faith and that is remedied by the Company within 10 days after receipt of
written notice by Employee; (b) a reduction in Employee's annual base salary or
target bonus; (c) the relocation of the Company's principle executive offices to
a location more than 75 miles from the current location of such offices or (d),
in the event such change in control occurs within the final two years prior to
the calendar date stated as the termination date of the Agreement in Article II,
and if, prior to such stated termination date and prior to termination of
Employee's employment, the Company has not offered to enter into an extension of
this employment agreement or a new employment agreement providing benefits
substantially equal to those under this agreement for a term to extend until at
least two years after the date of such change in control. In addition, if
Employee's employment hereunder is terminated for reasons other than those set
forth in Paragraph 6 of this Article within two (2) years after the effective
date of a change in control which was approved by a majority of Employer's Board
of Directors, Employee shall be entitled to a cash amount equal to (2.0) times
Employee's current salary and the target annual bonus for which Employee is
eligible in the year of termination, together with all other separation
compensation and benefits as are routinely made available to other employees of
Employer at the same organizational level. Payment of such amounts shall be made
in a lump sum within five (5) business days following the date such amounts
become payable hereunder, and shall, except as otherwise provided in any other
benefit program or in this Agreement, fully release Employer from any and all
liability of Employer relating to this Agreement or the employment hereunder.
10. Anything contained herein to the contrary notwithstanding in the event
that Employer shall discontinue operation of Employer other than as a result of
a merger, consolidation or acquisition, then this Agreement shall terminate and
the provisions of Article VI shall terminate as of the last day of the month in
which Employer ceases operation with the same force and effect as if such last
day of the month were originally set as the termination date hereof.
7
<PAGE>
11. Any amounts payable under this Article VII shall also be payable to
Employee in the event Employee is terminated without cause during the 90-day
period prior to a Change in Control.
12. Whether or not Employee becomes entitled to any payments under
Paragraphs 1 through 11 of this Article VII, if any payments or benefits
received, or to be received, by Employee (including the vesting of any option
and other non-cash benefits and property), whether pursuant to any provision of
this Agreement or any other plan, arrangement or agreement with Employer or any
affiliated company, excluding the Gross-Up Payment described herein (such
payments and benefits being the "Total Payments"), will be subject to any excise
tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended
(such excise tax, including penalties and interest thereon, being the "Excise
Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up
Payment") such that the net amount retained by Employee, after reduction for any
Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up
Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any
deductions disallowed for federal income tax purposes because of the inclusion
of the Gross-Up Payment in Executive's adjusted gross income multiplied by the
Executive's highest marginal rate of federal income taxation for the calendar
year in which the Gross-Up Payment is to be made.
ARTICLE VIII
EFFECT OF WAIVER
The waiver by either party of a breach of any provision of this agreement
shall not operate or be construed as a waiver of any subsequent breach thereof.
ARTICLE IX
ACTUAL ATTORNEY'S FEES EXPENDED
Employer and Employee agree that all attorneys fees expended by either
party in any dispute, arbitration or litigation concerning this Agreement will
be paid by the losing party in that dispute, arbitration or litigation.
ARTICLE X
NOTICE
Any and all notices referred to herein shall be sufficient if furnished in
writing, sent by registered mail to the representative parties at the addresses
subscribed below their signatures to this Agreement.
ARTICLE XI
ASSIGNMENT
The rights, benefits and obligations of Employee under this Agreement
shall be assignable, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against Employer's successors or
assigns.
8
<PAGE>
ARTICLE XII
ENTIRE AGREEMENT
This Agreement contains the entire Agreement between the parties, and the
parties hereby agree that no other oral representations or agreements have been
entered into in connection with this transaction.
ARTICLE XIII
AMENDMENT
No amendment or modification of this Agreement shall be deemed effective,
unless or until, it is executed in writing by the parties hereto.
ARTICLE XIV
VALIDITY
This Agreement, having been executed and delivered in the State of Nevada,
its validity, interpretation, performance and enforcement will be governed by
the laws of that state.
ARTICLE XV
SEVERABILITY
It is mutually agreed that all of the terms, covenants, provisions, and
agreements contained herein are severable and that, in the event any of them
shall be held to be invalid by any competent court, this Agreement shall be
interpreted as if such invalid term, covenant, provision, or agreement were not
contained herein.
ARTICLE XVI
FORUM
The parties hereto consent and agree that any action to enforce this
Agreement or any provision therein or any rights hereunder or any action
relating to the employment of Employee with Employer shall be brought in the
State of Nevada.
ARTICLE XVII
INDEMNIFICATION
Employer shall indemnify Employee whether or not then in
office, to the fullest extent provided for in Employer's Articles of
Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified
or revised from time to time (collectively, "Employer's Articles"), or permitted
under the law of Nevada or such other state in which Employer may hereafter be
domiciled, against any and all costs, claims, judgments, fines, settlements,
liabilities, and fees or expenses (including, without limitation,
9
<PAGE>
reasonable attorneys' fees) incurred in connection with any proceedings
(including without limitation, threatened actions, suits or investigations)
arising out of, or relating to, Employee's actions or in actions as a director,
officer or employee of Employer at any point during his employment by or service
to Employer, whether under this Agreement, any prior employment agreements or
otherwise. The indemnification contemplated under this Section shall be provided
to Employee unless, at the time indemnification is sought, such indemnification
would be prohibited under the law of Nevada or of the state in which Employer
may then be domiciled; Employer may rely on the advice of its counsel in
determining whether indemnification is so prohibited.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas,
Nevada, on the day of , 19 .
SIERRA HEALTH SERVICES, INC.
By:______________________________
President
P. O. Box 15645
Las Vegas, NV 89114-5645
EMPLOYEE
By:______________________________
Michael A. Montalvo
1919 Davina Street
Las Vegas, NV 89014
11
<PAGE>
EXHIBIT 10.6 (8)
EMPLOYMENT AGREEMENT
This Agreement is made this 15th day of November 1997, by and between
SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada
(hereinafter referred to as "Employer"), and Marie H. Soldo , (hereinafter
referred to as "Employee").
WITNESSETH
WHEREAS, Employer is a publicly traded company engaged in the
business of providing managed health care services through subsidiary companies;
WHEREAS, Employee has expertise and experience in providing
managed health care services; and,
WHEREAS, Employee has made and is expected to continue to make
a major contribution to the profitability, growth and financial strength of
Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements hereinafter set forth, Employer and Employee agree as follows:
ARTICLE I
EMPLOYMENT/DUTIES AND POWERS
1. Employer hereby employs, engages and hires Employee as Executive
Vice President, Government Affairs and Special Projects , and Employee hereby
accepts and agrees to such hiring, engagement and employment, subject to the
general supervision and direction of Employer.
2. Employee shall perform such duties as are assigned by the CEO of
Employer or his/her designee, and shall at all times faithfully and to the best
of his/her ability perform all the duties that may be required of Employee to
the reasonable satisfaction of Employer. Employee shall exercise only those
powers for signing contracts and conveyances in the ordinary course of business
as are expressly authorized by Employer's CEO or the appropriate Board of
Directors. Employee further agrees to participate in and assist in the
development of quality improvement programs offered by Employer.
ARTICLE II
TERM OF EMPLOYMENT - TERM OF AGREEMENT
1. The term of employment governed by this Agreement shall be for
approximately a 4 year period starting November 15, 1997 and terminating
December 31, 2001 subject, however, to prior termination as hereinafter provided
in Article VII. Unless earlier terminated by the mutual agreement of the parties
hereto, this Agreement shall terminate at December 31, 2001 or, if Employee has
become entitled to any benefit under Article VII due to termination of
employment on or before December 31, 2001,
1
<PAGE>
at such date as Employer has no further obligations to Employee under Article
VII; provided, however, that the provisions of Article V and Article VI (and
this clause of Article II) shall survive any termination of this Agreement.
ARTICLE III
COMPENSATION AND REVIEW
1. Employer shall pay Employee and Employee shall accept from Employer as
payment for Employee's services hereunder, compensation in the form of base
salary in the amount as set forth in Attachment A of this Agreement, payable at
such times as are deemed appropriate by Employer, but not less than twice a
month, and other compensation payable under this Agreement.
2. (a) Employer shall reimburse Employee for all necessary and reasonable
business expenses incurred by Employee while performing services pursuant to
Employer's direction.
(b) Employee agrees to maintain adequate records of expenses, in
such detail as Employer may reasonably request.
3. (a) Employee shall also be eligible for those Employee fringe benefit
programs, bonus plans, and stock option plans as are made available to other
employees of the corporation at the same organizational level, and as approved
by the Board of Directors.
(b) Except for Employee's vested benefits under the Supplemental
Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole
discretion, amend any fringe benefit programs, bonus programs, or stock option
programs without prior notice to Employee even though such an amendment may
decrease the future benefits available under said programs.
4. Employee's performance shall be reviewed at least annually based on
established job duties, goals and objectives and other reasonable standards as
deemed necessary and appropriate by Employer.
ARTICLE IV
OTHER EMPLOYMENT
Employee shall devote all of his time, attention, knowledge, and
skills solely to the business and interest of Employer, unless otherwise
authorized by Employer, and Employer shall be entitled to all of the income,
benefits, or profits arising from or incident to all work, work associations,
services, or advice of Employee, unless otherwise authorized in writing by
Employer. Employee shall not, during the term hereof, be interested in any
manner, as partner, officer, director, advisor, employee or in any other
capacity in any other business similar to Employer's business or any allied
trade, or obtain any interest adverse to Employer; provided, however, that
Employee may provide advice and consultation to other entities with the written
approval of Employer, and further provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest
any of his/her surplus funds in the capital stock or other securities of any
corporation whose stock or securities are publicly owned or are regularly traded
on any
2
<PAGE>
public exchange, nor shall anything herein contained be deemed to prevent
Employee from investing or limit Employee's right to invest his/her surplus
funds in real estate. Employee shall complete a Conflict of Interest form by
February 15 of each calendar year and submit it to Employer for review. All
conflicts of interest or any potential conflicts of interest which arise during
the year must be immediately reported to Employer. All conflict of interest
concerns must be resolved to the reasonable satisfaction of Employer as a
condition of continuation of employment.
ARTICLE V
BUSINESS SECRETS
1. Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or corporation,
in any manner whatsoever, any proprietary or confidential information concerning
any matter affecting or relating to the business of Employer or its
subsidiaries, including without limiting the generality of the foregoing, any of
their customers, the prices they obtain from providers or have obtained from the
sale of, or at which they sell or have sold, its services, or any other
information concerning the business of Employer or its subsidiaries, their
manner of operation, or their plans, if such a disclosure would be detrimental
to the business interests of Employer or its subsidiaries.
2. If Employee's employment hereunder is terminated by either party at any
time hereafter, then Employee agrees to turn over to Employer all papers,
documents, working papers, correspondence, memos and any and all other documents
in Employee's possession relating to or concerning any matter affecting or
relating to the business of Employer or its subsidiaries.
ARTICLE VI
NONCOMPETITION AGREEMENT
1. Employee acknowledges that in Employee's employment hereunder, Employee
will have continual contacts with the groups, members, and providers who are
covered by or associated with the managed health care programs offered by
Employer or its subsidiaries in Nevada and other states. In all of Employee's
activities, Employee, through the nature of Employee's work, will have access to
and will acquire confidential information related to the business and operations
of Employer and its subsidiaries, including, without limiting the generality of
the foregoing, member and group lists, and confidential information relating to
processes, plans, methods of doing business and special needs of doctors,
hospitals, members, groups, pharmacies, or other health care providers who
contract with Employer or its subsidiaries. Employee acknowledges that all such
information is the property of Employer or its subsidiaries solely and
constitutes confidential information of such parties; that the disclosure
thereof would cause substantial loss to the goodwill of Employer and its
subsidiaries; that disclosure thereof to Employee is being made only because of
the position of trust and confidence which Employee will occupy and because of
Employee's
3
<PAGE>
agreement to the restrictions herein contained; that his knowledge of these
matters would enable him, on termination of this Agreement, to compete with
Employer or its subsidiaries in a manner likely to cause Employer and its
subsidiaries irreparable harm, and disclosure of such matters would, likewise,
cause such harm; and that the restrictions imposed upon Employee herein would
not prohibit Employee in earning a living.
2. It is understood and agreed by Employee and Employer that the essence
of this Employment Agreement is the mutual covenants of the parties herein made,
that the present and future members and groups of Employer or its subsidiaries
will remain Employer's or its subsidiaries' members and groups during the term
of this Agreement and following its termination for any reason. In consideration
for the employment and continued employment of Employee by Employer, and also
for the amount received by Employee as compensation, Employee hereby irrevocably
warrants, covenants, and agrees as follows:
(a) during the term of Employee's employment and after leaving
the employment of Employer for any reason, whether involuntary or voluntary,
Employee will not take any action whatsoever which may or might disturb any
existing business relationship of Employer or its subsidiaries with any doctors,
groups, members, hospitals, pharmacies or other health care providers in Nevada
who contract with Employer or its subsidiaries;
(b) for a period of one (1) year after leaving the employment of
Employer, Employee will not solicit business from the members or groups of
Employer or its subsidiaries in Nevada, or in any manner disrupt any business
relationship Employer or its subsidiaries has with any contracted health care
provider in Nevada with whom Employee came in contact as an employee of
Employer.
(c) for a period of one (1) year after leaving the employment of
Employer, Employee will not, either directly or indirectly, work for any present
or future competitors of Employer operating in the state of Nevada who in any
manner offer any managed health care programs, insurance coverage, or administer
health care claims for employers. Such competitors shall include, but are not
limited to, HMOs, PPOs, insurance companies, utilization management companies,
or third party administrators.
3. The one (1) year period specified in this Article will be tolled during
any period of breach of any of the terms of Article VI by Employee.
4. Employee agrees that in the event of a breach of any term of this
Agreement, and more particularly, in the event of a breach of any of the terms
and provisions of Article VI, Employer shall be entitled to secure an order in
any suit brought for that purpose to enjoin Employee from violating any of the
provisions of the Agreement and that, pending the hearing and the decision on
the application for such order, Employer shall be entitled to a temporary
restraining order without prejudice to any other remedy available to Employer,
all at the expense of Employee should Employer prevail in such action. Employee
understands that the covenants of this Article are the essence of this
Employment Agreement, and without which no Employment Agreement with Employee
would be entered into by Employer.
4
<PAGE>
5. The provisions of Article VI shall in no event be construed to be an
exclusive remedy and such remedy shall be held and construed to be cumulative
and not exclusive of any rights or remedies, whether in law or equity, otherwise
available under the terms of this Agreement or under the laws of the United
States or the state of Nevada.
6. The covenants and agreements made by Employee in this Article VI shall
be construed as an agreement independent of any other provision in the Agreement
and the existence of any claim or cause of action by Employee against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer, by injunctive relief or otherwise, of
the provisions of Article VI. The invalidity of all or any part of any section
or paragraph of this Article VI shall not render invalid the remainder of this
Article or any section hereof.
7. No failure or failures on the part of Employer to enforce any violation
by Employee of this Noncompetition agreement, shall constitute a waiver of
Employer's rights thereafter to enforce all of the terms, covenants, provisions
and agreements herein contained.
ARTICLE VII
TERMINATION OF EMPLOYMENT
1. Termination of employment by either Employer or Employee shall follow
established Sierra Health Services Policies and Procedures including appropriate
notice, except as otherwise specifically set forth in this Article.
2. Employee may terminate employment hereunder with sixty (60) days prior
written notice. If Employee shall voluntarily terminate employment all eligible
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level, shall be paid or made
available to Employee. 3. If Employer shall terminate Employee's employment
hereunder without cause, except as otherwise set forth in Paragraph 7 of this
Article, Employee shall be entitled to twelve (12) months salary and all other
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level. 4. In the event
Employee's employment hereunder terminates for any reason other than for cause,
including those reasons set forth in Paragraph 6 of this Article, Employee and
his/her family shall be eligible to remain covered under Employer's health care
coverage program, at no expense, for a period of time equal to Employee's length
of service or until Medicare eligible, whichever occurs first, following
termination of such employment.
5. Notwithstanding any other provision in this Agreement to the
contrary, Employee hereby agrees that any separation compensation due to
Employee, other than accrued vacation, shall be paid out 25% after the first 90
days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of
365 days, except in the event of a change in control. Payment of such amounts
shall fully release Employer
5
<PAGE>
from any and all liability of Employer relating to this Agreement or the
employment hereunder. Any payments of such amounts which would otherwise be
payable after a change in control, or arising as a result of a change in
control, shall be made in a lump sum within five (5) business days following the
date of the change in control and shall, except as otherwise provided in any
other benefit program or in this Agreement, fully release Employer from any and
all liability of Employer relating to this Agreement or the employment
hereunder.
6. If Employer shall terminate Employee's employment due to Employee's
conduct that is materially detrimental to the Company's reputation, business
relationships, or for misappropriation of Employer's funds, Employee shall be
eligible for four (4) weeks salary and any other separation compensation and
benefits as are routinely made available to other employees of Employer at the
same organizational level, as full and final payment under this Agreement.
Payment of such amounts shall fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
7. (a) If Employee is unable to perform Employee's duties hereunder, by
reason of illness or incapacity of any kind, for a period of more than twelve
(12) months in excess of accrued sick leave, Employee's employment hereunder may
be terminated by Employer at its absolute discretion with one week of prior
written notice.
(b) If Employee's illness or incapacity shall have ended, and
Employee shall have assumed Employee's duties hereunder, prior to the date
specified in the notice of termination, Employee shall be entitled to resume
Employee's employment hereunder as if such notice had not been given.
8. In the event of a change in control of Employer, whereby any
"person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control was not approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (2.99) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level. Employee's
right to terminate under this Paragraph 8 may be exercised at the time of the
change in control or at any time within two years after the change in control,
including upon receipt of any notice that Employer has elected to terminate
Employee's employment without cause during such two-year period. Payment of such
amounts shall be made in a lump sum within five (5) business days following the
date such amounts become payable hereunder and shall, except as otherwise
provided in any other benefit program or in this Agreement, fully release
Employer from any and all liability of Employer relating to this Agreement or
the employment hereunder.
6
<PAGE>
9. In the event of a change in control of Employer, whereby any "person"
(as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control is approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (2.99) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level, if, within two
(2) years after the effective date of the change in control any one of the
following occurs: (a) the assignment to Employee of any duties inconsistent with
Employee's position (including status, offices, titles, and reporting
requirements), authority, duties, or responsibilities or any other action by the
Company that results in a material diminution in such position, authority,
duties, or responsibilities, excluding for this purpose an action not taken in
bad faith and that is remedied by the Company within 10 days after receipt of
written notice by Employee; (b) a reduction in Employee's annual base salary or
target bonus; (c) the relocation of the Company's principle executive offices to
a location more than 75 miles from the current location of such offices or (d),
in the event such change in control occurs within the final two years prior to
the calendar date stated as the termination date of the Agreement in Article II,
and if, prior to such stated termination date and prior to termination of
Employee's employment, the Company has not offered to enter into an extension of
this employment agreement or a new employment agreement providing benefits
substantially equal to those under this agreement for a term to extend until at
least two years after the date of such change in control. In addition, if
Employee's employment hereunder is terminated for reasons other than those set
forth in Paragraph 6 of this Article within two (2) years after the effective
date of a change in control which was approved by a majority of Employer's Board
of Directors, Employee shall be entitled to a cash amount equal to (2.99) times
Employee's current salary and the target annual bonus for which Employee is
eligible in the year of termination, together with all other separation
compensation and benefits as are routinely made available to other employees of
Employer at the same organizational level. Payment of such amounts shall be made
in a lump sum within five (5) business days following the date such amounts
become payable hereunder, and shall, except as otherwise provided in any other
benefit program or in this Agreement, fully release Employer from any and all
liability of Employer relating to this Agreement or the employment hereunder.
10. Anything contained herein to the contrary notwithstanding in the event
that Employer shall discontinue operation of Employer other than as a result of
a merger, consolidation or acquisition, then this Agreement shall terminate and
the provisions of Article VI shall terminate as of the last day of the month in
which Employer ceases operation with the same force and effect as if such last
day of the month were originally set as the termination date hereof.
7
<PAGE>
11. Any amounts payable under this Article VII shall also be payable to
Employee in the event Employee is terminated without cause during the 90-day
period prior to a Change in Control.
12. Whether or not Employee becomes entitled to any payments under
Paragraphs 1 through 11 of this Article VII, if any payments or benefits
received, or to be received, by Employee (including the vesting of any option
and other non-cash benefits and property), whether pursuant to any provision of
this Agreement or any other plan, arrangement or agreement with Employer or any
affiliated company, excluding the Gross-Up Payment described herein (such
payments and benefits being the "Total Payments"), will be subject to any excise
tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended
(such excise tax, including penalties and interest thereon, being the "Excise
Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up
Payment") such that the net amount retained by Employee, after reduction for any
Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up
Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any
deductions disallowed for federal income tax purposes because of the inclusion
of the Gross-Up Payment in Executive's adjusted gross income multiplied by the
Executive's highest marginal rate of federal income taxation for the calendar
year in which the Gross-Up Payment is to be made.
ARTICLE VIII
EFFECT OF WAIVER
The waiver by either party of a breach of any provision of this agreement
shall not operate or be construed as a waiver of any subsequent breach thereof.
ARTICLE IX
ACTUAL ATTORNEY'S FEES EXPENDED
Employer and Employee agree that all attorneys fees expended by either
party in any dispute, arbitration or litigation concerning this Agreement will
be paid by the losing party in that dispute, arbitration or litigation.
ARTICLE X
NOTICE
Any and all notices referred to herein shall be sufficient if furnished in
writing, sent by registered mail to the representative parties at the addresses
subscribed below their signatures to this Agreement.
ARTICLE XI
ASSIGNMENT
The rights, benefits and obligations of Employee under this Agreement
shall be assignable, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against Employer's successors or
assigns.
8
<PAGE>
ARTICLE XII
ENTIRE AGREEMENT
This Agreement contains the entire Agreement between the parties, and the
parties hereby agree that no other oral representations or agreements have been
entered into in connection with this transaction.
ARTICLE XIII
AMENDMENT
No amendment or modification of this Agreement shall be deemed effective,
unless or until, it is executed in writing by the parties hereto.
ARTICLE XIV
VALIDITY
This Agreement, having been executed and delivered in the State of Nevada,
its validity, interpretation, performance and enforcement will be governed by
the laws of that state.
ARTICLE XV
SEVERABILITY
It is mutually agreed that all of the terms, covenants, provisions, and
agreements contained herein are severable and that, in the event any of them
shall be held to be invalid by any competent court, this Agreement shall be
interpreted as if such invalid term, covenant, provision, or agreement were not
contained herein.
ARTICLE XVI
FORUM
The parties hereto consent and agree that any action to enforce this
Agreement or any provision therein or any rights hereunder or any action
relating to the employment of Employee with Employer shall be brought in the
State of Nevada.
ARTICLE XVII
INDEMNIFICATION
Employer shall indemnify Employee whether or not then in
office, to the fullest extent provided for in Employer's Articles of
Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified
or revised from time to time (collectively, "Employer's Articles"), or permitted
under the law of Nevada or such other state in which Employer may hereafter be
domiciled, against any and all costs, claims, judgments, fines, settlements,
liabilities, and fees or expenses (including, without limitation, reasonable
attorneys' fees) incurred in connection with any proceedings (including without
limitation,
9
<PAGE>
threatened actions, suits or investigations) arising out of, or relating to,
Employee's actions or in actions as a director, officer or employee of Employer
at any point during his employment by or service to Employer, whether under this
Agreement, any prior employment agreements or otherwise. The indemnification
contemplated under this Section shall be provided to Employee unless, at the
time indemnification is sought, such indemnification would be prohibited under
the law of Nevada or of the state in which Employer may then be domiciled;
Employer may rely on the advice of its counsel in determining whether
indemnification is so prohibited.
IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas,
Nevada, on the day of , 19 .
SIERRA HEALTH SERVICES, INC.
By:______________________________
Chief Executive Officer
P. O. Box 15645
Las Vegas, NV 89114-5645
EMPLOYEE
By:______________________________
Marie H. Soldo
3109 LaMancha Way
Las Vegas, NV 89014
10
<PAGE>
EXHIBIT 10.6 (9)
EMPLOYMENT AGREEMENT
This Agreement is made this 15th day of November 1997, by and between
SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada
(hereinafter referred to as "Employer"), and James L. Starr, (hereinafter
referred to as "Employee").
WITNESSETH
WHEREAS, Employer is a publicly traded company engaged in the
business of providing managed health care services through subsidiary companies;
WHEREAS, Employee has expertise and experience in providing
managed health care services; and,
WHEREAS, Employee has made and is expected to continue to make
a major contribution to the profitability, growth and financial strength of
Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements hereinafter set forth, Employer and Employee agree as follows:
ARTICLE I
EMPLOYMENT/DUTIES AND POWERS
1. Employer hereby employs, engages and hires Employee as Sr. Vice
President, Chief Financial Officer , and Employee hereby accepts and agrees to
such hiring, engagement and employment, subject to the general supervision and
direction of Employer.
2. Employee shall perform such duties as are assigned by the President of
Employer or his/her designee, and shall at all times faithfully and to the best
of his/her ability perform all the duties that may be required of Employee to
the reasonable satisfaction of Employer. Employee shall exercise only those
powers for signing contracts and conveyances in the ordinary course of business
as are expressly authorized by Employer's President or the appropriate Board of
Directors. Employee further agrees to participate in and assist in the
development of quality improvement programs offered by Employer.
ARTICLE II
TERM OF EMPLOYMENT - TERM OF AGREEMENT
1. The term of employment governed by this Agreement shall be for
approximately a 2 year period starting November 15, 1997 and terminating
December 31, 1999 subject, however, to prior termination as hereinafter provided
in Article VII. Unless earlier terminated by the mutual agreement of the parties
hereto, this Agreement shall terminate at December 31, 1999 or, if Employee has
become entitled to any benefit under Article VII due to termination of
employment on or before December 31, 1999,
1
<PAGE>
at such date as Employer has no further obligations to Employee under Article
VII; provided, however, that the provisions of Article V and Article VI (and
this clause of Article II) shall survive any termination of this Agreement.
ARTICLE III
COMPENSATION AND REVIEW
1. Employer shall pay Employee and Employee shall accept from Employer as
payment for Employee's services hereunder, compensation in the form of base
salary in the amount as set forth in Attachment A of this Agreement, payable at
such times as are deemed appropriate by Employer, but not less than twice a
month, and other compensation payable under this Agreement.
2. (a) Employer shall reimburse Employee for all necessary and reasonable
business expenses incurred by Employee while performing services pursuant to
Employer's direction.
(b) Employee agrees to maintain adequate records of expenses, in
such detail as Employer may reasonably request.
3. (a) Employee shall also be eligible for those Employee fringe benefit
programs, bonus plans, and stock option plans as are made available to other
employees of the corporation at the same organizational level, and as approved
by the Board of Directors.
(b) Except for Employee's vested benefits under the Supplemental
Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole
discretion, amend any fringe benefit programs, bonus programs, or stock option
programs without prior notice to Employee even though such an amendment may
decrease the future benefits available under said programs.
4. Employee's performance shall be reviewed at least annually based on
established job duties, goals and objectives and other reasonable standards as
deemed necessary and appropriate by Employer.
ARTICLE IV
OTHER EMPLOYMENT
Employee shall devote all of his time, attention, knowledge, and
skills solely to the business and interest of Employer, unless otherwise
authorized by Employer, and Employer shall be entitled to all of the income,
benefits, or profits arising from or incident to all work, work associations,
services, or advice of Employee, unless otherwise authorized in writing by
Employer. Employee shall not, during the term hereof, be interested in any
manner, as partner, officer, director, advisor, employee or in any other
capacity in any other business similar to Employer's business or any allied
trade, or obtain any interest adverse to Employer; provided, however, that
Employee may provide advice and consultation to other entities with the written
approval of Employer, and further provided, however, that nothing herein
contained shall be deemed to prevent or limit the right of Employee to invest
any of his/her surplus funds in the capital stock or other securities of any
corporation whose stock or securities are publicly owned or are regularly traded
on any
2
<PAGE>
public exchange, nor shall anything herein contained be deemed to prevent
Employee from investing or limit Employee's right to invest his/her surplus
funds in real estate. Employee shall complete a Conflict of Interest form by
February 15 of each calendar year and submit it to Employer for review. All
conflicts of interest or any potential conflicts of interest which arise during
the year must be immediately reported to Employer. All conflict of interest
concerns must be resolved to the reasonable satisfaction of Employer as a
condition of continuation of employment.
ARTICLE V
BUSINESS SECRETS
1. Employee shall not at any time or in any manner, either directly or
indirectly, divulge, disclose or communicate to any person, firm or corporation,
in any manner whatsoever, any proprietary or confidential information concerning
any matter affecting or relating to the business of Employer or its
subsidiaries, including without limiting the generality of the foregoing, any of
their customers, the prices they obtain from providers or have obtained from the
sale of, or at which they sell or have sold, its services, or any other
information concerning the business of Employer or its subsidiaries, their
manner of operation, or their plans, if such a disclosure would be detrimental
to the business interests of Employer or its subsidiaries.
2. If Employee's employment hereunder is terminated by either party at any
time hereafter, then Employee agrees to turn over to Employer all papers,
documents, working papers, correspondence, memos and any and all other documents
in Employee's possession relating to or concerning any matter affecting or
relating to the business of Employer or its subsidiaries.
ARTICLE VI
NONCOMPETITION AGREEMENT
1. Employee acknowledges that in Employee's employment hereunder, Employee
will have continual contacts with the groups, members, and providers who are
covered by or associated with the managed health care programs offered by
Employer or its subsidiaries in Nevada and other states. In all of Employee's
activities, Employee, through the nature of Employee's work, will have access to
and will acquire confidential information related to the business and operations
of Employer and its subsidiaries, including, without limiting the generality of
the foregoing, member and group lists, and confidential information relating to
processes, plans, methods of doing business and special needs of doctors,
hospitals, members, groups, pharmacies, or other health care providers who
contract with Employer or its subsidiaries. Employee acknowledges that all such
information is the property of Employer or its subsidiaries solely and
constitutes confidential information of such parties; that the disclosure
thereof would cause substantial loss to the goodwill of Employer and its
subsidiaries; that disclosure thereof to Employee is being made only because of
the position of trust and confidence which Employee will occupy and because of
Employee's
3
<PAGE>
agreement to the restrictions herein contained; that his knowledge of these
matters would enable him, on termination of this Agreement, to compete with
Employer or its subsidiaries in a manner likely to cause Employer and its
subsidiaries irreparable harm, and disclosure of such matters would, likewise,
cause such harm; and that the restrictions imposed upon Employee herein would
not prohibit Employee in earning a living.
2. It is understood and agreed by Employee and Employer that the essence
of this Employment Agreement is the mutual covenants of the parties herein made,
that the present and future members and groups of Employer or its subsidiaries
will remain Employer's or its subsidiaries' members and groups during the term
of this Agreement and following its termination for any reason. In consideration
for the employment and continued employment of Employee by Employer, and also
for the amount received by Employee as compensation, Employee hereby irrevocably
warrants, covenants, and agrees as follows:
(a) during the term of Employee's employment and after leaving
the employment of Employer for any reason, whether involuntary or voluntary,
Employee will not take any action whatsoever which may or might disturb any
existing business relationship of Employer or its subsidiaries with any doctors,
groups, members, hospitals, pharmacies or other health care providers in Nevada
who contract with Employer or its subsidiaries;
(b) for a period of one (1) year after leaving the employment of
Employer, Employee will not solicit business from the members or groups of
Employer or its subsidiaries in Nevada, or in any manner disrupt any business
relationship Employer or its subsidiaries has with any contracted health care
provider in Nevada with whom Employee came in contact as an employee of
Employer.
(c) for a period of one (1) year after leaving the employment of
Employer, Employee will not, either directly or indirectly, work for any present
or future competitors of Employer operating in the state of Nevada who in any
manner offer any managed health care programs, insurance coverage, or administer
health care claims for employers. Such competitors shall include, but are not
limited to, HMOs, PPOs, insurance companies, utilization management companies,
or third party administrators.
3. The one (1) year period specified in this Article will be tolled during
any period of breach of any of the terms of Article VI by Employee.
4. Employee agrees that in the event of a breach of any term of this
Agreement, and more particularly, in the event of a breach of any of the terms
and provisions of Article VI, Employer shall be entitled to secure an order in
any suit brought for that purpose to enjoin Employee from violating any of the
provisions of the Agreement and that, pending the hearing and the decision on
the application for such order, Employer shall be entitled to a temporary
restraining order without prejudice to any other remedy available to Employer,
all at the expense of Employee should Employer prevail in such action. Employee
understands that the covenants of this Article are the essence of this
Employment Agreement, and without which no Employment Agreement with Employee
would be entered into by Employer.
4
<PAGE>
5. The provisions of Article VI shall in no event be construed to be an
exclusive remedy and such remedy shall be held and construed to be cumulative
and not exclusive of any rights or remedies, whether in law or equity, otherwise
available under the terms of this Agreement or under the laws of the United
States or the state of Nevada.
6. The covenants and agreements made by Employee in this Article VI shall
be construed as an agreement independent of any other provision in the Agreement
and the existence of any claim or cause of action by Employee against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer, by injunctive relief or otherwise, of
the provisions of Article VI. The invalidity of all or any part of any section
or paragraph of this Article VI shall not render invalid the remainder of this
Article or any section hereof.
7. No failure or failures on the part of Employer to enforce any violation
by Employee of this Noncompetition agreement, shall constitute a waiver of
Employer's rights thereafter to enforce all of the terms, covenants, provisions
and agreements herein contained.
ARTICLE VII
TERMINATION OF EMPLOYMENT
1. Termination of employment by either Employer or Employee shall follow
established Sierra Health Services Policies and Procedures including appropriate
notice, except as otherwise specifically set forth in this Article.
2. Employee may terminate employment hereunder with sixty (60) days prior
written notice. If Employee shall voluntarily terminate employment all eligible
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level, shall be paid or made
available to Employee. 3. If Employer shall terminate Employee's employment
hereunder without cause, except as otherwise set forth in Paragraph 7 of this
Article, Employee shall be entitled to twelve (12) months salary and all other
separation compensation and benefits as are routinely made available to other
employees of Employer at the same organizational level. 4. In the event
Employee's employment hereunder terminates for any reason other than for cause,
including those reasons set forth in Paragraph 6 of this Article, Employee and
his/her family shall be eligible to remain covered under Employer's health care
coverage program, at no expense, for a period of time equal to Employee's length
of service or until Medicare eligible, whichever occurs first, following
termination of such employment.
5. Notwithstanding any other provision in this Agreement to the
contrary, Employee hereby agrees that any separation compensation due to
Employee, other than accrued vacation, shall be paid out 25% after the first 90
days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of
365 days, except in the event of a change in control. Payment of such amounts
shall fully release Employer
5
<PAGE>
from any and all liability of Employer relating to this Agreement or the
employment hereunder. Any payments of such amounts which would otherwise be
payable after a change in control, or arising as a result of a change in
control, shall be made in a lump sum within five (5) business days following the
date of the change in control and shall, except as otherwise provided in any
other benefit program or in this Agreement, fully release Employer from any and
all liability of Employer relating to this Agreement or the employment
hereunder.
6. If Employer shall terminate Employee's employment due to Employee's
conduct that is materially detrimental to the Company's reputation, business
relationships, or for misappropriation of Employer's funds, Employee shall be
eligible for four (4) weeks salary and any other separation compensation and
benefits as are routinely made available to other employees of Employer at the
same organizational level, as full and final payment under this Agreement.
Payment of such amounts shall fully release Employer from any and all liability
of Employer relating to this Agreement or the employment hereunder.
7. (a) If Employee is unable to perform Employee's duties hereunder, by
reason of illness or incapacity of any kind, for a period of more than twelve
(12) months in excess of accrued sick leave, Employee's employment hereunder may
be terminated by Employer at its absolute discretion with one week of prior
written notice.
(b) If Employee's illness or incapacity shall have ended, and
Employee shall have assumed Employee's duties hereunder, prior to the date
specified in the notice of termination, Employee shall be entitled to resume
Employee's employment hereunder as if such notice had not been given.
8. In the event of a change in control of Employer, whereby any
"person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control was not approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (2.99) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level. Employee's
right to terminate under this Paragraph 8 may be exercised at the time of the
change in control or at any time within two years after the change in control,
including upon receipt of any notice that Employer has elected to terminate
Employee's employment without cause during such two-year period. Payment of such
amounts shall be made in a lump sum within five (5) business days following the
date such amounts become payable hereunder and shall, except as otherwise
provided in any other benefit program or in this Agreement, fully release
Employer from any and all liability of Employer relating to this Agreement or
the employment hereunder.
6
<PAGE>
9. In the event of a change in control of Employer, whereby any "person"
(as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 51% or more of the combined
voting power of the then outstanding securities of Employer, and such change in
control is approved by a majority of the Board of Directors of Employer,
Employee, at his/her sole option, shall be entitled to terminate his/her
employment hereunder and, upon such termination, will be entitled to a cash
amount equal to (2.99) times Employee's current salary and the target annual
bonus for which Employee is eligible in the year of termination, together with
any other separation compensation and benefits as are routinely made available
to other employees of Employer at the same organizational level, if, within two
(2) years after the effective date of the change in control any one of the
following occurs: (a) the assignment to Employee of any duties inconsistent with
Employee's position (including status, offices, titles, and reporting
requirements), authority, duties, or responsibilities or any other action by the
Company that results in a material diminution in such position, authority,
duties, or responsibilities, excluding for this purpose an action not taken in
bad faith and that is remedied by the Company within 10 days after receipt of
written notice by Employee; (b) a reduction in Employee's annual base salary or
target bonus; (c) the relocation of the Company's principle executive offices to
a location more than 75 miles from the current location of such offices or (d),
in the event such change in control occurs within the final two years prior to
the calendar date stated as the termination date of the Agreement in Article II,
and if, prior to such stated termination date and prior to termination of
Employee's employment, the Company has not offered to enter into an extension of
this employment agreement or a new employment agreement providing benefits
substantially equal to those under this agreement for a term to extend until at
least two years after the date of such change in control. In addition, if
Employee's employment hereunder is terminated for reasons other than those set
forth in Paragraph 6 of this Article within two (2) years after the effective
date of a change in control which was approved by a majority of Employer's Board
of Directors, Employee shall be entitled to a cash amount equal to (2.99) times
Employee's current salary and the target annual bonus for which Employee is
eligible in the year of termination, together with all other separation
compensation and benefits as are routinely made available to other employees of
Employer at the same organizational level. Payment of such amounts shall be made
in a lump sum within five (5) business days following the date such amounts
become payable hereunder, and shall, except as otherwise provided in any other
benefit program or in this Agreement, fully release Employer from any and all
liability of Employer relating to this Agreement or the employment hereunder.
10. Anything contained herein to the contrary notwithstanding in the event
that Employer shall discontinue operation of Employer other than as a result of
a merger, consolidation or acquisition, then this Agreement shall terminate and
the provisions of Article VI shall terminate as of the last day of the month in
which Employer ceases operation with the same force and effect as if such last
day of the month were originally set as the termination date hereof.
7
<PAGE>
11. Any amounts payable under this Article VII shall also be payable to
Employee in the event Employee is terminated without cause during the 90-day
period prior to a Change in Control.
12. Whether or not Employee becomes entitled to any payments under
Paragraphs 1 through 11 of this Article VII, if any payments or benefits
received, or to be received, by Employee (including the vesting of any option
and other non-cash benefits and property), whether pursuant to any provision of
this Agreement or any other plan, arrangement or agreement with Employer or any
affiliated company, excluding the Gross-Up Payment described herein (such
payments and benefits being the "Total Payments"), will be subject to any excise
tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended
(such excise tax, including penalties and interest thereon, being the "Excise
Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up
Payment") such that the net amount retained by Employee, after reduction for any
Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up
Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any
deductions disallowed for federal income tax purposes because of the inclusion
of the Gross-Up Payment in Executive's adjusted gross income multiplied by the
Executive's highest marginal rate of federal income taxation for the calendar
year in which the Gross-Up Payment is to be made.
ARTICLE VIII
EFFECT OF WAIVER
The waiver by either party of a breach of any provision of this agreement
shall not operate or be construed as a waiver of any subsequent breach thereof.
ARTICLE IX
ACTUAL ATTORNEY'S FEES EXPENDED
Employer and Employee agree that all attorneys fees expended by either
party in any dispute, arbitration or litigation concerning this Agreement will
be paid by the losing party in that dispute, arbitration or litigation.
ARTICLE X
NOTICE
Any and all notices referred to herein shall be sufficient if furnished in
writing, sent by registered mail to the representative parties at the addresses
subscribed below their signatures to this Agreement.
ARTICLE XI
ASSIGNMENT
The rights, benefits and obligations of Employee under this Agreement
shall be assignable, and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against Employer's successors or
assigns.
8
<PAGE>
ARTICLE XII
ENTIRE AGREEMENT
This Agreement contains the entire Agreement between the parties, and the
parties hereby agree that no other oral representations or agreements have been
entered into in connection with this transaction.
ARTICLE XIII
AMENDMENT
No amendment or modification of this Agreement shall be deemed effective,
unless or until, it is executed in writing by the parties hereto.
ARTICLE XIV
VALIDITY
This Agreement, having been executed and delivered in the State of Nevada,
its validity, interpretation, performance and enforcement will be governed by
the laws of that state.
ARTICLE XV
SEVERABILITY
It is mutually agreed that all of the terms, covenants, provisions, and
agreements contained herein are severable and that, in the event any of them
shall be held to be invalid by any competent court, this Agreement shall be
interpreted as if such invalid term, covenant, provision, or agreement were not
contained herein.
ARTICLE XVI
FORUM
The parties hereto consent and agree that any action to enforce this
Agreement or any provision therein or any rights hereunder or any action
relating to the employment of Employee with Employer shall be brought in the
State of Nevada.
ARTICLE XVII
INDEMNIFICATION
Employer shall indemnify Employee whether or not then in
office, to the fullest extent provided for in Employer's Articles of
Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified
or revised from time to time (collectively, "Employer's Articles"), or permitted
under the law of Nevada or such other state in which Employer may hereafter be
domiciled, against any and all costs, claims, judgments, fines, settlements,
liabilities, and fees or expenses (including, without limitation, reasonable
attorneys' fees) incurred in connection with any proceedings (including without
limitation,
9
<PAGE>
threatened actions, suits or investigations) arising out of, or relating to,
Employee's actions or in actions as a director, officer or employee of Employer
at any point during his employment by or service to Employer, whether under this
Agreement, any prior employment agreements or otherwise. The indemnification
contemplated under this Section shall be provided to Employee unless, at the
time indemnification is sought, such indemnification would be prohibited under
the law of Nevada or of the state in which Employer may then be domiciled;
Employer may rely on the advice of its counsel in determining whether
indemnification is so prohibited.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas,
Nevada, on the day of , 19 .
SIERRA HEALTH SERVICES, INC.
By:__________________________
President
P. O. Box 15645
Las Vegas, NV 89114-5645
EMPLOYEE
By:______________________________
James L. Starr
7621 Angel Crest Circle
Las Vegas, NV 89117
11
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos.2-99954, 33-6920, 33-41542, 33-41543, 33-60901 and 33-82474 of Sierra Health
Services, Inc., on Forms S-8 of our report dated February 16, 1998 appearing
in this Annual Report on Form 10-K of Sierra Health Services, Inc. for the year
ended December 31, 1997.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 25, 1998
<PAGE>
