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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-8865
SIERRA HEALTH SERVICES, INC.
(Exact name of Registrant as specified in its charter)
NEVADA
(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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on February 26, 1999 was $353,058,000.
The number of shares of the registrant's common stock outstanding on
February 26, 1999 was 27,141,000.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Registrant's Current Report on Form 8-K dated Part I
March 17, 1999. Part II, Item 7
Portions of the registrant's definitive proxy statement for Part III
its 1999 annual meeting to be filed with the SEC not later
than 120 days after the end of the fiscal year.
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SIERRA HEALTH SERVICES, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
PART I
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Item 1. Business ................................................................................. 1
Item 2. Properties................................................................................ 17
Item 3. Legal Proceedings......................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders....................................... 17
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters............................................................ 18
Item 6. Selected Financial Data................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................. 20
Item 7a. Quantitative and Qualitative Disclosures about Market Risk ............................... 32
Item 8. Financial Statements and Supplementary Data............................................... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................................... 62
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 62
Item 11. Executive Compensation.................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 62
Item 13. Certain Relationships and Related Transactions............................................ 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 63
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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"),
managed indemnity plans, a third-party administrative services program for
employer-funded health benefit plans, workers' compensation medical management
programs and a subsidiary that administers a managed care federal contact for
the Department of Defense's TRICARE program in Region 1. This contract is
currently structured as five one-year option periods. If all option periods are
exercised by the Department of Defense ("DOD") and no extensions of the
performance period are made, health care delivery will end on May 31, 2003 for
Region 1. Ancillary products and services that complement the Company's managed
health care and workers' compensation product lines are also offered.
On October 31, 1998, Sierra and one of its subsidiaries, Texas Health Choice,
L.C. ("TXHC"), (formerly HMO Texas L.C.) completed the acquisition of certain
assets of Kaiser Foundation Health Plan of Texas ("Kaiser-Texas"), a health plan
operating in Dallas/Ft. Worth with approximately 109,000 members, and Permanente
Medical Association of Texas ("Permanente"), a medical group with approximately
150 physicians. The purchase price was $124 million, which is net $20 million in
operating cost support to be paid to Sierra by Kaiser Foundation Hospitals in
five quarterly installments following the closing of the transaction. The
purchase price includes amounts for real estate and eight medical and office
facilities with approximately 500,000 square feet. In December 1998, certain
accreditation goals were met by the health plan resulting in a purchase price
increase of $3.0 million, to $127 million. The purchase price may increase up to
an additional $27 million over three years if certain growth and member
retention goals are met by the health plan. Sierra assumed no prior liabilities
for malpractice or other litigation, or for any unanticipated future adjustments
to claims expenses for periods prior to closing. The transaction was financed
with a five-year revolving credit facility and a $35.2 million note payable to
Kaiser Foundation Health Plan of Texas. The note is secured by the acquired real
estate. Approximately $110 million of the $200 million revolving credit facility
was used to fund the transaction.
On December 31, 1998, Sierra completed the acquisition of the Nevada health care
business of Exclusive Healthcare, Inc. ("EHI"), United of Omaha Life Insurance
Company and United World Life Insurance Company ("United"), all of which are
subsidiaries of Mutual of Omaha Insurance Company. Sierra retained approximately
9,000 members (approximately 4,400 HMO members) subsequent to the acquisition.
On January 27, 1999, Sierra signed a definitive agreement to purchase the Texas
operations of EHI (6,900 HMO members) and United's related preferred provider
organization ("PPO") that is part of the dual option HMO/PPO plan. The
transaction is expected to be completed no later than April 30, 1999 and is
subject to regulatory approvals. The purchase price of both transactions is
contingent based on how many members are retained through 2000 and 2001. No cash
will be paid until group renewals begin in 2000.
On September 30, 1997, Sierra Military Health Services, Inc. ("SMHS") was
awarded a TRICARE contract to provide managed health care coverage to eligible
beneficiaries in Region 1. In June 1998, the Company began providing health care
benefits to approximately 606,000 individuals in Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island, Vermont, Virginia, West Virginia and Washington, D.C. In 1998, the
award resulted in a total of approximately $204.8
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million of revenue for the final five-months of the implementation phase and
seven months of health care delivery. SMHS was notified on February 13, 1998
that the United States General Accounting Office ("GAO") sustained a
competitor's protest of the contract award for TRICARE Managed Care Support
Region 1 and recommended that the contract be re-bid. In December 1998, the
Company reached an agreement to settle the protest (See Note 14 of Notes to the
Consolidated Financial Statements). As part of the settlement, the competitor
will forego any and all rights it may have to challenge the contract award and
seek a re-bid.
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, 1998, the Company provided HMO products to approximately
182,000 members in Nevada, 112,000 in Dallas, 25,000 in Houston and 5,000 in
Arizona. 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
41,000 members, Medicare supplement products to approximately 26,000 members,
and administrative services to approximately 318,000 members. Medical premiums
account for approximately 59% of total revenues. Approximately 70% of such
medical premiums were derived from southern Nevada in 1998. With the acquisition
of Kaiser-Texas, medical premiums derived from southern Nevada in November and
December of 1998 were approximately 57% of medical premium revenue.
Health Maintenance Organizations. The Company operates mixed group network model
HMOs in Las Vegas, Nevada and Dallas/Ft. Worth, Texas and a network model HMO in
Reno, Nevada and Houston, Texas. 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 or claim forms.
Most of the Company's managed health care services in Nevada are provided
through its independently contracted network of over 2,200 providers and 13
hospitals. These Nevada networks include the Company's multi-specialty medical
group, which provides medical services to approximately 71% of the Company's
Nevada HMO members and employs over 170 primary care and other providers in
various medical specialties. The Company directly provides home health care,
hospice care and behavioral health care services and operates a company that
provides home infusion, oxygen and durable medical equipment services. In
addition, the Company operates three 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 in Nevada provides a competitive advantage as it has helped it to manage
health care costs effectively while delivering quality care.
On October 31, 1998, the Company acquired certain assets of Kaiser-Texas, a
group model HMO with approximately 109,000 members and a 150 physician medical
group in Dallas/Ft. Worth, Texas. The independently contracted medical group
provides professional services from nine health centers; eight of which offer
primary care services while two offer specialty care services. In addition, TXHC
has contracts with 13 hospitals for inpatient care in Dallas/Ft. Worth. Shortly
after the acquisition, the Company changed the provider model in Dallas/Ft.
Worth from a group model to a mixed network model by overlaying individual
practice association ("IPA") delivery systems on top of the existing group model
to provide members with more choice. The first IPA was contracted in November
1998 and added approximately
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1,500 physicians to the Dallas/Ft. Worth delivery system. The Houston HMO
members are served by approximately 1,600 independent contracted providers and
30 hospitals.
In addition to its commercial HMO plans, which involve traditional HMO benefits
and POS benefits, the Company offers a Medicare risk product 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
contiguous parts of Arizona. The monthly payment received from the Health Care
Financing Administration ("HCFA") is determined by formula established by
Federal law. The Balanced Budget Act of 1997 included legislative changes which
affected the way health plans are compensated for Medicare members by
eliminating over five years amounts paid for graduate medical education and by
increasing the blend of national cost factors applied in determining local
reimbursement rates over a six-year phase-in period. Both changes will have the
effect of reducing reimbursement in high cost metropolitan areas with a large
number of teaching hospitals; however, the legislation includes a provision for
a minimum increase of 2% annually in health plan Medicare reimbursement for the
next five years. Under the authority provided by the 1997 Balanced Budget Act
(see "Government Regulation and Recent Legislation"), HCFA has begun to collect
hospital encounter data from Medicare risk contractors. The data will be used to
implement a new risk adjustment mechanism which will be phased in over a
five-year period beginning January 1, 2000. Given the relatively high Medicare
risk premium levels in certain of the Company's market areas, the Company is in
jeopardy that the new risk adjustment mechanism to be developed could adversely
affect the Company's Medicare premium rates going forward. The Company does not
believe that the risk adjustment mechanism will be applied to Social HMO
capitation payments.
As of December 31, 1998, the Company had 47,000 Medicare members, of which
33,500 were located in Nevada, 8,300 in Texas and 5,200 in Arizona.
Approximately 26,000 of the Nevada Medicare members were enrolled in a Social
Health Maintenance Organization (see "Social Health Maintenance Organization"
following).
Social Health Maintenance Organization. Effective November 1, 1996, the Company
entered into a 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, 1998. 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 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 those who currently have difficulty performing such daily
living functions because of a health or physical problem. HCFA has expressed the
intention to continue the current reimbursement methodology for the Social HMO
contract through December 31, 2000. HCFA has considered adjusting the
reimbursement factors for the Social HMO members. At this time, however, there
can be no assurance as to what the final per member reimbursement will be or
that the social HMO contract will be renewed.
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 PPO network. As of December 31, 1998, approximately 41,000 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,
Louisiana, Iowa and South Carolina. The Company is also exploring further
expansion in certain other states and currently provides other insurance
services in Missouri, New Mexico, and Pennsylvania. As of December 31, 1998 the
PPO is licensed in a total of 43 states and the District of Columbia.
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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, nuclear
medicine services, and mental health and substance abuse services. In Nevada,
the Company also provides home health care services, a hospice program and
vision 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 137,000 participants
from non-affiliated employer groups and insurance companies. In addition, the
Company offers home infusion, oxygen and durable medical equipment services.
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, 1998, approximately 318,000
members were enrolled in the Company's administrative services plans. The
results of operations for these services are included in specialty product
revenues and expenses in the Consolidated Statements of Operations.
Workers' Compensation Operations
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 31 states and the
District of Columbia. California, Colorado, and Texas represent approximately
84%, 8%, and 5%, respectively, of CII's fully insured workers' compensation
insurance premiums in 1998. Workers' compensation insurance premiums account for
approximately 13% of the Company's total revenue. The workers' compensation
subsidiary applies the discipline of managed care concepts to its operations.
These concepts include, but are not limited to, the use of specialized preferred
provider networks, utilization reviews by employed board certified occupational
medicine and orthopedic surgeons as well as nurse case managers, medical bill
reviewers and job developers who facilitate early return to work.
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 on July 1, 1999.
Military Contract Services
Sierra Military Health Services, Inc. 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 approximately 606,000 eligible
individuals in Connecticut, Delaware, Maine, Maryland, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia,
West Virginia and Washington, D.C. SMHS completed an eight month implementation
phase in May 1998 and began providing health care benefits on June 1, 1998 under
the TRICARE contract.
Under the TRICARE contract, SMHS provides health care services to approximately
606,000 dependents of active duty military personnel and military retirees and
their dependents through subcontractor partnerships and individual providers.
Through such partnerships, SMHS also performs specific administrative services,
such as health care appointment scheduling, enrollment, network management and
health care advice line services. SMHS performs such services using DOD
information systems. If all five option periods are exercised by the DOD and no
extensions of the performance period are made, health care delivery will end on
May 31, 2003, followed by an additional eight month phaseout of the Region 1
managed care support contract.
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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. In addition, the Company employs full-time field
underwriters who meet with agents and brokers and can provide an immediate quote
on a policy. As of December 31, 1998, the Company had relationships with
approximately 730 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.
SMHS administers marketing initiatives in accordance with the TRICARE Region 1
managed care support contract. SMHS' dedicated Marketing Division uses a
multi-faceted marketing approach to ensure that all beneficiaries within Region
1 have the opportunity to learn about the health care benefits under TRICARE and
have the opportunity to make health care choices that best fit their specific
needs. Marketing initiatives include direct beneficiary briefings, direct mail,
newspaper advertising, newsletters and web page briefs.
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Membership
Period End Membership:
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Years Ended December 31,
1998 1997 1996 1995 1994
HMO:
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Commercial.............................. 277,000 156,000 147,000 116,000 107,000
Medicare................................ 47,000 36,000 30,000 25,000 20,000
Managed Indemnity........................... 41,000 64,000 46,000 31,000 24,000
Medicare Supplement......................... 26,000 25,000 23,000 15,000 9,000
Administrative Services (1) ................ 318,000 328,000 338,000 117,000 65,000
TRICARE Eligibles........................... 606,000 _______ _______ _______ _______
Total Membership........................ 1,315,000 609,000 584,000 304,000 225,000
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(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, 1998 and 1997, the Company received
approximately 23.0% and 23.7%, 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 (See "Government Regulation and Recent Regulation").
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, 1998, the Company's ten
largest HMO employer groups were, in the aggregate, responsible for less than
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 71% of the Company's Nevada HMO members
and 80% of its Texas HMO members receive primary health care through the
Company's affiliated multi-specialty medical groups. The Company makes health
care available through independently contracted providers employed by the
multi-specialty medical groups and other independently contracted networks 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. The
Company has a system of limited incentive risk arrangements and utilization
management with respect
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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. In Nevada, 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 limited
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 and reduced fee-for-service
agreements with certain specialists and primary care providers 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. The per diem rate
increased 1% in 1998 and is scheduled for 2% in 1999. 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. In Texas, the Company has
negotiated a capitation arrangement with Columbia Hospital, Inc. for hospital
services provided in Houston and has contracts with 13 hospitals for inpatient
care in Dallas/Ft. Worth.
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 manages health care costs through its large case management program,
urgent care centers and by educating its members on how and when to use the
services of its plans and how to manage chronic disease conditions. The Company
also audits hospital bills to identify inappropriate charges. Further, in Nevada
the Company utilizes its home health care agency and its hospice which helps to
minimize hospital admissions and lengths of stay.
Military Health Services. Under the TRICARE contract, dependents of active duty
military personnel and military retirees and their dependents choose one of
three option plans available to them for health care services: (1) TRICARE Prime
(an HMO style option with a self-selected primary care manager and no
deductibles), (2) TRICARE Extra (a PPO style option), or (3) TRICARE Standard
(an indemnity style option with deductibles and cost shares). Approximately 30%
of eligible beneficiaries receive their primary care
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through existing Military Treatment Facilities. SMHS negotiated discounted
contracts with approximately 20,000 individual providers, 1,200 institutions and
5,000 pharmacies to provide supplemental network access for TRICARE Prime and
Extra beneficiaries. SMHS' contracts with providers are primarily on a
discounted fee-for-service basis with renewal and termination terms similar to
Sierra's commercial practice. SMHS is at-risk for and manages the health care
service cost of all TRICARE Extra and Standard beneficiaries as well as a small
percentage of TRICARE Prime beneficiaries.
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 groups maintain excess malpractice
insurance for the providers presently employed by the group. In Nevada and
Arizona, the Company has assumed the risk for the first $250,000 per malpractice
claim, not to exceed $1.5 million in the aggregate per contract year up to its
limits of coverage. In Texas, the Company has assumed no self-insured retention
per claim. The aggregate maximum exposure for each of these policies is $30
million per year. 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, depending on the contract,
$100,000 to $200,000, during the contract year and up to $2.0 million per member
per lifetime.
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.
Effective January 1, 1998, workers' compensation claims are reinsured between
$500,000 and $100 million per occurrence. For claims occurring on and after July
1, 1998, that are below $500,000, the Company obtained quota share and excess of
loss reinsurance. Under this agreement, the Company reinsures 30% of the first
$10,000 of each claim, 75% of the next $40,000 and 100% of the next $450,000.
The Company receives a ceding commission from the reinsurer as a partial
reimbursement of operating expenses.
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.
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.
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The Company is currently in the process of modifying or replacing its mission
critical financial and operational computer systems. The Company is also in the
process of testing its non-information system technology for Year 2000
compliance. The Year 2000 project has been broken down into five phases: (1)
inventorying Year 2000 items; (2) assessing the Year 2000 items that are
determined to be material to the Company; (3) renovating or replacing material
items that are determined not to be Year 2000 compliant; (4) testing and
validating material items; and (5) implementing renovated and validated systems.
At December 31, 1998, the inventory and assessment phases are substantially
complete as it relates to all material computer systems and approximately 50%
complete as it relates to non-information system technology. The Company
estimates that the replacement/renovation phases and the testing/validation
phases will be 95% complete by October 31, 1999. The Company estimates that it
is approximately 50% complete with the total project as of December 31, 1998.
Contingency planning for the mission critical business operations is scheduled
to be completed by the end of April 1999. These plans focus on business
operations involving information systems and non-information systems
technologies.
The Company has initiated formal communications with entities with whom it does
business to assess their Year 2000 issues. Evaluations of the most critical
third parties have been initiated, and follow-up reviews will be conducted
through 1999. Contingency plans are being developed based on these evaluations
and are expected to be completed by the middle of 1999. There can be no
assurances that the systems of other companies or governmental agencies, such as
HCFA and the DOD, on which the Company relies will be timely modified for Year
2000, or that the failure to modify by another company would not have a material
adverse effect on the Company. Based upon two separate reports issued by the
United States General Accounting Office it is doubtful that the computer systems
at both HCFA and the DOD will be fully Year 2000 compliant by the end of 1999.
The Company does not currently have available data to predict the impact of such
non-compliance on its business operations. Should there be any material delays
caused by Year 2000 issues, the Company anticipates that the governmental
entities will make estimated payments.
The Company is in the process of implementing three major systems at an
estimated cost of $36 million to $38 million, which includes the implementation
costs related to the recently acquired Kaiser-Texas operations. To date, the
Company has spent approximately $19.0 million on the new computer systems and
other Year 2000 items. The Company is expensing the costs to make modifications
to existing computer systems and non-computer equipment. Management currently
estimates the remaining new computer system costs and other Year 2000 costs to
be $13.0 million to $16.0 million for operations in existence prior to the
Kaiser-Texas transaction and $6.0 million to $8.0 million for the Kaiser-Texas
operations that were acquired on October 31, 1998. 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 failure to correct a material Year 2000 problem could result in an
interruption of, or a failure of, certain business activities or operations.
Such failures could materially adversely affect the Company's operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from uncertainty of the Year 2000
readiness of third parties with which the Company does business, the Company is
unable to determine at this time whether the consequences of potential Year 2000
failures will have a material adverse impact on the Company's results of
operations, liquidity or financial condition. The Company's Year 2000 project is
expected to significantly reduce the Company's level of uncertainty about the
Year 2000 problem. The Company believes that, with the implementation of the new
computer systems and completion of the entire project as scheduled, the
possibility of significant interruptions of operations should be reduced.
The above contains forward-looking statements including, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions, and adequate resources, that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that forward-looking statements contained in the
Year 2000 disclosure should be read in conjunction with the following disclosure
of the Company:
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The costs of the project and the dates on which the Company plans to complete
the necessary Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, the ability of the Company's significant suppliers,
customers and others with which it conducts business, including federal and
state governmental agencies, to identify and resolve their own Year 2000 issues
and similar uncertainties.
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, 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 in the health care industry. The Company
has voluntarily elected to be evaluated by these external organizations,
including the National Committee for Quality Assurance ("NCQA") and the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO").
NCQA is an independent, not-for-profit organization that evaluates managed care
organizations. The NCQA accreditation process includes rigorous evaluations
conducted by a team of physicians and managed care experts. No comparable
evaluation exists for fee-for-service health care. The NCQA evaluates plans on
approximately 50 quality standards that fall into six categories: Quality
Management and Improvement; Physician Credentials; Members' Rights and
Responsibilities; Preventive Health Services; Utilization Management; and,
Medical Records. In 1998, Health Plan of Nevada ("HPN") earned a three-year,
full accreditation from the NCQA for its HMO and Medicare products in the Las
Vegas metropolitan area and Pahrump. TXHC in Dallas/Ft. Worth currently has a
One-Year Accreditation from NCQA, pending a May 1999 acquisition review.
The JCAHO reviews rights, responsibilities and ethics, continuum of care,
education and communication, leadership, management of information, and human
resources and network performance. The Company's home health care and hospice
subsidiaries are JCAHO accredited.
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 or TXHC's
competitive positions in southern Nevada and Dallas/Ft. Worth, Texas
respectively.
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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
various 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 demographic variations
specific to each employer group such as the average age and sex of their
employees, group size and industry. 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 similar demographic adjustment factors
such as age, sex and industry factors to develop group-specific adjustments from
a given per member per month base rate by plan. Actual health claims experience
is used in whole or in part 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.
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.
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, Pacificare,
Inc., Aetna and Harris Methodist 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 markets 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
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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. Since open rating became effective for
policyholders in 1995, there have been, and continue to be, substantial
reductions in premiums. 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 greater distribution capability than the Company.
The largest writer of workers' compensation insurance in California is the State
Compensation Insurance Fund.
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 and
Texas, 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. The Company
then selects loss cost multiplier, expense loads to derive premium rates. Rating
plans in those states are more "standardized" and are usually based on plans
developed by the NCCI.
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 been incurred but have not yet been reported to the Company ("incurred
by not reported" or "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
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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 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 insureds' 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 and members,
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
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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 43 states and the District of
Columbia, with current operations primarily in Nevada, Arizona, Colorado, Texas,
California, Louisiana, Iowa and South Carolina. It is subject to licensing and
other regulations of the California Department of Insurance as well as the
insurance departments of other states in which it operates or holds 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 $17.8 million
at December 31, 1998. The Company's HMO and insurance subsidiaries meet
requirements to maintain minimum stockholder's equity ranging from $1.1 million
to $5.2 million. In addition, in conjunction with the Kaiser-Texas acquisition,
TXHC entered into a letter agreement with the Texas Department of Insurance
whereby TXHC agreed to maintain a net worth of $20.0 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 MedOne 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
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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 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 Antikickback
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 Antikickback
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.
In 1997, Congress passed the Balanced Budget Act ("Act") which revised the
structure of and reimbursement for private health plan options for Medicare
enrollees. The Act seeks to expand the options available to Medicare enrollees
by permitting HCFA to contract with a variety of types of managed care plans,
creating a new Medicare fee-for-service option and establishing a Medicare
Medical Savings Account Demonstration Program. The legislation also encourages
provider sponsored organizations to contract directly with HCFA to provide
coverage for Medicare enrollees. Federal reimbursement was modified so that the
premiums paid by HCFA will be adjusted to take into account, on an increasing
basis, a blend of national and local health care cost factors, rather than only
local costs--starting with a 10% national factor in 1998 and moving to a 50%
national factor by 2003. Congress also provided for gradual removal of a
graduate medical education factor in determining reimbursement. As a result, it
is likely that premiums paid by HCFA will not match the rate of increase for
medical costs.
The legislation includes a provision for a minimum increase of 2% annually in
health plan Medicare reimbursement for the next five years. The legislation also
provides for expedited licensure of provider-sponsored Medicare plans and
a repeal in 1999 of the rule requiring health plans to have one
commercial
enrollee for each Medicare or Medicaid enrollee. These changes could have the
effect of increasing competition in the Medicare market. Further, effective
January 1, 1999, the Company was required to implement new Medicare regulations
including, but not limited to, regulations relating to discharge notices,
additional provider contract language and extensive new quality improvement
programs. These new regulations are likely to increase the burden of
administering the Company's Medicare plans and may adversely impact the
Company's operations.
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
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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' 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.
16
<PAGE>
Employees
The Company had approximately 4,700 employees as of December 31, 1998. 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 406,000 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 an $800,000 loan balance from Bank of America. Also
included in this total is a 198,000 square foot six-story administrative
headquarters building which became fully occupied in 1998. This building was
financed in January 1998 and is subject to a $13.4 million loan balance. The
Company also owns several clinical facilities in the southern Nevada area
totalling approximately 396,000 square feet and consisting primarily of nine
medical clinics and two surgery centers. The Company leases additional office
and clinical space in Nevada totalling approximately 145,000 and 86,000 square
feet, respectively.
In conjunction with the Kaiser-Texas acquisition, the Company purchased eight
medical facilities totalling approximately 323,000 square feet and
administrative facilities totalling approximately 175,000 square feet. These
buildings are subject to a deed of trust note securing a $35.2 million note. In
addition, the Company leases additional office and clinical space in Texas
totalling approximately 54,000 square feet and 77,000 square feet, respectively.
The above properties are utilized primarily for the managed care operations. The
workers' compensation subsidiary is headquartered in Nevada and occupies
approximately 25% of the 198,000 square foot administrative building as well as
leases approximately 67,000 square feet of office space in California. The
Company leases approximately 150,000 square feet of office space in other
various states as needed for other regional operations, for TRICARE service
centers and for the military subsidiary's administrative headquarters.
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.
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.
ITEM 3. LEGAL PROCEEDINGS
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. The
litigation with Humana resulting from its acquisition of Physician Corporation
of America that was discussed in previous filings has been settled. 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
17
<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
1998 and 1997.
<TABLE>
<CAPTION>
Period High Low
1998
<S> <C> <C> <C> <C>
First Quarter........................................ $26 7/8 $20 9/16
Second Quarter....................................... 27 37/64 23 1/4
Third Quarter........................................ 26 15 7/8
Fourth Quarter....................................... 24 15/16 17 15/16
1997
First Quarter........................................ $18 1/2 $16 5/12
Second Quarter....................................... 21 5/12 16 1/12
Third Quarter........................................ 24 11/12 20 19/24
Fourth Quarter....................................... 26 2/3 20 19/24
</TABLE>
On February 26, 1999, the closing sale price of the common stock was $14 3/8 per
share.
Note: The above stock prices have been adjusted to account for the
three-for-two stock split of the Company's common stock to stockholders
of record as of May 18, 1998.
Holders
The number of record holders of Common Stock at February 26, 1999 was 254. 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 health maintenance organization ("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.
18
<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, 1998 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,
1998 1997 1996 1995 1994
(Amounts in thousands, except per share data)
Statement of Operations Data:
OPERATING REVENUES:
<S> <C> <C> <C> <C> <C>
Medical Premiums............................................. $ 609,404 $513,857 $386,968 $319,475 $269,382
Specialty Product Revenues .................................. 148,368 146,211 133,324 102,807 101,287
Military Contract Revenues .................................. 204,838 4,346
Professional Fees............................................ 45,363 31,238 28,836 19,417 12,331
Investment and Other Revenues................................ 29,230 26,072 26,283 25,310 19,081
Total...................................................... 1,037,203 721,724 575,411 467,009 402,081
OPERATING EXPENSES:
Medical Expenses............................................. 513,209 419,272 315,915 245,135 200,229
Specialty Product Expenses................................... 142,258 143,082 130,758 102,859 96,600
General, Administrative and Marketing Expenses............... 110,687 93,919 72,237 63,562 53,671
Military Contract Expenses ................................. 196,625 4,193
Integration, Settlement and Other Costs (1) ................. 13,851 29,350 12,064 11,614
Total...................................................... 976,630 689,816 530,974 423,170 350,500
OPERATING INCOME ............................................... 60,573 31,908 44,437 43,839 51,581
INTEREST EXPENSE AND OTHER, NET................................. (7,181) (4,433) (2,823) (3,737) (6,401)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ....................................... 53,392 27,475 41,614 40,102 45,180
PROVISION FOR INCOME TAXES...................................... 13,796 3,234 10,471 12,198 8,236
INCOME FROM CONTINUING OPERATIONS............................... 39,596 24,241 31,143 27,904 36,944
LOSS FROM DISCONTINUED OPERATIONS .............................. (6,600) (2,501)
NET INCOME ..................................................... $ 39,596 $ 24,241 $ 31,143 $ 21,304 $ 34,443
EARNINGS PER COMMON SHARE (2):
Income from Continuing Operations Per Share ................. $1.45 $.90 $1.17 $1.07 $1.57
Loss Per Share from Discontinued Operations ................. (.25) (.11)
Net Income Per Share ........................................ $1.45 $.90 $1.17 $ .82 $1.46
Weighted Average Number of Common
Shares Outstanding ........................................ 27,391 27,013 26,589 26,121 23,517
EARNINGS PER COMMON SHARE ASSUMING
DILUTION (2):
Income from Continuing Operations Per Share ............. $1.43 $.88 $1.15 $1.05 $1.54
Loss Per Share from Discontinued Operations ............. ___ (.25) (.10)
Net Income Per Share .................................... $1.43 $.88 $1.15 $ .80 $1.44
Weighted Average Number of Common
Shares Outstanding Assuming Dilution ...................... 27,747 27,426 27,191 26,601 23,999
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
(Amounts in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working Capital ............................................. $ 47,763 $ 88,377 $ 76,530 $ 18,157 $ 71,337
Total Assets................................................. 1,045,120 723,936 629,462 575,146 535,487
Long-term Debt (Net of Current Maturities)................... 242,398 90,841 66,189 71,257 75,209
Cash Dividends Per Common Share.............................. NONE NONE NONE NONE NONE
Stockholders' Equity......................................... 303,714 265,682 234,482 207,715 168,157
</TABLE>
(1) The Company recorded certain identifiable integration, settlement and other
costs. See Note 14 of Notes to the Consolidated Financial Statements. (2)
Adjusted to account for three-for-two stock split of the Company's common stock
to stockholders of record as of May 18, 1998.
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 1998 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 17, 1999, 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 materially from those expressed in any projected, estimated or
forward-looking statements relating to the Company.
Acquisitions
On October 31, 1998, Sierra and one of its subsidiaries, Texas Health Choice,
L.C. (formerly HMO Texas L.C.) completed the acquisition of certain assets of
Kaiser Foundation Health Plan of Texas ("Kaiser- Texas"), a health plan
operating in Dallas/Ft. Worth with approximately 109,000 members, and Permanente
Medical Association of Texas ("Permanente"), a medical group with approximately
150 physicians. The purchase price was $124 million, which is net $20 million in
operating cost support to be paid to Sierra by Kaiser Foundation Hospitals in
five quarterly installments following the closing of the transaction. The
purchase price allocation includes a premium deficiency reserve of $25 million
for estimated losses on the contracts acquired from Kaiser-Texas. Of this
amount, $6.8 million was reversed in 1998 to offset losses on the acquired
contracts. The purchase price includes amounts for real estate and eight medical
and office facilities with approximately 500,000 square feet. In December 1998,
certain accreditation goals were met by the health plan resulting in a purchase
price increase of $3.0 million to $127 million. The purchase price may increase
up to an additional $27 million over three years if certain growth and member
retention goals are met by the health plan. Sierra assumed no prior liabilities
for malpractice or other litigation, or for any unanticipated future adjustments
to claims expenses for periods prior to closing. The transaction was financed
with a five-year revolving credit facility and a $35.2 million note payable to
Kaiser Foundation Health Plan of Texas. The note is secured by the acquired real
estate. Approximately $110 million of the $200 million revolving credit facility
was used to fund the transaction.
20
<PAGE>
On December 31, 1998, Sierra completed the acquisition of the Nevada health care
business of Exclusive Healthcare, Inc., United of Omaha Life Insurance Company
and United World Life Insurance Company, all of which are subsidiaries of Mutual
of Omaha Insurance Company. The purchase price is contingent based on how many
members are retained through 2000 and 2001. No cash will be paid until group
renewals begin in 2000. Sierra retained approximately 9,000 members
(approximately 4,400 HMO members) subsequent to the acquisition.
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 $32.2 million in cash. At December 31, 1996, Prime
operated MedOne 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.
Overview
The Company derives revenues from its health maintenance organizations, managed
indemnity, military health care services 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 58.8%, 71.2% and 67.3% of the Company's total revenues for
1998, 1997 and 1996, respectively. The decrease in medical premiums as a
percentage of total revenues is primarily due to the addition of military
contract revenues. Continued medical premium revenue growth is principally
dependent upon continued enrollment in the Company's products and upon
competitive and regulatory factors.
The Company's principal expenses consist of medical expenses, military contract
expense, 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. Military contract expenses
represent the expenses of delivering health care as agreed to in the TRICARE
contract with the federal government as well as administrative costs to operate
the military health care subsidiary. 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.
On September 30, 1997, Sierra Military Health Services, Inc. ("SMHS") was
awarded a TRICARE contract to provide managed health care coverage to eligible
beneficiaries in Region 1. In June 1998, the Company began providing health care
benefits to approximately 606,000 individuals in Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island, Vermont,
21
<PAGE>
Virginia, West Virginia and Washington, D.C. In 1998, the award resulted in a
total of $204.8 million of revenue for the final five-months of the
implementation phase and seven months of health care delivery. SMHS was notified
on February 13, 1998 that the United States General Accounting Office ("GAO")
sustained a competitor's protest of the contract award for TRICARE Managed Care
Support Region 1 and recommended that the contract be re-bid. In December 1998,
the Company reached an agreement to settle the protest. As part of the
settlement, the competitor will forego any and all rights it may have to
challenge the contract award and seek a re-bid (See Note 14 of Notes to the
Consolidated Financial Statements).
Integration, settlement and other expenses represent identifiable incremental
costs the Company has incurred primarily 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 and the ultimate
cost to settle a bid protest. Start-up expenses associated with the proposal to
serve TRICARE beneficiaries 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,
1998 1997 1996
OPERATING REVENUES:
<S> <C> <C> <C>
Medical Premiums........................................ 58.8% 71.2% 67.3%
Specialty Product Revenues ............................. 14.3 20.3 23.2
Military Contract Revenues 19.7 .6
Professional Fees....................................... 4.4 4.3 5.0
Investment and Other Revenues .......................... 2.8 3.6 4.5
Total................................................ 100.0 100.0 100.0
OPERATING EXPENSES:
Medical Expenses........................................ 49.5 58.1 54.9
Specialty Product Expenses.............................. 13.7 19.8 22.7
General, Administrative and Marketing Expenses.......... 10.7 13.0 12.6
Military Contract Expenses ............................. 19.0 .6
Integration, Settlement and Other Costs................. 1.3 4.1 2.1
Total................................................ 94.2 95.6 92.3
OPERATING INCOME ............................................ 5.8 4.4 7.7
INTEREST EXPENSE AND OTHER, NET.............................. (.7) (.6) (.5)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................................... 5.1 3.8 7.2
PROVISION FOR INCOME TAXES................................... 1.3 .4 1.8
NET INCOME .................................................. 3.8% 3.4% 5.4%
</TABLE>
22
<PAGE>
1998 Compared to 1997
Revenues. The Company's total operating revenues for 1998 increased
approximately 43.7% to $1.04 billion from $721.7 million for 1997. The increase
was primarily due to military contract revenue of $204.8 million and an increase
in premium revenue of $95.5 million. The military contract revenue is a result
of the implementation of the TRICARE contract as well as the first seven months
of health care delivery. Revenue under the TRICARE contract is recorded based on
the contract price as agreed to by the federal government. The contract also
contains provisions which adjust the contract price based on actual experience.
The estimated effects of these adjustments are recognized on a monthly basis.
Medical premium revenue from the Company's HMO and managed indemnity insurance
subsidiaries increased $95.5 million, or 18.6%. Excluding the effect of the
Kaiser-Texas acquisition in the fourth quarter of 1998, premium revenue
increased $66.9 million, or 13.0%. The $66.9 million increase in premium revenue
reflects a 3.4% increase in member months (the number of months of each year
that an individual is enrolled in a plan). Medicare member months increased
20.1% which contributed to the increase in medical premium revenue. Such growth
in Medicare member months contributes significantly to the increase in premium
revenues as the Medicare per member premium rates are over three times higher
than the average commercial premium rate. The Company's premium rates increased
an average of 3% to 4% for its HMO commercial groups and in excess of 10% for
managed indemnity commercial groups. The Company also realized a slight increase
in its capitation rate established by Health Care Financing Administration
("HCFA"). Approximately 78% of the Company's Nevada Medicare members are
enrolled in the Social HMO Medicare program. HCFA is considering adjusting the
reimbursement factor for the Social HMO members in the future. If the
reimbursement for these members decreases significantly and related benefit
changes are not made timely, there could be a material adverse effect on the
Company's business.
Specialty product revenue increased $2.2 million, or 1.5%, for the year ended
December 31, 1998 compared to the prior year. The increase was due to revenue
growth of $5.1 million in the workers' compensation insurance operation offset
in part by a decrease in administrative services and other revenue of $2.9
million due primarily to the termination of the Company's workers' compensation
administrative services contract with the State of Nevada. The Company's
workers' compensation subsidiary signed a reinsurance agreement whereby a
greater portion of premium is ceded thus reducing revenue. The agreement results
in a reduction of specialty product expense as discussed later in this section.
Excluding the effect of the new reinsurance agreement, the workers' compensation
subsidiaries' revenue would have increased $21.2 million compared to the prior
year. Professional fee revenue increased approximately $14.1 million primarily
due to the January 1998 acquisition of the operations of two medical clinics in
southern Nevada and the clinics acquired in the Dallas/Ft. Worth area. In
addition approximately $3.5 million of the increase in professional fees was due
to the operations of Total Home Care, Inc. ("THC") which was acquired in August
1997.
Investment and other revenue increased approximately $3.2 million over the
comparable period in the prior year primarily due to an increase in invested
balances and capital gains realized on the sale of investments.
Medical and Specialty Product Expense. Medical expenses as a percentage of
medical premiums and professional fees ("Medical Care Ratio") increased from
76.9% to 78.4% for the year ended December 31, 1998 compared to the prior
period. The increase in the medical care ratio was due to an increase in
Medicare members as a percentage of fully-insured members, continued expansion
in Texas, northern Nevada and Arizona which have higher medical care ratios,
higher pharmacy costs and the acquisitions of THC and two medical clinics for
which costs of operations are included in medical expenses. The cost of
providing medical care to Medicare members generally requires a greater
percentage of the premiums received. Pharmacy costs increased as the management
of the pharmacy benefit was transitioned from a capitated pharmacy benefits
contract to in-house management in the third quarter of 1998. The costs
23
<PAGE>
under such capitation contract were substantially below actual claims
experience. The medical care ratio is expected to further increase in 1999 due
to the changes in member mix and pharmacy costs noted above. Included in medical
expenses is the reversal of $4.4 million of premium deficiency reserve that was
used to offset losses on contracts from the Kaiser-Texas operations that were
acquired on October 31, 1998.
Specialty product expenses decreased approximately $800,000, or less than 1.0%,
due primarily to the implementation of the reinsurance agreement as discussed
previously. Specialty product revenue and expense is primarily related to the
workers' compensation insurance business. Effective January 1, 1998, workers'
compensation claims are reinsured between $500,000 and $100 million per
occurrence. For claims occurring on and after July 1, 1998, that are below
$500,000, the Company obtained quota share and excess of loss reinsurance. Under
this agreement, the Company reinsures 30% of the first $10,000 of each claim,
75% of the next $40,000 and 100% of the next $450,000. The Company receives a
ceding commission from the reinsurer as a partial reimbursement of operating
expenses. Excluding the effect of the reinsurance agreement, specialty product
expense would have increased $19.5 million compared to the prior year.
The combined ratio for the workers' compensation insurance business was 98.7%
compared to 101.9% for the comparable prior year period. The reduction was due
to a 198 basis point decrease in the loss ratio and a 122 basis point decrease
in the expense ratio. The decrease in the loss ratio was largely due to the new
reinsurance agreement for losses occurring on and after July 1, 1998 and as a
result of the Company's ability to overlay and implement managed care techniques
to the workers' compensation claims. The combined ratio excluding the effect of
the new reinsurance agreement was 101.6% for the year ended December 31, 1998.
In addition, favorable loss development on prior accident years totalled $9.6
million for the year ended December 31, 1998, compared to net favorable loss
development of $9.0 million for the comparable prior year period. The favorable
loss development is largely due to actual paid losses being below projected
losses. There can be no assurance that favorable development, or the magnitude
thereof, will continue in the future. The reduction in the expense ratio was
largely due to a reduction in agents' commissions, as a result of a ceding
commission related to the new reinsurance agreement and from lower salaries and
related benefits expenses. The losses and loss adjustment expense ratio for the
year ended December 31, 1998 reflect the Company's current projection of the
ultimate costs of claims occurring in the current as well as prior accident
years. Such projections are subject to change and any change would be reflected
in the income statement. Workers' compensation claims are paid over several
years. Until payment is made, the Company invests the monies, earning a yield on
the invested balance.
Military Contract Expense. The military contract expense is comprised of those
expenses incurred in 1998 for five months of contract implementation and seven
months of health care delivery. This expense consists primarily of costs to
provide managed health care services to eligible beneficiaries in accordance
with the Company's TRICARE contract. Under the contract, SMHS provides health
care services to approximately 606,000 dependents of active duty military
personnel and military retirees and their dependents through subcontractor
partnerships and individual providers. Health care costs are recorded in the
period when services are provided to eligible beneficiaries, including estimates
for provider costs which have been incurred but not reported to the Company.
Also, included in military contract expense are costs incurred to perform
specific administrative services, such as health care appointment scheduling,
enrollment, network management and health care advice line services, and other
administrative functions of the military health care subsidiary.
General, Administrative and Marketing Expenses. General, administrative and
marketing ("G&A") cost increased $16.8 million, or 17.9%, compared to 1997. As a
percentage of revenues, G&A costs for 1998 decreased to 10.7% from 13.0% during
1997. The decrease in the G&A ratio is primarily due to the addition of military
contract revenues offset in part by costs for additional infrastructure needed
to support overall Company growth. Excluding military revenues, G&A as a
percentage of revenues was 13.3% in 1998. Of the $16.8 million increase in G&A,
$3.2 million was due to additional G&A related to the acquired HMO business in
the Dallas/Ft. Worth area. The remaining increase of $13.6 million consisted of
$3.8
24
<PAGE>
million increased compensation expense, resulting primarily from additional
employees supporting expanded services and new benefit programs for management.
Broker, third party administration and premium tax expense increased
approximately $900,000 due to increased membership. In addition, depreciation
expense increased $1.7 million.
Integration, Settlement and Other Costs. In the fourth quarter of 1998, the
Company expensed approximately $13.9 million, $10.3 million after tax, of costs
primarily associated with the settlement of the protest pertaining to its
military services contract as well as costs associated with the integration of
the Kaiser-Texas business acquired October 31, 1998 (see Note 14 to the
Consolidated Financial Statements).
On March 18, 1997, the Company announced it had terminated its merger agreement
with Physician Corporation of America, Inc. and recorded expenses of $11.0
million, $8.4 million after tax, for merger- related costs. During the third
quarter of 1997 SMHS was awarded a contract to serve TRICARE eligible
beneficiaries in Region 1. 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 TRICARE Region 1. Such expenses
had been deferred until award notification.
Interest Expense and Other. Interest expense and other increased approximately
$2.7 million for the year ended December 31, 1998, compared to the same period
in the prior year due to an increase in debt as a result of the Kaiser-Texas
acquisition.
Income Taxes. For the period, the Company recorded approximately $13.8 million
of tax expense for an effective tax rate of 25.8% compared to 23.9% in 1997,
excluding the tax effects of identifiable integration, settlement and other
costs. The Company's current low operating tax rate is primarily a result of
tax-preferred investments and the change in the deferred tax valuation
allowance,
which is due primarily to the ability to use a portion of net operating loss
carryovers. The effective tax rate will increase to the 32% to 34% range in 1999
as most of the valuation allowances for net operating loss carryforwards have
been utilized as of December 31, 1998.
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 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 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 MedOne 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
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<PAGE>
assets and operations of THC during the third quarter of 1997. 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. 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. The Medical Care 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, MedOne Health Plan has a higher Medical Care Ratio, which further
contributed to the increase in the Company's overall Medical Care 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%
for the year ended December 31, 1997, 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 on prior accident years 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 being below projected losses. 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 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. 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 was 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 was 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.
Integration, Settlement and Other Costs. On March 18, 1997, the Company
announced it had terminated its merger agreement with Physician Corporation of
America, Inc. and recorded and paid expenses of approximately $11.0 million,
$8.4 million after tax, for merger-related costs.
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 approximately 606,000 TRICARE beneficiaries in 13
northeastern states and the District of Columbia. Development expenses of
26
<PAGE>
$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.
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 $3.8 million, ($2.9 million after tax) in the fourth
quarter of 1996, primarily to recognize the estimated costs to dispose of the
hospital. As of December 31, 1998, 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, ($6.2 million after tax). These restructuring
costs included cancellation of certain contractual obligations of $6.0 million,
lease termination costs of $1.5 million and approximately $750,000 of other
costs.
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. 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 charges related to the
Physicians Corporation of America acquisition and start-up costs associated with
the TRICARE contract. Excluding these costs, the effective tax rate for 1997 is
23.9%. See Note 9 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities of $50.1 million during the
twelve months ended December 31, 1998 resulted primarily from $39.6 million of
net income, $19.3 million in depreciation and amortization and $6.4 million in
provision for doubtful accounts offset by a $15.2 million decrease in cash flows
from changes in assets and liabilities. The decrease in cash flow resulting from
the change in assets and liabilities was primarily due to an increase in
reinsurance recoverable and military accounts receivable. The increase in
reinsurance recoverable is primarily due to the new reinsurance agreement
implemented by the Company's workers' compensation subsidiary for claims
occurring on or after July 1, 1998 that are below $500,000 (see Note 6 to the
Consolidated Financial Statements). Military accounts receivable increased due
to the implementation of health care delivery in 1998. Military accounts
receivable consists primarily of one month's contract payment from the
government in arrears, estimates of bid price adjustments ("BPAs") under the
contract based on actual experience and any change orders not originally
specified in the contract. These cash outflows were offset in part by increases
in military health care payable and other current liabilities. The increase in
military health care payable is a result of health care delivery beginning June
1, 1998 for the Region 1 TRICARE contract. Military health care payable includes
the estimated cost for unpaid claims for which health care services have been
provided to TRICARE eligibles and a provision of the estimated costs for claims
that have been incurred but have not been
27
<PAGE>
reported. The increase in other current liabilities is primarily due to expenses
related to operations of the military services subsidiary and reinsurance
premiums payable due to the new reinsurance contract.
SMHS receives monthly cash payments equivalent to one-twelfth of its annual
contractual price with the Department of Defense ("DOD") and accrues health care
revenue on a monthly basis for any monies owed above its monthly cash receipt
based on the number of at-risk eligible beneficiaries. Approximately $34 million
of the military accounts receivable balance is associated with monies owed to
SMHS as a result of providing health care services for a larger than expected
beneficiary population. SMHS expects to receive this amount at the completion of
the first BPA. The BPA process serves to adjust the DOD's monthly payments to
SMHS, because such payments are based in part on 1996 DOD estimates for:
beneficiary population, beneficiary population baseline health care cost,
inflation and military direct care system utilization. As actual information is
made available for the above items, quarterly adjustments are made to SMHS'
monthly health care payment in addition to a lump sum adjustment for past
months. SMHS accrues for such adjustments on a monthly basis as actual
information is made available. The first such adjustment did not occur as
scheduled on February 28, 1999 (SMHS anticipates additional DOD delays of up to
6 months). If the timing or amount of the BPA reimbursement varies significantly
from the Company's expectations, there could be a material adverse effect on the
Company's business and cash flows.
Net cash used for investing activities during 1998 included $40.7 million in
capital expenditures for construction costs associated with office facilities,
furniture and equipment for the newly constructed six-story administrative
headquarters building, continued implementation of three new computer systems,
computer and medical equipment, other capital needs to support the Company's
growth, and a $24.2 million net increase in investments. In addition,
approximately $111.4 million of cash was used to purchase the Dallas, Texas
operations of Kaiser Foundation Health Plan.
Cash flows from financing activities included net proceeds from long-term
borrowings (proceeds less payments) of $113.1 million. The majority of net
proceeds from long-term borrowings was used to fund the Kaiser-Texas
acquisition. The transaction was financed with a five-year revolving credit
facility. As of December 31, 1998, the Company had $139 million in borrowings on
the $200 million line of credit. Interest under the credit facility is variable
and based on the London Interbank Offering Rate ("LIBOR") plus a margin
determined by reference to the Company's leverage ratio. In addition, $50
million of the outstanding balance is covered by interest-rate swap agreements.
The average cost of borrowing on this line of credit for the fourth quarter of
1998, including the impact of the swap agreements, was approximately 8.0%. The
terms of the credit facility contain a mandatory payment schedule that begins on
June 30, 2001 and ends on September 30, 2003 if the principal balance exceeds
certain thresholds. The terms of the credit facility contain certain covenants
including a minimum fixed charge coverage ratio and a maximum leverage ratio.
The remaining $61 million available balance on the line of credit as of December
31, 1998, may be used for general corporate purposes, including working capital.
During 1998 and 1997, the Company used $9.2 million and $5.5 million,
respectively, to buy back Company stock on the open market.
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 $650,000 in 1998 and $2 million in
1997 at an interest rate equal to the LIBOR Offering Rate plus 53 basis points.
During the first quarter of 1999, the CEO repaid approximately $360,000 of the
line of credit. The line of credit is collateralized by certain of the CEO's
rights to compensation from the Company and is due and payable no later than
August 15, 1999.
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.
28
<PAGE>
Each $1,000 in principal is convertible into 25.382 shares of the Company's
common stock at a conversion price of $39.40 per share. Unamortized issuance
costs of $500,000 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, 1998, the
Company purchased $3.2 million of the Debentures on the open market.
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 Company had restricted assets on deposit in
various states totaling $17.8 million as of December 31, 1998. The HMO and
insurance subsidiaries must also meet requirements to maintain minimum
stockholder's equity, on a statutory basis, ranging from $1.1 million to $5.2
million. In addition, in conjunction with the Kaiser-Texas acquisition, Texas
Health Choice, L.C. ("TXHC") entered into a letter agreement with the Texas
Department of Insurance whereby TXHC agreed to maintain a net worth of $20.0
million. Of the cash and cash equivalents held at December 31, 1998, $81.3
million is designated for use only by the regulated subsidiaries. Such amounts
are available for transfer to the holding company from the HMO and insurance
subsidiaries only to the extent that they can be remitted in accordance with the
terms of existing management agreements and by dividends. Remaining amounts are
generally available on an unrestricted basis.
The National Association of Insurance Commissioners has adopted new minimum
capitalization requirements for HMOs, health care insurance entities and other
risk-bearing health care entities. Depending on the nature and extent of the new
minimum capitalization requirements ultimately adopted by each state, there
could be an increase in the capital required for certain of the Company's
regulated subsidiaries. The Company intends to fund any increase from available
parent company cash reserves; however, there can be no assurance that such cash
reserves will be sufficient to fund these minimum capitalization requirements.
The new requirements are expected to be effective on or before December 31, 1999
upon enactment by each state. The Company does not believe that any such
required increase in the amount of funds to be contributed to the subsidiaries
will be material.
The holding company will not receive dividends from its regulated subsidiaries
if such dividend payment would cause violation of statutory net worth and
reserve requirements.
The Company has a 1999 capital budget of approximately $60 million, primarily
for computer hardware and software, furniture and equipment and other
requirements due to the Company's computer system conversion and projected
growth and expansion. The Company's liquidity needs over the next 12 months will
primarily be for the capital items noted above, the Company's stock repurchase
program, debt service and expansion of the Company's operations, including
potential acquisitions. The Company believes that existing working capital,
operating cash flow and, if necessary, mortgage financing, equipment leasing,
and amounts available under its credit facility will be sufficient to fund its
capital expenditures and debt service. Additionally, subject to unanticipated
cash requirements, the Company believes that its existing working capital and
operating cash flow and, if necessary, its access to new credit facilities, will
enable it to meet its liquidity needs on a longer term basis.
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.
29
<PAGE>
The Company is currently in the process of modifying or replacing its mission
critical financial and operational computer systems. The Company is also in the
process of testing its non-information system technology for Year 2000
compliance. The Year 2000 project has been broken down into five phases: (1)
inventorying Year 2000 items; (2) assessing the Year 2000 items that are
determined to be material to the Company; (3) renovating or replacing material
items that are determined not to be Year 2000 compliant; (4) testing and
validating material items; and (5) implementing renovated and validated systems.
At December 31, 1998, the inventory and assessment phases are substantially
complete as it relates to all material computer systems and approximately 50%
complete as it relates to non-information system technology. The Company
estimates that the replacement/renovation phases and the testing/validation
phases will be 95% complete by October 31, 1999. The Company estimates that it
is approximately 50% complete with the total project as of December 31, 1998.
Contingency planning for the mission critical business operations is scheduled
to be completed by April 1999. These plans focus on business operations
involving information systems and non-information systems technologies.
The Company has initiated formal communications with entities with whom it does
business to assess their Year 2000 issues. Evaluations of the most critical
third parties have been initiated, and follow-up reviews will be conducted
through 1999. Contingency plans are being developed based on these evaluations
and are expected to be completed by the middle of 1999. There can be no
assurances that the systems of other companies or governmental agencies, such as
HCFA and the Department of Defense ("DOD"), on which the Company relies will be
timely modified for Year 2000, or that the failure to modify by another company
would not have a material adverse effect on the Company. Based upon two separate
reports issued by the United States General Accounting Office it is doubtful
that the computer systems at both HCFA and the DOD will be fully Year 2000
compliant by the end of 1999. The Company does not currently have available data
to predict the impact of such non-compliance on its business operations. Should
there be any material delays caused by Year 2000 issues, the Company anticipates
that the governmental entities will make estimated payments.
The Company is in the process of implementing three major systems at an
estimated cost of $36 million to $38 million, which includes the implementation
costs related to the recently acquired Kaiser-Texas operations. To date the
Company has spent approximately $19.0 million on the new computer systems and
other Year 2000 items. The Company is expensing the costs to make modifications
to existing computer systems and non-computer equipment. Management currently
estimates the remaining new computer system costs and other Year 2000 costs to
be $13.0 million to $16.0 million for operations in existence prior to the
Kaiser-Texas transaction and $6.0 million to $8.0 million for the Kaiser-Texas
operations that were acquired on October 31, 1998. 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 failure to correct a material Year 2000 problem could result in an
interruption of, or a failure of, certain business activities or operations.
Such failures could materially adversely affect the Company's operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from uncertainty of the Year 2000
readiness of third parties with which the Company does business, the Company is
unable to determine at this time whether the consequences of potential Year 2000
failures will have a material adverse impact on the Company's results of
operations, liquidity or financial condition. The Company's Year 2000 project is
expected to significantly reduce the Company's level of uncertainty about the
Year 2000 problem. The Company believes that, with the implementation of the new
computer systems and completion of the entire project as scheduled, the
possibility of significant interruptions of operations should be reduced.
The above contains forward-looking statements including, without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions, and adequate resources, that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Readers
30
<PAGE>
are cautioned that forward-looking statements contained in the Year 2000
disclosure should be read in conjunction with the following disclosure of the
Company:
The costs of the project and the dates on which the Company plans to complete
the necessary Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, the ability of the Company's significant suppliers,
customers and others with which it conducts business, including federal and
state governmental agencies, to identify and resolve their own Year 2000 issues
and similar uncertainties.
Inflation
Health care costs 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, increases
in 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 manage 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
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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.
Recently Issued Accounting Standards
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued Statement of Position
98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed For
or Obtained For Internal Use". SOP 98-1 requires certain computer software costs
to be capitalized and amortized over the software's estimated useful life. In
June 1998, the AcSEC issued Statement of Position 98-5 ("SOP 98-5"), "Reporting
on the Costs of Start-Up Activities". This standard requires organization costs
and costs associated with start-up activities to be expensed as incurred. Both
statements are effective for years beginning after December 15, 1998. The
Company will adopt SOP 98-1 and SOP 98-5 for the fiscal year ending December 31,
1999 and does not believe these statements will have a material impact on its
financial statements.
In June 1998, The Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 is effective
for fiscal years beginning after June 15, 1999. FAS 133 addresses the accounting
for derivative instruments including certain derivative instruments embedded in
other contracts, and hedging activities. The Company does not believe this
statement will have a material impact on its financial statements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1998, the Company has approximately $392 million in cash and
cash equivalents, and short-term, long-term and restricted investments. Of the
investments, approximately $254.6 million is classified as available-for-sale
investments and $54.0 million is classified as held-to-maturity investments.
These investments are primarily in fixed income, investment grade securities.
The Company's investment policies emphasize return of principal and liquidity
and are focused on fixed returns that limit volatility and risk of principal.
Because of the Company's investment policies, the primary market risk associated
with the Company's portfolio is interest rate risk.
Assuming an immediate 10% increase in interest rates, the net hypothetical loss
in fair value of shareholders' equity related to financial instruments is
estimated to be approximately $7.5 million (after tax) (2.5% of total
shareholders' equity). The Company believes that such an increase in interest
rates would not have a material impact on future earnings or cash flows as it is
unlikely that the Company would need or choose to substantially liquidate its
investment portfolio.
The effect of interest rate risk on potential near-term net income, cash flow
and fair value was determined based on commonly used sensitivity analyses. The
models project the impact of interest rate changes on a wide range of factors,
including duration and prepayment. Fair value was estimated based on the net
present value of cash flows or duration estimates, assuming an immediate 10%
increase in interest rates.
As of December 31, 1998, the Company had approximately $139 million in
borrowings outstanding under a revolving credit facility that was entered into
in October 1998. Interest under the credit facility is variable and based on the
London Interbank Offering Rate plus a margin, except for $50 million of the
outstanding balance that is covered by interest-rate swap agreements. The
average cost of borrowing on this line of credit was approximately 8% for the
fourth quarter of 1998. If the average cost of borrowing on the amount
outstanding as of December 31, 1998, was to increase by 10%, annual income
before tax would decrease by approximately $900,000.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
<S> <C>
Management Report on Consolidated Financial Statements.................................................... 34
Independent Auditors' Report.............................................................................. 35
Consolidated Balance Sheets at December 31, 1998 and 1997................................................. 36
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997, and 1996...................................................................... 37
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996................................................... 38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996...................................................................... 39
Notes to Consolidated Financial Statements................................................................ 40
</TABLE>
33
<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, 1998, 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
Paul H. Palmer
Vice President, Finance
Chief Financial Officer,
and Treasurer
34
<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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 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 8, 1999
35
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
ASSETS
<CAPTION>
1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents.............................................. $ 83,910,000 $ 96,841,000
Short-term Investments................................................. 110,008,000 115,498,000
Accounts Receivable (Less: Allowance for Doubtful
Accounts 1998 - $10,540,000 ; 1997 - $7,916,000)................... 44,100,000 37,695,000
Military Accounts Receivable........................................... 69,552,000 4,346,000
Current Portion of Deferred Tax Asset ................................. 14,311,000 15,496,000
Reinsurance Recoverable................................................ 32,076,000 5,159,000
Prepaid Expenses and Other Current Assets.............................. 39,974,000 25,571,000
Total Current Assets............................................... 393,931,000 300,606,000
PROPERTY AND EQUIPMENT, NET................................................ 229,164,000 148,831,000
LONG-TERM INVESTMENTS...................................................... 180,816,000 155,153,000
RESTRICTED CASH AND INVESTMENTS............................................ 17,758,000 16,540,000
REINSURANCE RECOVERABLE, Net of Current Portion............................ 34,946,000 20,245,000
GOODWILL (Less: Accumulated Amortization
1998 - $5,213,000; 1997 - $2,898,000)............................. 142,471,000 42,803,000
OTHER ASSETS............................................................... 46,034,000 39,758,000
TOTAL ASSETS............................................................... $1,045,120,000 $723,936,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities.................................. $ 69,284,000 $ 43,601,000
Accrued Payroll and Taxes................................................. 19,942,000 14,838,000
Medical Claims Payable.................................................... 78,022,000 55,943,000
Current Portion of Reserve for
Losses and Loss Adjustment Expense .................................. 79,869,000 63,358,000
Unearned Premium Revenue.................................................. 39,968,000 29,763,000
Military Health Care Payable.............................................. 53,820,000
Current Portion of Long-term Debt......................................... 5,263,000 4,726,000
Total Current Liabilities............................................ 346,168,000 212,229,000
RESERVE FOR LOSSES AND
LOSS ADJUSTMENT EXPENSE (Less Current Portion) ........................... 132,394,000 139,341,000
LONG-TERM DEBT (Less Current Portion) ........................................ 242,398,000 90,841,000
OTHER LIABILITIES ............................................................ 20,446,000 15,843,000
TOTAL LIABILITIES............................................................. 741,406,000 458,254,000
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: 1998 -- 28,236,000;
1997 - 27,709,000.................................................... 141,000 139,000
Additional Paid-in Capital................................................ 173,583,000 164,247,000
Treasury Stock; 1998 - 966,900; 1997 - 426,800
Common Shares........................................................ (14,821,000) (5,601,000)
Accumulated Other Comprehensive Income:
Unrealized Holding (Loss) Gain on Available-for-Sale
Investment...................................................... (1,027,000) 655,000
Retained Earnings......................................................... 145,838,000 106,242,000
Total Stockholders' Equity........................................... 303,714,000 265,682,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $1,045,120,000 $723,936,000
</TABLE>
See the accompanying notes to consolidated
financial statements.
36
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
OPERATING REVENUES:
<S> <C> <C> <C>
Medical Premiums............................................. $ 609,404,000 $513,857,000 $386,968,000
Specialty Product Revenues .................................. 148,368,000 146,211,000 133,324,000
Military Contract Revenues .................................. 204,838,000 4,346,000
Professional Fees............................................ 45,363,000 31,238,000 28,836,000
Investment and Other Revenues ............................... 29,230,000 26,072,000 26,283,000
Total..................................................... 1,037,203,000 721,724,000 575,411,000
OPERATING EXPENSES:
Medical Expenses............................................. 513,209,000 419,272,000 315,915,000
Specialty Product Expenses................................... 142,258,000 143,082,000 130,758,000
General, Administrative and Marketing Expenses............... 110,687,000 93,919,000 72,237,000
Military Contract Expenses .................................. 196,625,000 4,193,000
Integration, Settlement and Other Costs...................... 13,851,000 29,350,000 12,064,000
Total..................................................... 976,630,000 689,816,000 530,974,000
OPERATING INCOME.................................................. 60,573,000 31,908,000 44,437,000
INTEREST EXPENSE AND OTHER, NET................................... (7,181,000) (4,433,000) (2,823,000)
INCOME FROM OPERATIONS
BEFORE INCOME TAXES ......................................... 53,392,000 27,475,000 41,614,000
PROVISION FOR INCOME TAXES........................................ 13,796,000 3,234,000 10,471,000
NET INCOME ....................................................... $ 39,596,000 $ 24,241,000 $ 31,143,000
EARNINGS PER COMMON SHARE:
Net Income Per Share .................................... $1.45 $.90 $1.17
EARNINGS PER COMMON SHARE ASSUMING DILUTION:
Net Income Per Share .................................... $1.43 $.88 $1.15
</TABLE>
See the accompanying notes to consolidated financial
statements.
37
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY For the Years Ended December 31, 1998,
1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
Accumu-
lated
Addi- Other Total
tional Compre- Compre- Stock-
Common Stock Paid-In Treasury hensive hensive Retained holders'
Shares Amount Capital Stock Income Income Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996.............. 26,516 $133 $147,195 $ (130) $9,659 0 $50,858 $207,715
Comprehensive Income:
Net Income....................... $31,143 31,143 31,143
Other Comprehensive Income, Net of Tax
Unrealized Loss on Available-for-sale-
Investments ................ (9,172) (9,172) (9,172)
Comprehensive Income................. $21,971
Common Stock Issued in Connection
With Stock Plans................. 349 1 3,637 3,638
Income Tax Benefit Realized Upon
Exercise of Stock Options........ 1,158 ______ 1,158
BALANCE, DECEMBER 31, 1996 ........... 26,865 134 151,990 (130) 487 82,001 234,482
Comprehensive Income:
Net Income....................... $24,241 24,241 24,241
Other Comprehensive Income,
Net of Tax
Unrealized Gain on Available-for-sale-
Investments ............ 168 168 168
Comprehensive Income................. $24,409
Common Stock Issued in Connection
with Stock Plans................. 844 5 10,253 10,258
Purchase of Treasury Stock ......... (5,471) (5,471)
Income Tax Benefit Realized Upon
Exercise of Stock Options........ 2,004 2,004
BALANCE, DECEMBER 31, 1997 ........... 27,709 139 164,247 (5,601) 655 106,242 265,682
Comprehensive Income:
Net Income....................... $39,596 39,596 39,596
Other Comprehensive Income,
Net of Tax
Unrealized Holding Loss on Available-
for-sale Investments Arising
During Period. (3,960) (3,960) (3,960)
Reclassification Adjustment for
Gains Included in Net Income 2,278 2,278 2,278
Comprehensive Income................. $37,914
Common Stock Issued in Connection
with Stock Plans................. 527 2 8,052 8,054
Purchase of Treasury Stock ......... (9,220) (9,220)
Income Tax Benefit Realized Upon
Exercise of Stock Options........ 1,284 1,284
BALANCE, DECEMBER 31, 1998 ......... 28,236 $141 $173,583 $(14,821) $(1,027) $145,838 $303,714
</TABLE>
See the accompanying notes to
consolidated financial statements.
38
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income ........................................................ $ 39,596,000 $ 24,241,000 $ 31,143,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization.................................. 19,263,000 13,510,000 10,499,000
Provision for Doubtful Accounts................................ 6,379,000 4,283,000 3,057,000
Change in Assets and Liabilities, Net of
Effects from Acquisitions:
Other Assets................................................... (5,362,000) (5,851,000) (16,301,000)
Reinsurance Recoverable ....................................... (41,618,000) (5,635,000) 10,164,000
Reserve for Losses and Loss Adjustment Expense ................ 9,564,000 14,923,000 5,458,000
Other Liabilities ............................................. 4,594,000 6,838,000 6,985,000
Minority Interests............................................. 9,000 (12,000) (1,746,000)
Accounts Receivable............................................ (2,870,000) (7,944,000) (12,469,000)
Other Current Assets........................................... (10,674,000) (11,853,000) (4,671,000)
Military Accounts Receivable................................... (69,552,000) (4,346,000)
Military Health Care Payable................................... 53,820,000
Medical Claims Payable......................................... 12,333,000 8,974,000 4,973,000
Other Current Liabilities...................................... 34,606,000 15,692,000 15,354,000
Net Cash Provided by Operating Activities ..................... 50,088,000 52,820,000 52,446,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures............................................... (40,743,000) (55,642,000) (17,927,000)
Property and Equipment Dispositions, Net........................... 772,000 172,000
Purchase of Available-for-Sale Investments......................... (901,542,000) (1,078,396,000) (712,503,000)
Proceeds from Sales/Maturities of
Available-for-Sale Investments................................. 884,288,000 1,046,523,000 752,279,000
Purchase of Held-to-Maturity Investments........................... (51,887,000) (7,523,000) (25,835,000)
Proceeds from Maturities of Held-to-Maturity Investments........... 44,964,000 10,449,000 39,184,000
Corporate Acquisitions, Net of Cash Acquired....................... (111,408,000) (3,145,000) (36,310,000)
Corporate Disposition, Net of Cash Disposed........................ 1,373,000
Net Cash Used for Investing Activities......................... (174,955,000) (86,962,000) (940,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-term Borrowing.................................. 172,200,000 25,000,000 1,000,000
Payments on Debt and Capital Leases................................ (59,098,000) (2,391,000) (9,601,000)
Purchase of Treasury Stock ........................................ (9,220,000) (5,471,000)
Exercise of Stock in Connection with Stock Plans................... 8,054,000 10,258,000 3,638,000
Net Cash Provided by (Used for) Financing Activities........... 111,936,000 27,396,000 (4,963,000)
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS............................................... (12,931,000) (6,746,000) 46,543,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR........................................................... 96,841,000 103,587,000 57,044,000
CASH AND CASH EQUIVALENTS AT END OF YEAR................................. $ 83,910,000 $ 96,841,000 $103,587,000
</TABLE>
See the accompanying notes to consolidated
financial statements.
39
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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,
workers' compensation medical management programs and its military health
services programs. Ancillary products and services that complement the Company's
managed health care product lines are also offered.
Acquisitions. On October 31, 1998, Texas Health Choice, L.C. ("TXHC") (formerly
HMO Texas, L.C.), a subsidiary of Sierra, completed the acquisition of certain
assets of Kaiser Foundation Health Plan of Texas ("Kaiser-Texas"), a health plan
operating in Dallas/Ft. Worth with approximately 109,000 members, and Permanente
Medical Association of Texas ("Permanente"), a 150 physician medical group
operating in that area. The purchase price was $124 million, which is net of $20
million in operating cost support to be paid to Sierra by Kaiser Foundation
Hospitals in five quarterly installments following the closing of the
transaction. The purchase price allocation includes a premium deficiency reserve
of approximately $25 million for estimated losses on the contracts acquired from
Kaiser-Texas. The purchase price includes amounts for real estate and eight
medical and office facilities encompassing approximately 500,000 square feet.
During the first quarter of 1999 certain accreditation goals were met by the
health plan resulting in a purchase price increase of $3.0 million, to $127
million. The purchase price may increase an additional $27 million over three
years if certain growth and member retention goals are met by the health plan.
The acquisition has been recorded using purchase accounting and the excess of
the purchase price over the fair value of the assets acquired was recorded as
goodwill. The goodwill, in the amount of $102.0 million, is being amortized on a
straight line basis over 40 years.
The following pro forma information (unaudited) has been prepared assuming that
this acquisition had taken place at the beginning of the respective periods. The
pro forma information includes adjustments for the amortization of goodwill
arising from the transaction and interest expense that would have been incurred
to finance the purchase. The pro forma financial information is not necessarily
indicative of the results of operations had the transaction been effected on the
assumed dates. <TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Total Revenue ....................................... $1,207,000,000 $923,797,000
Net Income (Loss).................................... (2,818,000) (20,239,000)
Net Income (Loss) Per Common Share................... (.10) (.75)
Net Income (Loss) Per Common Share
Assuming Dilution............................... (.10) (.75)
</TABLE>
On December 31, 1998, Sierra completed the acquisition of the Nevada health care
business of Exclusive Healthcare, Inc., United of Omaha Life Insurance Company
and United World Life Insurance Company, all of which are subsidiaries of Mutual
of Omaha Insurance Company. The purchase price is contingent based on how many
members are retained through 2000 and 2001. No cash will be paid until group
renewals begin in 2000. Sierra retained approximately 9,000 members
(approximately 4,400 HMO members) subsequent to the acquisition.
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
40
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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 $32 million in cash. At December 31, 1996 Prime
operated MedOne Health Plan, Inc. ("MedOne"), 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 million.
In November 1996, the Company acquired complete ownership of TXHC 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.
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"), TXHC and MedOne, all licensed HMOs; Sierra
Health and Life Insurance Company, Inc. ("SHL"), a health and life insurance
company; Southwest Medical Associates, Inc. ("SMA"), and The Medical Group of
Texas ("TMGT"), multi-specialty medical groups; CII Financial, Inc. ("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 from June 1, 1998 to May
31, 2003; administrative services companies; a home health care agency; a
hospice; a home medical products subsidiary; 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, TXHC and MedOne commercial and SHL indemnity premiums. HPN and TXHC offer a
prepaid health care program to Medicare recipients. Revenues associated with
these Medicare recipients were approximately $238,913,000, $186,105,000 and
$140,611,000 in 1998, 1997 and 1996, respectively.
Specialty Product Revenues. 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. Also included in specialty product revenue are revenues
associated with administrative services and certain ancillary products.
Military Contract Revenues. Revenue under the TRICARE contract is recorded based
on the contract price as agreed to by the federal government. The contract also
contains provisions which adjust the contract price based on actual experience.
The estimated effects of these adjustments are recognized on a monthly basis. In
addition, the Company records revenue based on estimates of the earned portion
of any contract change orders not originally specified in the contract.
41
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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.
Military Contract Expenses. This expense consists primarily of costs to provide
managed health care services to eligible beneficiaries in accordance with the
Company's TRICARE contract. Under the contract, SMHS provides health care
services to approximately 606,000 dependents of active duty military personnel
and military retirees and their dependents through subcontractor partnerships
and individual providers. Health care costs are recorded in the period when
services are provided to eligible beneficiaries including estimates for provider
costs which have been incurred as of the balance sheet date but not reported to
the Company. Also included in military contract expense are costs incurred to
perform specific administrative services, such as health care appointment
scheduling, enrollment, network management and health care advice line services,
and other administrative functions of the military health care subsidiary.
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.
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.
Military Accounts Receivable. Amounts receivable under government contracts are
comprised primarily of one month's contract payment from the government in
arrears, estimates of adjustments under the contract based on actual experience,
and estimates of the earned portion of any change orders not originally
specified in the contract.
42
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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 40 years. The Company evaluates the carrying value of
its intangible assets at each balance sheet date.
Medical Claims Payable and Military Health Care Payable. Medical claims payable
and Military health care payable include the estimated cost for unpaid claims
for which health care services have been provided to enrollees and TRICARE
eligibles and a provision of the estimated costs for claims that have been
incurred 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.
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 regions, 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, other than
gaming, 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, Nevada and Texas. However, the Company
is licensed and does business in several other states as well. As of December
31, 1998, the Company has receivables outstanding from the federal government
related to its TRICARE contract in the amount of $69.6 million. 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.
Recently Issued Accounting Standards. In March 1998, the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
("AcSEC") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed For or Obtained For Internal Use". SOP 98-1
requires certain computer software costs to be capitalized and amortized over
the software's estimated useful life. In June 1998, the AcSEC issued Statement
of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities".
This standard requires organization costs and costs
43
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
associated with start-up activities to be expensed as incurred. Both statements
are effective for years beginning after December 15, 1998. The Company will
adopt SOP 98-1 and SOP 98-5 for the fiscal year ending December 31, 1999 and
does not believe these statements will have a material impact on its financial
statements.
In June 1998, The Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 is effective
for fiscal years beginning after June 15, 1999. FAS 133 addresses the accounting
for derivative instruments including certain derivative instruments embedded in
other contracts, and hedging activities. The Company does not believe this
statement will have a material impact on its financial statements.
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 and military revenue and
expenses. Actual results may materially differ from estimates.
Reclassifications. Certain amounts in the Consolidated Financial Statements for
the years ended December 31, 1997 and 1996 have been reclassified to conform
with the current year presentation.
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, 1998:
<S> <C> <C> <C>
Net Income..................................... $39,596,000 0 $39,596,000
Shares......................................... 27,391,000 356,000 27,747,000
Per Share Amount............................... $1.45 $1.43
For the Year Ended December 31, 1997:
Net Income..................................... $24,241,000 $24,241,000
Shares......................................... 27,013,000 413,000 27,426,000
Per Share Amount............................... $.90 $.88
For the Year Ended December 31, 1996:
Net Income..................................... $31,143,000 $31,143,000
Shares......................................... 26,589,000 602,000 27,191,000
Per Share Amount............................... $1.17 $1.15
</TABLE>
Stock Split. On May 5, 1998, the Company announced a three-for-two stock split.
Each stockholder of record of the Company owning one share of common stock, par
value of $.005, as of the close of business on the record date of May 18, 1998,
received an additional one-half share on June 18, 1998. In lieu of any
fractional share resulting from the stock split, a stockholder received a cash
payment based on the closing price of the Company's common stock on the record
date. The par value remains $.005 per share. Common stock and earnings per share
amounts have been retroactively adjusted to account for the split.
44
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
CII issued convertible subordinated debentures (the "Debentures") due September
15, 2001. Each $1,000 in principal is convertible into 25.382 shares of the
Company's common stock at a conversion price of $39.40 per share. The Debentures
were not included in the computation of EPS because their effect would be
anti-dilutive.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
Classification 1998 1997
<S> <C> <C>
Land................................................... $ 28,588,000 $ 14,296,000
Buildings and Improvements............................. 145,308,000 109,307,000
Furniture, Fixtures and Equipment...................... 57,261,000 38,692,000
Data Processing Equipment and Software................. 43,643,000 31,452,000
Software in Development and Construction
in Progress......................................... 20,324,000 4,170,000
Less: Accumulated Depreciation ........................ (65,960,000) (49,086,000)
Net Property and Equipment......................... $229,164,000 $148,831,000
</TABLE>
The following is an analysis of property and equipment under capital leases by
classification as of December 31:
<TABLE>
<CAPTION>
Classification 1998 1997
<S> <C> <C>
Data Processing Equipment and Software ................ $4,736,000 $4,779,000
Furniture, Fixtures and Equipment...................... 3,783,000 728,000
Building............................................... 245,000 245,000
Less: Accumulated Depreciation......................... (2,185,000) (467,000)
Net Property and Equipment.......................... $6,579,000 $5,285,000
</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 1998, 1997 and 1996 was $1,037,000, $1,621,000 and $245,000,
respectively.
5. CASH AND INVESTMENTS
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
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 on
investments in 1998 were $4.8 million and $2.5 million, respectively. Realized
gains and losses are calculated using the specific identification method and are
included in net income.
45
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
The following table summarizes the Company's short-term, long-term and
restricted investments as of December 31, 1998:
<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..................... $ 19,180,000 $ 52,000 $ 219,000 $ 19,013,000
Municipal Obligations................... 24,974,000 88,000 5,000 25,057,000
Corporate Bonds......................... 31,419,000 45,000 60,000 31,404,000
Other. . . . ........................... 13,795,000 41,000 548,000 13,288,000
Total Short-term..................... 89,368,000 226,000 832,000 88,762,000
Classified as Long-term:
U.S. Government
and its Agencies..................... 61,034,000 608,000 1,357,000 60,285,000
Mortgage Backed......................... 6,209,000 1,000 216,000 5,994,000
Municipal Obligations................... 33,086,000 229,000 408,000 32,907,000
Corporate Bonds......................... 51,198,000 714,000 769,000 51,143,000
Total Long-term...................... 151,527,000 1,552,000 2,750,000 150,329,000
Classified as Restricted:
U.S. Government
and its Agencies..................... 8,549,000 87,000 8,636,000
Municipal Obligations................... 2,594,000 124,000 2,718,000
Corporate Bonds......................... 2,071,000 19,000 2,090,000
Other. . . . . . . . . ................. 2,081,000 2,081,000
Total Restricted .................... 15,295,000 230,000 15,525,000
Total Available-for-Sale ......... $256,190,000 $2,008,000 $3,582,000 $254,616,000
Held-to-Maturity Investments:
Classified as Short-term:
U.S. Government
and its Agencies..................... $ 8,468,000 $ 9,000 $ 432,000 $ 8,045,000
Mortgage Backed......................... 5,936,000 266,000 5,670,000
Municipal Obligations................... 1,570,000 44,000 1,614,000
Corporate Bonds......................... 5,272,000 66,000 5,338,000
Total Short-term..................... 21,246,000 119,000 698,000 20,667,000
Classified as Long-term:
U.S. Government
and its Agencies..................... 6,529,000 29,000 51,000 6,507,000
Mortgage Backed.......................... 14,331,000 672,000 13,659,000
Municipal Obligations.................... 4,154,000 259,000 4,413,000
Corporate Bonds.......................... 5,473,000 441,000 5,914,000
Total Long-term...................... 30,487,000 729,000 723,000 30,493,000
Classified as Restricted:
U.S. Government
and its Agencies..................... 495,000 9,000 504,000
Municipal Obligations................... 574,000 17,000 591,000
Corporate Bonds......................... 1,164,000 50,000 1,214,000
Total Restricted .................... 2,233,000 76,000 2,309,000
Total Held-to-Maturity ........... $ 53,966,000 $ 924,000 $1,421,000 $ 53,469,000
</TABLE>
46
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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>
47
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
The contractual maturities of available-for-sale short-term, long-term and
restricted investments at December 31, 1998 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...................................... $ 64,036,000 $ 63,497,000
Due after one year through five years........................ 54,609,000 55,362,000
Due after five years through ten years....................... 16,763,000 17,063,000
Due after ten years.......................................... 120,782,000 118,694,000
Total................................................... $256,190,000 $254,616,000
</TABLE>
The contractual maturities of held-to-maturity short-term, long-term and
restricted investments at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
Due in one year or less...................................... $12,563,000 $12,417,000
Due after one year through five years........................ 12,209,000 12,957,000
Due after five years through ten years....................... 2,954,000 2,988,000
Due after ten years.......................................... 26,240,000 25,107,000
Total................................................... $53,966,000 $53,469,000
</TABLE>
Of the cash and cash equivalents that total $83,910,000 million in the
accompanying Consolidated Balance Sheet at December 31, 1998, $81,328,000
million 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, depending on
the contract, $100,000 to $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 $2,860,000, $3,156,000
and $3,235,000 net of reinsurance recoveries of $1,185,000, $1,729,000 and
$2,276,000 are included in medical expense for 1998, 1997 and 1996,
respectively. In addition, SHL maintains reinsurance on certain other insurance
products.
CII also has reinsurance treaties in effect. Effective January 1, 1998, workers'
compensation claims between $500,000 and $100,000,000 per occurrence are
reinsured. In 1997 and 1996, workers' compensation claims between $350,000 and
$60,000,000 per occurrence were reinsured. In addition, effective July 1, 1998,
workers' compensation claims below $500,000 per occurrence are reinsured under
quota share and excess reinsurance agreements (referred to as "low level
reinsurance") with an A+ rated carrier. Under this agreement, CII reinsures 30%
of the first $10,000 of each loss, 75% of the next $40,000
48
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
and 100% of the next $450,000. CII receives a ceding commission from the
reinsurer as a partial reimbursement of its operating expenses.
The low level reinsurance agreement contains both retroactive and prospective
reinsurance coverage and CII has bifurcated the low level reinsurance agreement
to account for the different accounting treatments. The amount by which the
estimated ceded liabilities exceed the amount paid for the retroactive coverage
is amortized to income over the estimated remaining settlement period using the
interest method. For the year ended December 31, 1998, CII amortized a deferred
gain of $1,038,000. Any subsequent changes in estimated or actual cash flows are
accounted for by adjusting the previously recorded deferred gain to the balance
that would have existed had the revised estimate been available at the inception
of the reinsurance transactions, with a corresponding charge or credit to
income.
At December 31, 1998 and 1997, the amount of reinsurance recoverable under
prospective reinsurance contracts for unpaid losses and loss adjustment expenses
for CII was $37,797,000 and $21,056,000, respectively. At December 31, 1998, the
amount of reinsurance recoverable under the retroactive reinsurance contract was
$18,710,000. The amount of reinsurance receivable for paid losses and loss
adjustment expenses was $1,917,000 and $358,000, at December 31, 1998 and 1997,
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 prospective reinsurance
information for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
Change in
Recoveries Recoverable
on Paid on Unpaid Premiums
Losses/LAE Losses/LAE Ceded
1998:
Travelers Indemnity Company
<S> <C> <C> <C>
of Illinois............................... $1,379,000 $19,664,000 $16,095,000
General Reinsurance Corporation............... 3,292,000 (2,923,000) 3,533,000
Others ....................................... 202,000
Total ........................................ $4,671,000 $16,741,000 $19,830,000
1997:
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
</TABLE>
49
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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,
1998 1997 1996
<S> <C> <C> <C>
Net Beginning Losses and LAE Reserve ..................... $181,643,000 $172,100,000 $156,447,000
Net Provision for Insured Events Incurred in:
Current Year .......................................... 103,990,000 102,301,000 101,401,000
Prior Years............................................ (9,643,000) (8,970,000) (15,284,000)
Total Net Provision.................................. 94,347,000 93,331,000 86,117,000
Net Payments for Losses and LAE
Attributable to Insured Events Incurred in:
Current Year .......................................... 29,592,000 26,811,000 24,733,000
Prior Years............................................ 71,932,000 56,977,000 45,731,000
Total Net Payments .................................. 101,524,000 83,788,000 70,464,000
Net Ending Losses and LAE Reserve ........................ 174,466,000 181,643,000 172,100,000
Reinsurance Recoverable .................................. 37,797,000 21,056,000 15,676,000
Gross Ending Losses and LAE Reserve ...................... $212,263,000 $202,699,000 $187,776,000
</TABLE>
8. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revolving Credit Facility............................................ $139,000,000 $ 25,000,000
7 1/2% Convertible Subordinated Debentures .......................... 51,251,000 54,467,000
6% Mortgage Note..................................................... 35,171,000
7 1/5% Mortgage Note................................................. 13,440,000
7 3/8% Mortgage Note ............................................... 821,000 5,833,000
Adjustable Rate Mortgage Note ....................................... 3,116,000
Other................................................................ 7,978,000 7,151,000
Total.............................................................. 247,661,000 95,567,000
Less Current Portion................................................. (5,263,000) (4,726,000)
Long-term Debt....................................................... $242,398,000 $90,841,000
</TABLE>
Revolving Credit Facility. On October 31, 1998, the Company replaced its prior
line of credit with a $200 million credit facility under which it has $139
million in borrowings outstanding as of December 31, 1998. Interest under the
credit facility is variable and based on the London Interbank Offering Rate plus
a margin determined by reference to the Company's leverage ratio. Of the
outstanding balance, $50.0 million is covered by interest-rate swap agreements.
The average cost of borrowing on this line of credit for the fourth quarter of
1998, including the impact of the swap agreements, was approximately 8.0%. The
terms of the credit facility contain a mandatory payment schedule that begins on
June 30, 2001 and ends on September 30, 2003 if the principal balance exceeds
certain thresholds. The terms of the credit facility
50
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
contain certain covenants including a minimum fixed charge coverage ratio and a
maximum leverage ratio. In November 1998, the Company borrowed approximately
$110 million to fund the acquisition of Kaiser- Texas.
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 25.382 shares of
the Company's common stock at a conversion price of $39.40 per share.
Unamortized issuance costs of $509,000 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, 1998 and 1997 was $1,117,000 and
$1,191,000, respectively. The Debentures are redeemable by CII, in whole or in
part, at redemption prices of 101.05% in 1999 and 100.75% thereafter, 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, 1998 and 1997, the Company purchased $3,216,000 and $30,000,
respectively, of the debentures on the open market.
6.0% Mortgage Note. In conjunction with the acquisition of Kaiser-Texas, TXHC
executed a deed of trust note for $35,200,000. The note is secured by deeds of
trust covering the underlying real estate and fixtures. The terms of the note
include fixed monthly payments of $211,000 for five years at which time the
remaining principal is due.
7 1/5% Mortgage Note. In January 1998, the Company obtained a $15,000,000 loan
from Bank of America, Nevada at an interest rate of 7 1/5%. 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.
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.
Adjustable Rate Mortgage Note. In 1998, the Company repaid a mortgage which had
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%.
Other. The Company has obligations under capital leases with interest rates from
6.3% to 13.4%. In addition, the Company has term loans with the City of
Baltimore and the State of Maryland.
51
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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, 1998, are as follows:
<TABLE>
<CAPTION>
Obligations
Notes Under Capital
Year ending December 31, Payable Leases
<S> <C> <C> <C>
1999................................................. $ 2,761,000 $2,932,000
2000................................................. 2,310,000 1,967,000
2001................................................. 53,263,000 1,314,000
2002................................................. 2,150,000 1,278,000
2003 ................................................ 173,984,000 105,000
Thereafter........................................... 6,379,000 276,000
Total............................................. $240,847,000 7,872,000
Less: Amounts Representing Interest................. (1,058,000)
Present Value of Minimum Lease Payments.............. $6,814,000
</TABLE>
The fair value of the Debentures at December 31, 1998 was $48,176,000 which was
determined based on the market price on January 7, 1999. Excluding the
Debentures, the fair value of long-term debt, including the current portion, is
$195,057,000 based on the borrowing rates currently available to the Company for
bank loans with similar terms and average maturities.
9. INCOME TAXES
A summary of the provision for income taxes for the years ended December 31,
1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Provision for Income Taxes:
<S> <C> <C> <C>
Current..................................... $12,595,000 $5,528,000 $11,860,000
Deferred.................................... 1,201,000 (2,294,000) (1,389,000)
$13,796,000 $3,234,000 $10,471,000
</TABLE>
The following reconciles the difference between the 1998, 1997 and 1996 current
and statutory provision for income taxes:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory Rate .................................. 35% 35% 35%
Tax Preferred Investments ....................... (2) (5) (6)
Change in Valuation Allowance ................... (9) (17) (6)
Other ........................................... 2 (1) 2
Provision for Income Taxes ................. 26% 12% 25%
</TABLE>
52
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
The tax effects of significant items comprising the Company's net deferred
tax assets are as follows: <TABLE>
<CAPTION>
1998 1997
Deferred Tax Assets:
<S> <C> <C>
Medical and Losses and LAE Reserves ...................... $ 4,398,000 $ 7,428,000
Accruals Not Currently Deductible......................... 4,875,000 7,269,000
Compensation Accruals .................................... 4,569,000 2,344,000
Bad Debt Allowances....................................... 2,189,000 2,041,000
Loss Carryforwards and Credits............................ 9,878,000 11,543,000
Unearned Premiums......................................... 850,000 902,000
Deferred Reinsurance Gains................................ 2,188,000
Other .................................................... 551,000
29,498,000 31,527,000
Deferred Tax Liabilities:
Deferred Policy Acquisition Costs ........................ 586,000 596,000
Depreciation and Amortization ............................ 6,249,000 4,872,000
Other .................................................... 558,000 1,096,000
7,393,000 6,564,000
Net Deferred Tax Asset Before
Valuation Allowance.................................... 22,105,000 24,963,000
Valuation Allowance ...................................... (1,575,000) (6,266,000)
Net Deferred Tax Asset ................................... $20,530,000 $18,697,000
</TABLE>
At December 31, 1998, the Company had approximately $20,022,000 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. In addition to the 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.
A valuation allowance has been set up to reflect the Company's inability to use
tax benefits from certain acquisitions currently or in the near future. For the
years ended December 31, 1998 and 1997, 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
$4,691,000 and $4,663,000 for the years ended December 31, 1998 and 1997,
respectively.
53
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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>
1999................................................... $ 8,811,000
2000................................................... 6,896,000
2001................................................... 6,060,000
2002................................................... 5,665,000
2003 .................................................. 3,740,000
Thereafter............................................. 5,038,000
Total............................................. $36,210,000
</TABLE>
Rent expense totaled $8,763,000, $5,827,000 and $4,945,000 in 1998, 1997 and
1996, respectively.
Litigation and Legal Matters. 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.
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 a
maximum of 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 $4,522,000, $3,929,000 and $3,216,000 in 1998, 1997 and 1996,
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 has funded and
entered into split dollar life insurance agreements with certain officers and
key executives (selected and approved by the Sierra Board of Directors). The
premiums paid by the Company will be reimbursed upon the occurrence of certain
events as specified in the contract.
Supplemental Executive Retirement Plan (SERP). Effective July 1, 1997, the
Company adopted a defined benefit retirement plan covering certain key
employees. The Company is funding the benefits through the
54
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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. In 1998,
the Company expanded the SERP to include more participants. The effect of adding
these participants is included in plan amendments in the reconciliation below.
A reconciliation of ending year balances is as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
1998 1997
Change in Benefit Obligation:
Projected Benefit Obligation at Beginning of Period
<S> <C> <C> <C>
(Inception for 1997) ...................................... $ 9,515,000 $ 9,008,000
Service Cost ................................................. 408,000 132,000
Interest Cost ................................................ 875,000 375,000
Plan Amendments............................................... 995,000
Actuarial Gains/Losses........................................ 1,925,000
Benefits Paid ................................................ (97,000)
Benefit Obligation at End of Period........................... 13,621,000 9,515,000
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Period.............. 1,872,000
Actual Return on Plan Assets ................................. (58,000) (308,000)
Company Contributions ........................................ 2,679,000 2,180,000
Fair Value of Plan Assets at End of Period.................... 4,493,000 1,872,000
Funded Status of the Plan .................................... (9,128,000) (7,643,000)
Unrecognized Actuarial Change................................. 1,858,000
Unrecognized Prior Service Credit ............................ 8,757,000 8,647,000
Unrecognized Net Loss ........................................ 748,000 394,000
Total Recognized ............................................. $ 2,235,000 $ 1,398,000
Total Recognized Amounts in the Financial
Statements Consist of:
Accrued Benefit Liability .................................... $(3,325,000) $(2,964,000)
Intangible Asset ............................................. 5,560,000 4,362,000
Total ........................................................ $ 2,235,000 $ 1,398,000
Assumptions:
Discount Rate ................................................ 7.0% 7.0%
Expected Return on Plan Assets ............................... 8.0% 8.0%
Rate of Compensation Increase ................................ 5.0% 5.0%
Components of Net Periodic Benefit Cost:
Service Cost.................................................. $ 408,000 $ 132,000
Interest Cost ................................................ 875,000 375,000
Expected Return on Plan Assets................................ (295,000) (87,000)
Amortization of Prior Service Credits......................... 885,000 361,000
Recognized Actuarial Loss..................................... 68,000
Net Periodic Benefit Cost..................................... $1,941,000 $ 781,000
</TABLE>
55
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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. The Company has several plans that provide common
stock-based awards to employees and to non-employee directors. The plans provide
for the granting of Options, Stock, and other stock-based awards. 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. The
exercise price of each option equals the market price of the Company's stock on
the date of grant. Stock options generally vest at a rate of 20% - 25% per year.
Options generally expire one year after the end of the vesting period.
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, 1996................. 2,790,000 $ 2.25 - $21.17 $14.36
Granted.................................. 480,000 16.67 - 23.33 17.43
Exercised................................ (249,000) 2.25 - 19.09 8.38
Canceled................................. (23,000) 7.13 - 21.17 14.47
Outstanding December 31, 1996 .............. 2,998,000 5.00 - 23.33 15.34
Granted.................................. 459,000 16.25 - 24.50 23.15
Exercised................................ (705,000) 5.00 - 21.17 11.81
Canceled................................. (97,000) 6.31 - 23.33 17.33
Outstanding December 31, 1997 .............. 2,655,000 6.31 - 24.50 17.53
Granted.................................. 468,000 16.94 - 24.83 22.49
Exercised................................ (386,000) 6.31 - 23.33 14.25
Canceled................................. (7,000) 7.13 - 24.50 17.01
Outstanding December 31, 1998............... 2,730,000 6.31 - 24.83 18.89
Exercisable at December 31, 1998 ........... 1,274,000 $6.31 $24.50 $17.16
Available for Grant at
December 31, 1998 ....................... 3,002,000
</TABLE>
56
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
The following table summarizes information about stock options outstanding
at December 31, 1998: <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>
$ 6.31 - 6.311,264 days 16,000 16,000 $ 6.31 $ 6.31
9.91 - 12.083,068 days 189,000 136,000 11.10 11.11
16.25 - 21.171,081 days 1,678,000 1,034,000 17.53 17.52
22.17 - 24.831,986 days 847,000 88,000 23.57 24.30
</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, 1998, the
Company had 353,000 shares reserved for purchase under the Purchase Plan. During
1998, a total of 144,000 shares were purchased at prices of $17.75 and $19.06
per share. During January 1999, 72,000 shares were issued to employees at $17.85
per share in connection with the Purchase Plan.
Accounting for Stock-Based Compensation. The Company uses the intrinsic value
method in accounting for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized for its employee stock option plans nor
the Stock Purchase Plan. Had compensation cost for the Company's 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
1998 1997 1996
<S> <C> <C> <C>
Net Income As reported $39,596,000 $24,241,000 $31,143,000
Proforma 37,106,000 22,177,000 29,703,000
Net Income Per Share As reported $1.45 $.90 $1.17
Proforma 1.35 .82 1.12
Net Income Per Share
Assuming Dilution As reported $1.43 $.88 $1.15
Proforma 1.34 .81 1.09
</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 1998, 1997 and 1996, respectively: dividend yield
of 0% for all years; expected volatility of 37%, 35% and 29%; risk-free interest
rates of 4.46%, 5.89% and 5.92%; and expected lives of five years for all years.
The weighted fair value of options granted in 1998, 1997 and 1996 was $9.92,
$8.27 and $5.65, 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 1998,
1997 and 1996, respectively: dividend yield of 0% for all years; expected
volatility of 32%, 35% and 29%; risk-free interest rates of 5.30%, 5.32% and
5.29%; and expected lives of six months for all years.
57
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
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.
13. STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
Supplemental statements of cash flows information for the years ended
December 31, is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Cash Paid During the Year for Interest
<S> <C> <C> <C>
(Net of Amount Capitalized)............................... $ 8,737,000 $4,463,000 $5,275,000
Cash Paid During the Year for Income Taxes.................... 15,003,000 7,943,000 7,966,000
Noncash Investing and Financing Activities:
Liabilities Assumed in Connection with
Corporate Acquisitions................................. 53,461,000 195,000 7,890,000
Reductions to Funds Withheld by Ceding
Insurance Company and Future
Policy Benefits........................................ 8,471,000 773,000
Stock Issued for Exercise of Options
and Related Tax Benefits............................... 1,284,000 2,004,000 1,158,000
Additions to Capital Leases............................... 3,070,000 4,574,000
</TABLE>
14. INTEGRATION, SETTLEMENT AND OTHER COSTS
1998
During the fourth quarter of 1998, the Company incurred settlement expenses
totaling $8 million, $5.9 million after tax, related to the settlement of a
competitor's protest for the Region 1 TRICARE contract. All this amount was paid
during fiscal year 1998. On September 30, 1997, SMHS was awarded a five-year,
$1.2 billion contract to administer managed health care services to military
families and retirees in 13 northeastern states and Washington, D.C. A competing
bidder protested the contract award and claimed, among other issues, that the
United States Department of Defense failed to adequately disclose the weights of
the significant factors used to evaluate proposals. In December 1998, SMHS
reached an agreement to settle the protest. As part of the settlement, the
competitor has foregone any and all rights it may have to challenge the contract
award and seek re-bid.
During the fourth quarter of 1998, the Company incurred integration, transition
and other charges totaling $3.1 million, $2.3 million after tax, related
primarily to its acquisition of the Texas operations of Kaiser Foundation Health
Plan. In addition, the Company incurred certain legal expenses totaling $2.7
million, $2.0 million after tax, resulting primarily from the TRICARE settlement
and acquisition and integration activity. As of December 31, 1998, $2.8 million
was included in accrued expenses for these integration, transition and legal
costs incurred through December 31, 1998.
1997
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. The original agreement had been entered into in November
1996.
58
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
During the third quarter of 1997, SMHS was notified it had been awarded a
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
$18.4 million $10.6 million net of taxes, were recorded in the third quarter,
primarily for expenses associated with the Company's proposal to serve TRICARE
beneficiaries in Region 1. Such expenses had been deferred until award
notification. SMHS began health care delivery on June 1, 1998. SMHS subcontracts
for health care delivery, including some of the risk, for parts of the TRICARE
contract.
1996
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 $3.8 million, $2.9 million after tax, in the fourth quarter
of 1996, primarily to recognize the estimated costs to dispose of the hospital.
As of December 31, 1998, 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, $6.2 million after tax. These restructuring
costs included cancellation of certain contractual obligations of $6.0 million,
lease termination costs of $1.5 million and approximately $750,000 of other
costs.
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, 1998:
<S> <C> <C> <C> <C>
Operating Revenues.................................... $210,409 $244,545 $281,082 $301,167
Operating Income...................................... 17,663 18,550 18,213 6,147
Income Before Income Taxes ........................... 16,382 16,931 17,006 3,073
Net Income .....................................12,187 12,551 12,584 2,274
Earnings Per Share ................................... .44 .46 .46 .08
Earnings Per Share Assuming Dilution ................. .44 .45 .46 .08
Year Ended December 31, 1997:
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 ................................... .05 .39 .02 .43
Earnings Per Share Assuming Dilution ................. .05 .39 .02 .43
</TABLE>
59
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
16. SEGMENT REPORTING
The Company has three reportable segments based on the products and services
offered: managed care and corporate operations, workers' compensation operations
and military health services operations. The managed care segment includes
managed health care services provided through HMOs, managed indemnity plans,
third-party administrative services programs for employer-funded health benefit
plans, multi-specialty medical groups, other ancillary services and corporate
operations. The workers' compensation segment assumes workers' compensation
claims risk in return for premium revenues. The military health services segment
administers a five-year, managed care federal contract for the Department of
Defense's TRICARE program in Region 1.
Sierra evaluates each segment's performance based on segment operating profit.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.
60
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
Information concerning the operations of the reportable segments is as follows:
(Amounts in thousands)
<TABLE>
<CAPTION>
Managed Care Workers' Military
and Corporate Compensation Health Services
Operations Operations Operations Total
1998
<S> <C> <C> <C> <C>
Medical Premiums.................................. $609,404 0 0 $ 609,404
Specialty Product Revenues........................ 12,843 $135,525 148,368
Professional Fees ................................ 45,363 45,363
Military Contract Revenues........................ $204,838 204,838
Investment and Other Revenues..................... 8,594 20,229 407 29,230
Total Revenue.................................. $676,204 $155,754 $205,245 $1,037,203
Depreciation and Amortization..................... $ 15,545 $ 1,551 $ 2,167 $ 19,263
Interest Expense and Other 2,610 3,998 573 7,181
Segment Profit. ....................... $ 40,704 $ 18,492 $ 8,047 $ 67,243
Integration, Settlement and Other Costs........... (4,869) (8,982) (13,851)
Net Income (Loss) Before Income Taxes............. $ 35,835 $ 18,492 $ (935) $ 53,392
Segment Assets. ........................ $ 593,332 $377,911 $ 73,877 $1,045,120
Capital Expenditures.............................. 32,520 3,208 5,015 40,743
1997
Medical Premiums.................................. $513,857 $ 513,857
Specialty Product Revenues........................ 16,297 $129,914 146,211
Professional Fees ................................ 31,238 31,238
Military Contract Revenues........................ $ 4,346 4,346
Investment and Other Revenues..................... 8,711 17,361 26,072
Total Revenue.................................. $570,103 $147,275 $ 4,346 $ 721,724
Depreciation & Amortization....................... $ 12,491 $ 950 $ 69 $ 13,510
Interest Expense and Other 371 4,062 4,433
Segment Profit. ....................... $ 45,662 $ 11,010 153 $ 56,825
Integration, Settlement and Other Costs........... (12,600) (16,750) (29,350)
Net Income (Loss) Before Income Taxes............. $ 33,062 $ 11,010 $(16,597) $ 27,475
Segment Assets. ........................ $373,652 $343,425 $ 6,859 $ 723,936
Capital Expenditures.............................. 43,825 11,178 639 55,642
1996
Medical Premiums.................................. $386,968 $ 386,968
Specialty Product Revenues........................ 11,983 $121,341 133,324
Professional Fees ................................ 28,836 28,836
Investment and Other Revenues..................... 7,595 18,688 26,283
Total Revenue.................................. $435,382 $140,029 $ 575,411
Depreciation & Amortization....................... $ 9,599 $ 900 $ 10,499
Interest Expense and Other (1,247) 4,070 2,823
Segment Profit. ....................... $ 42,930 $ 10,748 $ 53,678
Integration, Settlement and Other Costs........... (12,064) 12,064
Net Income Before Income Taxes.................... $ 30,866 $ 10,748 $ 41,614
Segment Assets. ....................... $313,463 $315,999 $ 629,462
Capital Expenditures.............................. 17,361 566 17,927
</TABLE>
61
<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 1999 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 1999 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 1999
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 1999 Annual Meeting of
Stockholders, is incorporated herein by reference.
62
<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:
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report............................................................. 35
Consolidated Balance Sheets at December 31, 1998 and 1997................................ 36
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996...................................................... 37
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996.................................. 38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996...................................................... 39
Notes to Consolidated Financial Statements............................................... 40
(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
</TABLE>
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, incorporated by reference to
Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 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).
(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).
63
<PAGE>
(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 October 30, 1998, among Sierra
Health Services, Inc. as Borrower, Bank of America National
Trust and Savings Association as Administrative Agent and
Issuing Bank, First Union National Bank as Syndication Agent,
and the Other Financial Institutions Party Thereto, dated as
of October 30, 1998.
(10.5) First Amendment to Credit Agreement among Sierra Health
Services, Inc., as Borrower, Bank of America National Trust
and Savings Association as Administrative Agent and Issuing
Bank and the Other Financial Institutions Party Thereto, dated
as of November 23, 1998.
(10.6) Second Amendment to Credit Agreement among Sierra Health
Services, Inc. as borrower, Bank of America National Trust and
Savings Association as Administrative Agent and the Other
Financial Institutions Party Thereto, dated as of January 15,
1999.
(10.7) Compensatory Plans, Contracts and Arrangements.
(1) Employment Agreement with Jonathon W. Bunker dated
November 15, 1997, incorporated by reference to Exhibit
10.6 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(2) Employment Agreement with Frank E. Collins dated
November 15, 1997, incorporated by reference to Exhibit
10.6 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(3) Employment Agreement with William R. Godfrey dated
November 15, 1997, incorporated by reference to Exhibit
10.6 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(4) Employment Agreement with Laurence S. Howard dated
November 15, 1997, incorporated by reference to Exhibit
10.6 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(5) Employment Agreement with Anthony M. Marlon, M.D. dated
November 15, 1997, incorporated by reference to Exhibit
10.6 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
64
<PAGE>
(6) Employment Agreement with Erin E. MacDonald dated
November 15, 1997, incorporated by reference to Exhibit
10.6 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(7) Employment Agreement with Michael A. Montalvo dated
November 15, 1997, incorporated by reference to Exhibit
10.6 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(8) Employment Agreement with Marie H. Soldo dated November
15, 1997, incorporated by reference to Exhibit 10.6 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
(9) Employment Agreement with James L. Starr dated November
15, 1997, incorporated by reference to Exhibit 10.6 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
(10) Employment Agreement with Paul H. Palmer dated November
20, 1998.
(11) 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.
(12) 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.
(13) 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.
(14) Sierra Health Services, Inc. Supplemental Executive
Retirement Plan effective as of March 1, 1998,
incorporated by reference to Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1998.
(15) 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.
(16) 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.
(17) 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.
(18) Sierra Health Services, Inc. 1995 Long-Term Incentive
Plan, as amended and restated through May 18, 1998,
incorporated by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998.
65
<PAGE>
(19) Sierra Health Services, Inc. 1995 Non-Employee
Directors' Stock Plan, as amended and restated through
May 18, 1998, incorporated by reference to Exhibit 10.5
to the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1998.
(10.8) 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.
(10.9) 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.
(10.10) Master Purchase and Sale Agreement between Kaiser Foundation
Health Plan of Texas (as Seller) and HMO Texas, L.C. (as
Buyer), dated June 5, 1998, incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1998.*
(10.11) Asset Sale and Purchase Agreement between Kaiser Foundation
Health Plan of Texas, A Texas Non-Profit Corporation and HMO
Texas, L.C., a Texas Limited Liability Company, dated June 5,
1998, incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998.*
(10.12) Asset Sale and Purchase Agreement between Permanente Medical
Association of Texas, a Texas Professional Association and HMO
Texas, L.C., a Texas Limited Liability Company, dated June 5,
1998, incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998.*
(10.13) Amendment No. 2 to Asset Sale and Purchase Agreement between Kaiser
Foundation Health Plan of Texas and Texas Health Choice, L.C. (formerly HMO
Texas, L.C.)*
66
<PAGE>
(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. (Texas Health Choice, 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
Nevada Administrators, Inc. Nevada
MedOne Health Plan, Inc. Nevada
(23.1) Consent of Deloitte & Touche LLP
(27.1) Financial Data Schedule - 1998
(99) Registrant's current report on Form 8-K dated March 17, 1999,
incorporated herein.
All other Exhibits are omitted because they are not applicable.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated November
11, 1998, with the Securities and Exchange Commission to
present pro forma financial information related to the
acquisition of Kaiser-Texas and the required financial
statements.
(d) Financial Statement Schedules
The Exhibits set forth in Item 14 (a)(2) are filed herewith.
*The agreements contain certain schedules and exhibits which were not included
in this filing. The Company will furnish supplementally a copy of any omitted
schedule or exhibit to the Commission upon request.
67
<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 17, 1999
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 17, 1999
Anthony M. Marlon, M.D. and Chairman of the Board
(Chief Executive Officer)
/S/ PAUL H. PALMER Vice President of Finance, March 17, 1999
Paul H. Palmer Chief Financial Officer,
and Treasurer
(Chief Accounting Officer)
/S/ ERIN E. MACDONALD President and March 17, 1999
Erin E. MacDonald Chief Operating Officer
Director
/S/ CHARLES L. RUTHE Director March 17, 1999
Charles L. Ruthe
/S/ WILLIAM J. RAGGIO Director March 17, 1999
William J. Raggio
/S/ THOMAS Y. HARTLEY Director March 17, 1999
Thomas Y. Hartley
</TABLE>
68
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS - Parent Company Only
<TABLE>
<CAPTION>
December 31,
1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents .......................................... $ 7,945,000 $ 15,115,000
Short-term Investments.............................................. 2,831,000 2,090,000
Prepaid Expenses and Other Current Assets........................... 9,189,000 10,415,000
Total Current Assets.......................................... 19,965,000 27,620,000
PROPERTY AND EQUIPMENT - NET ............................................ 45,699,000 55,251,000
EQUITY IN NET ASSETS OF SUBSIDIARIES .................................... 375,910,000 204,204,000
NOTES RECEIVABLE FROM SUBSIDIARIES ...................................... 9,677,000 9,744,000
LONG-TERM INVESTMENTS ................................................... 1,088,000 86,000
GOODWILL AND OTHER INTANGIBLE ASSETS .................................... 2,275,000 2,362,000
OTHER ................................................................... 30,817,000 24,081,000
TOTAL ASSETS ............................................................ $485,431,000 $323,348,000
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Liabilities ..................... $ 24,422,000 $ 16,757,000
Current Portion of Long-term Debt .................................. 393,000 2,349,000
Total Current Liabilities .................................... 24,815,000 19,106,000
LONG-TERM DEBT (Less Current Portion).................................... 139,429,000 25,858,000
OTHER LIABILITIES ....................................................... 17,473,000 12,702,000
TOTAL LIABILITIES ....................................................... 181,717,000 57,666,000
STOCKHOLDERS' EQUITY:
Capital Stock ...................................................... 141,000 139,000
Additional Paid-in Capital ......................................... 173,583,000 164,247,000
Treasury Stock ..................................................... (14,821,000) (5,601,000)
Accumulated Other Comprehensive Income:
Unrealized Holding (Loss) on Available-for-sale
Investments ............................................. (1,027,000) 655,000
Retained Earnings .................................................. 145,838,000 106,242,000
Total Stockholders' Equity ................................... 303,714,000 265,682,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $485,431,000 $323,348,000
</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>
1999........................................................... $ 393,000
2000........................................................... 429,000
2001........................................................... --
2002........................................................... --
2003 .......................................................... 139,000,000
Thereafter..................................................... --
Total...................................................... $139,822,000
</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,
1998 1997 1996
OPERATING REVENUES:
<S> <C> <C> <C>
Management Fees........................................ $52,773,000 $47,303,000 $44,139,000
Subsidiary Dividends................................... 4,085,000 1,700,000 3,733,000
Investment and Other Income............................ 5,564,000 6,688,000 5,145,000
Total Operating Revenues............................ 62,422,000 55,691,000 53,017,000
GENERAL AND ADMINISTRATIVE EXPENSES:
Payroll and Benefits................................... 22,238,000 17,616,000 11,579,000
Depreciation........................................... 5,329,000 3,707,000 3,433,000
Data Processing Maintenance............................ 2,556,000 2,370,000 1,115,000
Rent................................................... 620,000 615,000 649,000
Repairs and Maintenance................................ 879,000 459,000 408,000
Legal.................................................. 691,000 293,000 1,874,000
Consulting............................................. 1,242,000 769,000 827,000
Other.................................................. 6,489,000 4,677,000 4,030,000
Integration, Settlement and Other Costs ..... ......... 4,569,000 29,350,000 12,064,000
Total General and Administrative.................... 44,613,000 59,856,000 35,979,000
INTEREST EXPENSE AND OTHER, NET............................ (2,566,000) (676,000) (503,000)
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES............................... 28,364,000 25,615,000 21,991,000
INCOME BEFORE INCOME TAXES................................. 43,607,000 20,774,000 38,526,000
(PROVISION FOR) BENEFIT FROM
INCOME TAXES.......................................... (4,011,000) 3,467,000 (7,383,000)
NET INCOME................................................. $39,596,000 $24,241,000 $31,143,000
</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,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income........................................................... $39,596,000 $24,241,000 $31,143,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization.................................... 5,416,000 3,885,000 3,611,000
Equity in Undistributed Earnings of Subsidiaries..................... (28,364,000) (25,615,000) (21,991,000)
Change in Assets and Liabilities:
Other Assets..................................................... (6,890,000) (1,177,000) (15,917,000)
Current Assets................................................... 1,192,000 (2,312,000) (5,959,000)
Current Liabilities.............................................. 8,949,000 5,493,000 4,712,000
Other Long-term Liabilities ..................................... 4,770,000 6,634,000 6,069,000
Net Cash Provided by Operating Activities........................ 24,669,000 11,149,000 1,668,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Net ........................................... (22,294,000) (26,453,000) (9,292,000)
(Increase) Decrease in Short-term Securities......................... (606,000) 9,732,000 14,136,000
(Increase) Decrease in Other Assets.................................. (886,000) 5,820,000 6,942,000
Dividends from Subsidiary............................................ 4,085,000 1,700,000 3,733,000
Acquisitions, Net of Cash Acquired .................................. (7,500,000) (3,145,000) (31,270,000)
Dispositions, Net of Cash Disposed .................................. 1,373,000
(Increase) Decrease in Net Assets in Subsidiaries................... (125,488,000) (30,816,000) 14,321,000
Net Cash Used for Investing Activities .......................... (151,316,000) (43,162,000) (1,430,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-term Borrowing ................................... 166,000,000 25,000,000
Reductions in Long-term Obligations and
Payments on Capital Leases....................................... (45,424,000) (480,000) (718,000)
Proceeds from Note Receivable to Subsidiary.......................... 67,000 60,000 2,789,000
Purchase of Treasury Stock .......................................... (9,220,000) (5,471,000)
Exercise of Stock in Connection with Stock Plans..................... 8,054,000 10,258,000 3,638,000
Net Cash Provided by Financing Activities........................ 119,477,000 29,367,000 5,709,000
Net (Decrease) Increase in Cash and Cash Equivalents....................... (7,170,000) (2,646,000) 5,947,000
Cash and Cash Equivalents at Beginning of Year............................. 15,115,000 17,761,000 11,814,000
Cash and Cash Equivalents at End of Year................................... $ 7,945,000 $15,115,000 $17,761,000
Supplemental condensed statements of cash flows information:
Cash Paid During the Year for Interest
(Net of Amount Capitalized).......................................... $ 2,030,000 $ 632,000 $ 443,000
Cash Paid During the Year for Income Taxes................................. 14,788,000 7,916,000 6,423,000
Noncash Investing and Financing Activities:
Stock Issued for Exercise of Options
and Related Tax Benefits......................................... 1,284,000 2,004,000 1,158,000
Liabilities Assumed in Connection
with Corporate Acquisition....................................... 1,233,000
</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, 1998........ $1,804 $212,263 -- $11,158 $154,104 $18,241
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
</TABLE>
Table continued on next page
<PAGE>
SIERRA HEALTH SERVICES, INC.
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY - CASUALTY INSURANCE
(amounts in thousands)
<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, 1998........ $103,990 $(9,643) $28,243 $101,524 $153,914
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
</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>
Year ended December 31
<CAPTION>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Losses and LAE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve............... $212,263 $202,699 $187,776 $182,318 $190,962 $200,356 $178,460 $112,749 $ 67,593 $ 37,466
Less Reinsurance
Recoverables (1)...... 37,797 21,056 15,676 25,871 29,342 25,841 20,207
Net Loss and LAE
Reserves ............. 174,466 181,643 172,100 156,447 161,620 174,515 158,253
Cumulative Net Paid
as of:
One Year Later ....... 71,933 56,977 45,731 44,519 50,210 50,360 57,611 39,118 14,820
Two Years Later ...... 91,765 70,854 68,619 79,788 84,465 89,177 65,165 28,657
Three Years Later .... 83,674 80,645 94,865 104,569 108,849 76,988 36,579
Four Years Later ..... 86,381 102,395 114,293 120,539 83,822 39,345
Five Years Later ..... 106,012 119,462 126,100 87,618 41,043
Six Years Later ...... 122,000 129,060 89,607 41,962
Seven Years Later .... 130,649 90,721 42,541
Eight Years Later .... 91,354 42,818
Nine Years Later ..... 43,054
Net Reserve Re-estimated
as of:
One Year Later ....... 172,000 163,130 141,163 139,741 160,562 154,388 140,815 83,841 37,463
Two Years Later ...... 146,987 132,193 125,279 141,100 147,167 142,447 96,011 39,753
Three Years Later .... 113,766 117,792 126,483 134,747 143,433 97,142 43,528
Four Years Later ..... 102,955 122,517 132,193 137,143 97,942 44,404
Five Years Later ..... 114,443 131,112 135,249 94,852 45,027
Six Years Later ...... 127,258 135,299 93,561 44,543
Seven Years Later .... 133,729 93,672 43,741
Eight Years Later .... 92,851 43,682
Nine Years Later ..... 43,682
Cumulative Redundancy
(Deficiency) ......... 9,643 25,113 42,681 58,665 60,072 30,995 (20,980) (25,258) (6,216)
Net Reserve.............. 174,466 181,643 172,100 156,447 161,620 174,515
Reinsurance
Recoverables...... 37,797 21,056 15,676 25,871 29,342 25,841
Gross Reserve ......... $212,263 202,699 187,776 182,318 190,962 200,356
Net Re-estimated Reserve ..... 172,000 146,987 113,766 102,955 114,443
Re-estimated Reinsurance
Recoverables ......... 17,856 14,154 15,000 14,502 12,523
Gross Re-Estimated
Reserve .............. 189,856 161,141 128,766 117,457 126,966
Gross Cumulative
Redundancy............ $ 12,843 $ 26,635 $ 53,552 $ 73,505 $ 73,390
</TABLE>
(1) Amounts reflect reinsurance recoverable under prospective reinsurance
contracts only. 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, 1998 and 1997.
However, for purposes of the reconciliation and development tables, loss
and LAE information are shown net of reinsurance.
See the notes to consolidated financial
statements.
S-5
<PAGE>
EXHIBIT 10.4
CREDIT AGREEMENT
Dated as of October 30, 1998
among
SIERRA HEALTH SERVICES, INC.,
as Borrower,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Administrative Agent
and
Issuing Bank,
FIRST UNION NATIONAL BANK,
as Syndication Agent,
and
THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO
Lead Arranger:
NATIONSBANC MONTGOMERY SECURITIES LLC
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
ARTICLE I
<S> <C>
DEFINITIONS.....................................................................................................1
1.01 Certain Defined Terms.....................................................................................1
1.02 Other Interpretive Provisions............................................................................24
1.03 Accounting Principles....................................................................................25
ARTICLE II
THE CREDITS....................................................................................................26
2.01 Amounts and Terms of Commitments.........................................................................26
2.02 Loan Accounts............................................................................................26
2.03 Procedure for Borrowing..................................................................................27
2.04 Conversion and Continuation Elections....................................................................28
2.05 Voluntary Termination or Reduction of Commitments........................................................29
2.06 Optional Prepayments.....................................................................................30
2.07 Mandatory Prepayments of Loans; Mandatory Commitment
Reductions and Repayments.........................................................................30
2.09 Interest.................................................................................................33
2.10 Fees ..................................................................................................34
(a) Agents' Fees..............................................................................34
(b) Commitment Fees...........................................................................34
2.11 Computation of Fees and Interest.........................................................................34
2.12 Payments by the Company..................................................................................35
2.13 Payments by the Banks to the Agent.......................................................................35
2.14 Sharing of Payments, Etc.................................................................................36
2.15 Security.................................................................................................37
ARTICLE III
THE LETTERS OF CREDIT..........................................................................................37
3.01 The Letter of Credit Subfacility.........................................................................37
3.02 Issuance, Amendment and Renewal of Letters of Credit.....................................................38
3.03 Existing BofA Letters of Credit; Risk Participations,
Drawings and Reimbursements.......................................................................41
3.04 Repayment of Participations..............................................................................43
3.05 Role of the Issuing Bank.................................................................................44
3.06 Obligations Absolute.....................................................................................44
3.07 Cash Collateral Pledge...................................................................................46
3.08 Letter of Credit Fees....................................................................................46
3.09 Uniform Customs and Practice.............................................................................46
ARTICLE IV
TAXES, YIELD PROTECTION AND ILLEGALITY.........................................................................47
4.01 Taxes ..................................................................................................47
4.02 Illegality...............................................................................................48
4.03 Increased Costs and Reduction of Return..................................................................49
4.04 Funding Losses...........................................................................................50
4.05 Inability to Determine Rates.............................................................................50
4.06 Certificates of Banks....................................................................................51
</TABLE>
-i-
<TABLE>
<CAPTION>
Section Page
<S> <C>
4.07 Substitution of Banks....................................................................................51
4.08 Survival.................................................................................................51
ARTICLE V
CONDITIONS PRECEDENT...........................................................................................51
5.01 Conditions of Initial Credit Extensions..................................................................51
(a) Credit Agreement and Notes................................................................52
(b) Resolutions; Incumbency...................................................................52
(c) Organization Documents; Good Standing.....................................................52
(d) Legal Opinions............................................................................52
(e) Payment of Fees...........................................................................52
(f) Certificate...............................................................................53
(g) Collateral Documents......................................................................53
(h) Regulatory Compliance.....................................................................54
(i) Prior Credit Agreement....................................................................54
(j) Kaiser Acquisition Agreements.............................................................54
(k) Litigation................................................................................55
(l) Financial Covenant Certificate............................................................55
(m) Other Documents...........................................................................55
5.02 Conditions to All Credit Extensions......................................................................55
(a) Notice, Application.......................................................................55
(b) Continuation of Representations and Warranties............................................56
(c) No Existing Default.......................................................................56
ARTICLE VI
REPRESENTATIONS AND WARRANTIES.................................................................................56
6.01 Corporate Existence and Power............................................................................56
6.02 Corporate Authorization; No Contravention................................................................57
6.03 Authorization, Approval, etc.............................................................................57
6.04 Binding Effect...........................................................................................58
6.05 Litigation...............................................................................................58
6.06 No Default...............................................................................................58
6.07 Compliance with Laws and ERISA...........................................................................58
6.08 Use of Proceeds; Margin Regulations......................................................................60
6.09 Title to Property and Collateral; No Liens...............................................................60
6.10 As to Pledged Shares.....................................................................................60
6.11 Taxes ..................................................................................................60
6.12 Financial Condition......................................................................................60
6.13 Environmental Matters....................................................................................61
6.14 Collateral Documents.....................................................................................62
6.15 Regulated Entities.......................................................................................62
6.16 No Burdensome Restrictions...............................................................................62
6.17 Copyrights, Patents, Trademarks and Licenses, etc........................................................62
6.18 Subsidiaries.............................................................................................63
6.19 Insurance................................................................................................63
6.20 Swap Obligations.........................................................................................63
6.21 Full Disclosure..........................................................................................63
6.22 Business Activity........................................................................................63
6.23 Licensing, Etc...........................................................................................63
</TABLE>
-ii-
<TABLE>
<CAPTION>
Section Page
6.24 Kaiser Acquisition Agreements.............................................................................64
6.25 Year 2000 Representation.................................................................................64
ARTICLE VII
<S> <C>
AFFIRMATIVE COVENANTS..........................................................................................65
7.01 Financial Statements.....................................................................................65
7.02 Certificates; Other Information..........................................................................66
7.03 Notices..................................................................................................67
7.04 Preservation of Corporate Existence, Etc.................................................................68
7.05 Maintenance of Property..................................................................................68
7.06 Insurance................................................................................................68
7.07 Payment of Obligations...................................................................................69
7.08 Compliance with Laws.....................................................................................69
7.09 Compliance with ERISA....................................................................................69
7.10 Inspection of Property and Books and Records.............................................................70
7.11 Environmental Laws.......................................................................................70
7.12 Use of Proceeds..........................................................................................70
7.13 Further Assurances.......................................................................................70
7.14 Dividends of Subsidiaries During Default.................................................................71
7.15 Acquisitions.............................................................................................71
ARTICLE VIII
NEGATIVE COVENANTS.............................................................................................72
8.01 Limitation on Liens......................................................................................72
8.02 Disposition of Assets....................................................................................74
8.03 Consolidations and Mergers...............................................................................74
8.04 Loans and Investments....................................................................................75
8.05 Limitation on Indebtedness...............................................................................76
8.06 Transactions with Affiliates.............................................................................76
8.07 Use of Proceeds..........................................................................................77
8.08 Contingent Obligations...................................................................................77
8.09 Lease Obligations........................................................................................77
8.10 Restricted Payments......................................................................................78
8.11 ERISA ..................................................................................................79
8.12 Change in Business.......................................................................................79
8.13 Accounting Changes.......................................................................................79
8.14 Financial Covenants......................................................................................79
8.15 Limitation on Payment Restrictions Affecting
Subsidiaries......................................................................................80
8.16 Pledged Shares...........................................................................................80
8.17 Acquisitions.............................................................................................81
ARTICLE IX
EVENTS OF DEFAULT..............................................................................................81
9.01 Event of Default.........................................................................................81
(a) Non-Payment...............................................................................81
(b) Representation or Warranty................................................................82
(c) Specific Defaults.........................................................................82
(d) Other Defaults............................................................................82
</TABLE>
-iii-
<TABLE>
<CAPTION>
Section Page
<S> <C>
(e) Cross-Default.............................................................................82
(f) Insolvency; Voluntary Proceedings.........................................................82
(g) Involuntary Proceedings...................................................................83
(h) ERISA.....................................................................................83
(i) Monetary Judgments........................................................................83
(j) Non-Monetary Judgments....................................................................83
(k) Change of Control.........................................................................83
(l) Loss of Licenses..........................................................................84
(m) HMO Event.................................................................................84
(n) Prospective Premium Default...............................................................84
(o) Adverse Change............................................................................84
(p) Invalidity of Subordination Provisions....................................................84
9.02 Remedies.................................................................................................84
9.03 Rights Not Exclusive.....................................................................................85
ARTICLE X
THE AGENT......................................................................................................85
10.01 Appointment and Authorization; "Agent"..................................................................85
10.02 Delegation of Duties....................................................................................86
10.03 Liability of Agent......................................................................................86
10.04 Reliance by Agent.......................................................................................87
10.05 Notice of Default.......................................................................................87
10.06 Credit Decision.........................................................................................88
10.07 Indemnification of Agent................................................................................88
10.08 Agent in Individual Capacity............................................................................89
10.09 Successor Agent.........................................................................................89
10.10 Withholding Tax.........................................................................................90
10.11 Syndication Agent.......................................................................................91
ARTICLE XI
MISCELLANEOUS..................................................................................................91
11.01 Amendments and Waivers..................................................................................91
11.02 Notices.................................................................................................92
11.03 No Waiver; Cumulative Remedies..........................................................................93
11.04 Costs and Expenses......................................................................................93
11.05 Company Indemnification.................................................................................94
11.06 Payments Set Aside......................................................................................95
11.07 Successors and Assigns..................................................................................95
11.08 Assignments, Participations, etc........................................................................95
11.09 Set-off.................................................................................................97
11.10 Automatic Debits of Fees................................................................................97
11.11 Notification of Addresses, Lending Offices, Etc.........................................................98
11.12 Counterparts............................................................................................98
11.13 Severability............................................................................................98
11.14 No Third Parties Benefited..............................................................................98
11.15 Governing Law and Jurisdiction..........................................................................98
11.16 Waiver of Jury Trial....................................................................................99
11.17 Entire Agreement.......................................................................................100
</TABLE>
-iv-
SCHEDULES
Schedule 1.01 Specified Charges
Schedule 2.01 Commitments
Schedule 3.03 Existing BofA Letters of Credit
Schedule 5.01(g) Excluded Subsidiaries
Schedule 6.03 Required Approvals
Schedule 6.05 Litigation
Schedule 6.12 Permitted Liabilities
Schedule 6.13 Environmental Matters
Schedule 6.18 Subsidiaries and Minority Interests
Schedule 6.19 Insurance Matters
Schedule 8.01 Permitted Liens
Schedule 8.04 Existing Investments
Schedule 8.05 Permitted Indebtedness
Schedule 8.08 Contingent Obligations
Schedule 8.17 Permitted Acquisitions
Schedule 11.02 Lending Offices; Addresses for Notices
EXHIBITS
Exhibit A Form of Notice of Borrowing
Exhibit B Form of Notice of Conversion/Continuation
Exhibit C Form of Compliance Certificate
Exhibit D Form of Legal Opinion of Company's Counsel
Exhibit E Form of Assignment and Acceptance
Exhibit F Form of Promissory Note
Exhibit G Form of Pledge Agreement
Exhibit H Form of Kaiser Note
Exhibit I Form of Joinder Agreement
-v-
CREDIT AGREEMENT
This CREDIT AGREEMENT is entered into as of October 30,
1998, among SIERRA HEALTH SERVICES, INC., a Nevada corporation
(the "Company"), the several financial institutions from time to
time party to this Agreement (collectively, the "Banks";
individually, a "Bank"), Bank of America National Trust and
Savings Association, as Issuing Bank and as administrative agent
for the Banks and First Union National Bank, as syndication
agent.
WHEREAS, the Banks have agreed to make available to the
Company a revolving credit facility with letter of credit
subfacility upon the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained herein, the parties agree as
follows:
ARTICLE I
DEFINITIONS
1.01 Certain Defined Terms. The following terms have the
following meanings:
"Acquisition" means any transaction or series of related
transactions for the purpose of or resulting, directly or
indirectly, in (a)the acquisition of all or substantially all of
the assets of a Person, or of any business or division of a
Person, (b)the acquisition of in excess of 50% of the capital
stock, partnership interests, membership interests or equity of
any Person, or otherwise causing any Person to become a
Subsidiary, or (c)a merger or consolidation or any other
combination with another Person (other than a Person that is a
Subsidiary) provided that the Company or the Subsidiary is the
surviving entity.
"Actual Knowledge" shall mean, as to any matter with respect
to any Person, the actual knowledge of such matter by a
Responsible Officer of such Person, it being understood in any
event that "actual knowledge" shall be deemed to exist upon
receipt of a notice of such matter by a Responsible Officer.
"Affiliate" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is
under common control with, such Person. A Person shall be deemed
to control another Person if the controlling Person possesses,
directly or indirectly, the power to direct or cause the
direction of the management and policies of the other Person,
1
whether through the ownership of voting securities, membership
interests, by contract, or otherwise.
"Agent" means BofA in its capacity as agent for the Banks
hereunder, and any successor agent arising under Section 10.09.
"Agent-Related Persons" means BofA and any successor agent
arising under Section 10.09 and any successor letter of credit
issuing bank hereunder, together with their respective Affiliates
(including, in the case of BofA, the Arranger), and the officers,
directors, employees, agents and attorneys-in-fact of such
Persons and Affiliates.
"Agent's Payment Office" means the address for payments set
forth on Schedule 11.02 or such other address as the Agent may
from time to time specify.
"Agreement" means this Credit Agreement.
"Applicable Regulatory Requirements" refers to any requisite
filing or approval requirements of any state insurance regulatory
authorities having jurisdiction over any of the Subsidiaries that
must be satisfied or obtained by the Agent or the Lender Parties
as a condition to exercising or transferring direct or indirect
voting or other control over such Subsidiaries or transferring or
otherwise disposing of the Pledged Shares, Pledged Property or
Collateral with respect to such Subsidiaries.
"Applicable Commitment Fee Rate" means a rate per annum
determined by reference to the Leverage Ratio as follows:
<TABLE>
<CAPTION>
Applicable
Level Leverage Ratio Commitment Fee Rate
<S> <C> <C> <C>
Level 1 Less than or equal to 1.50 0.300%
Level 2 Greater than 1.50 but less than or equal to 2.00 0.350%
Level 3 Greater than 2.00 but less than or equal to 2.50 0.350%
Level 4 Greater than 2.50 but less than or equal to 3.00 0.450%
Level 5 Greater than 3.00 but less than or equal to 3.50 0.450%
Level 6 Greater than 3.50 0.500%
</TABLE>
From the Closing Date until the delivery of the Compliance
Certificate for the fiscal quarter ending June 30, 1999, the
Applicable Commitment Fee Rate shall be Level 5. Thereafter, the
Applicable Commitment Fee Rate shall be effective from and
including the date on which the Agent receives a Compliance
Certificate to but excluding the date on which the Agent receives
the next Compliance Certificate; provided, however, that if the
2
Agent does not receive a Compliance Certificate by the date
required by subsection 7.02(b), the Applicable Commitment Fee
Rate shall, effective as of such date, be Level 6 to but
excluding the date the Agent receives such Compliance
Certificate.
"Applicable Letter of Credit Fee Rate" means a rate per
annum equal to the Applicable Margin for LIBOR Rate Loans.
"Applicable Margin" means in the case of Base Rate Loans and
LIBOR Rate Loans a rate per annum determined by reference to the
Leverage Ratio as follows:
<TABLE>
<CAPTION>
Applicable Applicable
LIBOR Base
Level Leverage Ratio Rate Margin Rate Margin
<S> <C> <C> <C> <C>
Level 1 Less than or equal to 1.50 1.000% 0.000%
Level 2 Greater than 1.50 but less
than or equal to 2.00 1.250% 0.250%
Level 3 Greater than 2.00 but less
than or equal to 2.50 1.625% 0.625%
Level 4 Greater than 2.50 but less
than or equal to 3.00 1.875% 0.875%
Level 5 Greater than 3.00 but less
than or equal to 3.50 2.125% 1.125%
Level 6 Greater than 3.50 2.375% 1.375%
</TABLE>
From the Closing Date until the delivery of the Compliance
Certificate for the fiscal quarter ending June 30, 1999, the
Applicable Margin shall be Level 5. Thereafter, the Applicable
Margin shall be effective from and including the date on which
the Agent receives a Compliance Certificate to but excluding the
date on which the Agent receives the next Compliance Certificate;
provided, however, that if the Agent does not receive a
Compliance Certificate by the date required by subsection
7.02(b), the Applicable Margin shall, effective as of such date,
be Level 6 to but excluding the date the Agent receives such
Compliance Certificate.
"Assignee" has the meaning specified in subsection 11.08(a).
"Attorney Costs" means and includes all reasonable fees and
disbursements of any law firm or other external counsel, the
allocated reasonable cost of internal legal services and all
disbursements of internal counsel.
"Bank" has the meaning specified in the introductory clause
hereto. References to the "Banks" shall include BofA, and shall
3
include any Bank acting in its capacity as Issuing Bank; for
purposes of clarification only, to the extent that a Bank may
have any rights or obligations in addition to those of the Banks
due to its status as Issuing Bank, its status as such will be
specifically referenced.
"Bankruptcy Code" means the Federal Bankruptcy Reform Act of
1978 (11 U.S.C. Section 101, et seq.), as amended.
"Base Rate" means, for any day, the higher of: (a) 0.50%
per annum above the latest Federal Funds Rate; and (b)the rate
of interest in effect for such day as publicly announced from
time to time by BofA in San Francisco, California, as its
"reference rate." (The "reference rate" is a rate set by BofA
based upon various factors including BofA's costs and desired
return, general economic conditions and other factors, and is
used as a reference point for pricing some loans, which may be
priced at, above, or below such announced rate.) Any change in
the reference rate announced by BofA shall take effect at the
opening of business on the day specified in the public
announcement of such change.
"Base Rate Loan" means a Revolving Loan, or an L/C Advance,
that bears interest based on the Base Rate.
"BofA" means Bank of America National Trust and Savings
Association, a national banking association.
"Borrowing" means a borrowing hereunder consisting of
Revolving Loans of the same Type made to the Company on the same
day by the Banks under Article II, and, other than in the case of
Base Rate Loans, having the same Interest Period.
Borrowing Date means any date on which a Borrowing occurs
under Section 2.03.
"Business Day" means any day other than a Saturday, Sunday
or other day on which commercial banks in San Francisco are
authorized or required by law to close and, if the applicable
Business Day relates to any LIBOR Rate Loan, means such a day on
which dealings are carried on in the applicable offshore dollar
interbank market.
"Capital Adequacy Regulation" means any guideline, request
or directive of any central bank or other Governmental Authority,
or any other law, rule or regulation, whether or not having the
force of law, in each case, regarding capital adequacy of any
bank or of any corporation controlling a bank.
4
"Capital Expenditures" means, for any period, the aggregate
amount of all expenditures of the Company and its Subsidiaries
for fixed or capital assets made during such period which, in
accordance with GAAP, would be classified as capital
expenditures.
"Capital Lease" means any lease of property which in
accordance with GAAP should be capitalized on the lessee's
balance sheet or disclosed in a footnote thereto as a capitalized
lease.
"Cash Collateralize" means to pledge and deposit with or
deliver to the Agent, for the benefit of the Agent, the Issuing
Bank and the Banks, as additional collateral for the L/C
Obligations, cash or deposit account balances pursuant to
documentation in form and substance satisfactory to the Agent and
the Issuing Bank (which documents are hereby consented to by the
Banks). Derivatives of such term shall have corresponding
meaning. The Company shall grant to the Agent, for the benefit
of the Agent, the Issuing Bank and the Banks, a security interest
in all such cash and deposit account balances. Cash collateral
shall be maintained in blocked deposit accounts at BofA.
"Change of Control" shall be deemed to have occurred if any
Person or group (as defined in Section 13(d)(3) of the Exchange
Act) acquires (beneficially or of record) 25% or more of the
voting or economic interests in the fully diluted capital stock
of the Company.
"CII" means CII Financial, Inc., a wholly-owned Subsidiary
of the Company.
"Closing Date" means the date on or before November 30, 1998
on which all conditions precedent set forth in Section 5.01 are
satisfied or waived by all Banks (or, in the case of subsection
5.01(e), waived by the Person entitled to receive such payment).
"Code" means the Internal Revenue Code of 1986, and
regulations promulgated thereunder.
"Collateral" means all property and interests in property
and proceeds thereof now owned or hereafter acquired by the
Company and its Subsidiaries in or upon which a Lien now or
hereafter exists in favor of the Banks, or the Agent on behalf of
the Banks, whether under this Agreement or under any other
documents executed by any such Person and delivered to the Agent
or the Banks.
5
"Collateral Documents" means, collectively, (i)the Pledge
Agreements and all other security agreements, mortgages, deeds of
trust, patent and trademark assignments, lease assignments,
guarantees and other similar agreements between the Company or
any Subsidiary and the Banks or the Agent for the benefit of the
Banks now or hereafter delivered to the Banks or the Agent
pursuant to or in connection with the transactions contemplated
hereby, and all financing statements (or comparable documents now
or hereafter filed in accordance with the Uniform Commercial Code
or comparable law) against the Company or any Subsidiary as
debtor in favor of the Banks or the Agent for the benefit of the
Banks as secured party, and (ii) any amendments, supplements,
modifications, renewals, replacements, consolidations,
substitutions and extensions of any of the foregoing.
"Commitment", as to each Bank, has the meaning specified in
Section 2.01.
"Commitment Increase Date" has the meaning specified in
Section 2.08.
"Company" has the meaning specified in the introductory
clause hereto.
"Compliance Certificate" means a certificate substantially
in the form of Exhibit C.
"Consolidated Adjusted EBITDA" means, for any period, the
Sierra Adjusted EBITDA plus the Kaiser-Texas Modified EBITDA.
Consolidated Adjusted EBITDA shall be calculated as of the last
day of the most recently ended fiscal quarter of the Company for
the period of four consecutive full fiscal quarters then ended.
"Consolidated Funded Debt" means, as of any date, when
used with reference to any Person, without duplication,
(i) Indebtedness of such Person which by its terms matures in, or
at such Person's option can be extended for, one year or more
from the date of the creation or incurrence thereof (including
current portions of such long-term Indebtedness), including all
hedging agreements and letters of credit entered into in
connection with such Indebtedness, (ii) such Person's Capital
Lease obligations classified as long-term liabilities under GAAP,
(iii) Guaranty Obligations of such Person of Indebtedness of
other Persons of the character referred to in clauses (i) and
(ii) above and (iv) the amount by which CII's reserve liabilities
exceed the sum of CII's cash and marketable securities.
"Consolidated Net Worth" of any Person means the amount, if
any, by which Total Assets exceed Total Liabilities.
6
"Consolidated Tangible Assets" means, at any time, (a) the
Total Assets of the Company and its Subsidiaries, minus (b) the
aggregate net book value at such time of all assets of the
Company and its Subsidiaries that should be treated as intangible
assets in accordance with GAAP, (including, without limitation,
goodwill, patents, trade names, trade marks, copyrights,
franchises, experimental expense, organization expense,
unamortized debt discount and expense, deferred assets (other
than prepaid insurance, prepaid taxes and deferred tax assets)
treasury stock and the excess of cost of shares acquired over
book value of related assets).
"Contingent Obligation" means, as to any Person, any direct
or indirect liability of that Person, with or without recourse,
(a) with respect to any Indebtedness, lease, dividend, letter of
credit or other obligation (the "primary obligations") of another
Person (the "primary obligor"), including any obligation of that
Person (i) to purchase, repurchase or otherwise acquire such
primary obligations or any security therefor, (ii) to advance or
provide funds for the payment or discharge of any such primary
obligation, or to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial
condition of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the
owner of any such primary obligation of the ability of the
primary obligor to make payment of such primary obligation, or
(iv) otherwise to assure or hold harmless the holder of any such
primary obligation against loss in respect thereof (each, a
"Guaranty Obligation"); (b) with respect to any Surety Instrument
issued for the account of that Person or as to which that Person
is otherwise liable for reimbursement of drawings or payments;
(c) to purchase any materials, supplies or other property from,
or to obtain the services of, another Person if the relevant
contract or other related document or obligation requires that
payment for such materials, supplies or other property, or for
such services, shall be made regardless of whether delivery of
such materials, supplies or other property is ever made or
tendered, or such services are ever performed or tendered, or
(d) in respect of any Swap Contract. The amount of any
Contingent Obligation shall, in the case of Guaranty Obligations,
be deemed equal to the stated or determinable amount of the
primary obligation in respect of which such Guaranty Obligation
is made or, if not stated or if indeterminable, the maximum
reasonably anticipated liability in respect thereof, and in the
case of other Contingent Obligations other than in respect of
Swap Contracts, shall be equal to the maximum reasonably
anticipated liability in respect thereof and, in the case of
7
Contingent Obligations in respect of Swap Contracts, shall be
equal to the Swap Termination Value.
"Contractual Obligation" means, as to any Person, any
provision of any security issued by such Person or of any
agreement, undertaking, contract, indenture, mortgage, deed of
trust or other instrument, document or agreement to which such
Person is a party or by which it or any of its property is bound.
"Conversion/Continuation Date" means any date on which,
under Section 2.04, the Company (a) converts Loans of one Type to
another Type, or (b) continues as Loans of the same Type, but
with a new Interest Period, Loans having Interest Periods
expiring on such date.
"Convertible Debt" means the Indebtedness in respect of
those certain 71/2% Convertible Subordinated Debentures Due 2001 of
CII, in an outstanding principal amount of $51,456,000 as of
September 30, 1998.
"Credit Extension" means and includes (a) the making of any
Revolving Loans hereunder, and (b) the Issuance of any Letters of
Credit hereunder.
"Default" means any event or circumstance which, with the
giving of notice, the lapse of time, or both, would (if not cured
or otherwise remedied during such time) constitute an Event of
Default.
"Dollars", "dollars" and "$" each mean lawful money of the
United States.
"Effective Amount" means (i) with respect to any Revolving
Loans on any date, the aggregate outstanding principal amount
thereof after giving effect to any Borrowings and prepayments or
repayments of Revolving Loans occurring on such date; and
(ii) with respect to any outstanding L/C Obligations on any date,
the amount of such L/C Obligations on such date after giving
effect to any Issuances of Letters of Credit occurring on such
date and any other changes in the aggregate amount of the L/C
Obligations as of such date, including as a result of any
reimbursements of outstanding unpaid drawings under any Letters
of Credit or any reductions in the maximum amount available for
drawing under Letters of Credit taking effect on such date.
"Eligible Assignee" means (a) a commercial bank organized
under the laws of the United States, or any state thereof, and
having a combined capital and surplus of at least $100,000,000;
8
b) a commercial bank organized under the laws of any other
country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political
subdivision of any such country, and having a combined capital
and surplus of at least $100,000,000, provided that such bank is
acting through a branch or agency located in the United States;
(c) a Person that is primarily engaged in the business of
commercial banking and that is (i) a Subsidiary of a Bank, (ii) a
Subsidiary of a Person of which a Bank is a Subsidiary, or
(iii) a Person of which a Bank is a Subsidiary; or (d) any
insurance company, mutual fund or other financial institution or
fund which has been approved in writing by the Company and the
Agent as an Eligible Assignee for purposes of this Agreement,
provided that in each such case such approval shall not be
unreasonably withheld and shall not be required from the Company
during the continuance of any Event of Default.
"Environmental Claims" means all claims, however asserted,
by any Governmental Authority or other Person alleging potential
liability or responsibility for violation of any Environmental
Law, or for release or injury to the environment or threat to
public health, personal injury (including sickness, disease or
death), property damage, natural resources damage, or otherwise
alleging liability or responsibility for damages (punitive or
otherwise), cleanup, removal, remedial or response costs,
restitution, civil or criminal penalties, injunctive relief, or
other type of relief, resulting from or based upon the presence,
placement, discharge, emission or release (including intentional
and unintentional, negligent and non-negligent, sudden or non-
sudden, accidental or non-accidental, placement, spills, leaks,
discharges, emissions or releases) of any Hazardous Material at,
in, or from Property, whether or not owned by the Company.
"Environmental Laws" means all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and
codes, together with all administrative orders, directed duties,
requests, licenses, authorizations and permits of, and agreements
with, any Governmental Authorities, in each case relating to
environmental, health, safety and land use matters; including,
without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), the Clean Air
Act, the Federal Water Pollution Control Act of 1972, the Solid
Waste Disposal Act, the Federal Resource Conservation and
Recovery Act, the Toxic Substances Control Act and the Emergency
Planning and Community Right-to-Know Act.
"ERISA" means the Employee Retirement Income Security Act of
1974, and regulations promulgated thereunder.
9
"ERISA Affiliate" means any trade or business (whether or
not incorporated) under common control with the Company within
the meaning of Section 414(b) or (c) of the Code (and Sections
414(m) and (o) of the Code for purposes of provisions relating to
Section 412 of the Code).
"ERISA Event" means (a) a Reportable Event with respect to a
Pension Plan; (b) a withdrawal by the Company or any ERISA
Affiliate from a Pension Plan subject to Section 4063 of ERISA
during a plan year in which it was a substantial employer (as
defined in Section 4001(a)(2) of ERISA) or a cessation of
operations which is treated as such a withdrawal under Section
4062(e) of ERISA; (c) a complete or partial withdrawal by the
Company or any ERISA Affiliate from a Multiemployer Plan or
notification that a Multiemployer Plan is in reorganization;
(d) the filing of a notice of intent to terminate, the treatment
of a Plan amendment as a termination under Section 4041 or 4041A
of ERISA, or the commencement of proceedings by the PBGC to
terminate a Pension Plan or Multiemployer Plan; (e) an event or
condition which might reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or
the appointment of a trustee to administer, any Pension Plan or
Multiemployer Plan; or (f) the imposition of any liability under
Title IV of ERISA, other than PBGC premiums due but not
delinquent under Section 4007 of ERISA, upon the Company or any
ERISA Affiliate.
"Eurodollar Reserve Percentage" has the meaning specified in
the definition of "LIBOR Rate".
"Event of Default means any of the events or circumstances
specified in Section 9.01.
"Exchange Act" means the Securities Exchange Act of 1934,
and regulations promulgated thereunder.
"Excluded Subsidiary" means the 2314 Partnership, any
Subsidiary of the Company that has less than $500,000 of assets
or the pledge of whose stock (i) is prohibited pursuant to
applicable regulations of a Governmental Authority or (ii) would
otherwise subject the Company or such Subsidiary to burdensome
regulatory requirements (as reasonably determined by the Company
and the Agent).
"Existing BofA Letters of Credit" means the letters of
credit described in Schedule 3.03.
"Federal Funds Rate" means, for any day, the rate set forth
in the weekly statistical release designated as H.15(519), or any
10
successor publication, published by the Federal Reserve Bank of
New York (including any such successor, "H.15(519)") on the
preceding Business Day opposite the caption "Federal Funds
(Effective)"; or, if for any relevant day such rate is not so
published on any such preceding Business Day, the rate for such
day will be the arithmetic mean as determined by the Agent of the
rates for the last transaction in overnight Federal funds
arranged prior to 9:00 a.m. (New York City time) on that day by
each of three leading brokers of Federal funds transactions in
New York City selected by the Agent.
"Fee Letter" has the meaning specified in subsection
2.10(a).
"Fixed Charges" means, for any period of four consecutive
fiscal quarters and without duplication, the sum of (i) cash
Interest Expense and fees paid on, all Indebtedness during such
period plus (ii) the aggregate principal amount of all current
maturities of Consolidated Funded Debt (including the principal
portion of rentals under Capital Leases) scheduled to be paid by
the Company and its Subsidiaries during such period (excluding
prepayments of principal not required under the loan documents
relating to such Indebtedness and excluding the payment of the
Convertible Debt upon the maturity thereof), all as determined
for the Company and its Subsidiaries on a consolidated basis in
accordance with GAAP.
"Fixed Charges Coverage Ratio" means, at any date, the ratio
of (i) Consolidated Adjusted EBITDA for the four consecutive
fiscal quarters ending on or prior to such date minus cash
Capital Expenditures and cash income taxes paid during such
period to (ii) Fixed Charges for such period.
"FRB" means the Board of Governors of the Federal Reserve
System, and any Governmental Authority succeeding to any of its
principal functions.
"Further Taxes" means any and all present or future taxes,
levies, assessments, imposts, duties, deductions, fees,
withholdings or similar charges (including, without limitation,
net income taxes and franchise taxes), and all liabilities with
respect thereto, imposed by any jurisdiction on account of
amounts payable or paid pursuant to Section 4.01.
"GAAP" means generally accepted accounting principles set
forth from time to time in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of
Certified Public Accountants and statements and pronouncements of
11
the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the
U.S. accounting profession), which are applicable to the
circumstances as of the Closing Date.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, any central bank
(or similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Guaranty Obligation" has the meaning specified in the
definition of "Contingent Obligation."
"Hazardous Materials" means all those substances that are
regulated by, or which may form the basis of liability under, any
Environmental Law, including any substance identified under any
Environmental Law as a pollutant, contaminant, hazardous waste,
hazardous constituent, special waste, hazardous substance,
hazardous material, or toxic substance, or petroleum or petroleum
derived substance or waste.
"Health Care Business" shall mean (a) the provision,
administration or arrangement of health care services, related
ancillary products or both, directly or through an HMO, a
provider, a regulated health care service contractor or any other
business which in the ordinary course provides, administers or
arranges for such services, products or both, (b) the provision,
administration or arrangement of health, life and related
insurance, (c) the provision or management of health care
services (including medical management claims services and
management through medical information services), (d) the
provision, administration or arrangement of health care through a
hospital, outpatient, urgent care, clinical, home health or
hospice environment, (e) the provision, administration or
arrangement of workers' compensation services both fully insured
and administrative in nature, (f) any business activities
directly related and incidental to any of the foregoing, and
(g) any other business activity which is related, ancillary or
incidental to any of the foregoing and in which the Company is
engaged on the Closing Date.
"HMO" shall mean any Person which operates as a health
maintenance organization.
12
"HMO Event" shall mean failure by the Company or any of its
HMO Subsidiaries to comply in any material respect with any of
the terms and provisions of any applicable HMO Regulation
pertaining to the fiscal soundness, solvency or financial
condition of the Company or any of its HMO Subsidiaries, or the
assertion in writing, after the Closing Date, by an HMO Regulator
that it intends to take administrative action against the Company
or any of its HMO Subsidiaries to revoke or modify any
Governmental Approval of, or to enforce the fiscal soundness,
solvency or financial provisions or requirements of such HMO
Regulations against, the Company or any of its HMO Subsidiaries,
if such action, modification or enforcement is reasonably likely
to have a Material Adverse Effect.
"HMO Regulations" shall mean all Requirements of Law
applicable to any HMO Subsidiary under federal or state law and
any regulations, orders and directives promulgated or issued
pursuant to the foregoing.
"HMO Regulator" means any Person charged with the
administration, oversight or enforcement of an HMO Regulation,
whether primarily, secondarily, or jointly.
"HMO Subsidiary" shall mean any current or future Subsidiary
of the Company that is either an HMO or a regulated health care
service contractor.
"HMO Texas" means HMO Texas, L.C., a Texas limited liability
company which is an indirect Subsidiary of the Company.
"Honor Date" has the meaning specified in subsection
3.03(b).
"Indebtedness" of any Person means, without duplication,
(a) all indebtedness for borrowed money; (b) all obligations
issued, undertaken or assumed as the deferred purchase price of
property or services (other than trade payables entered into in
the ordinary course of business on ordinary terms); (c) all non-
contingent reimbursement or payment obligations with respect to
Surety Instruments; (d) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations
so evidenced incurred in connection with the acquisition of
property, assets or businesses; (e) all indebtedness created or
arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect
to property acquired by the Person (even though the rights and
remedies of the seller or bank under such agreement in the event
of default are limited to repossession or sale of such property);
13
f) all obligations with respect to Capital Leases; (g) all
Indebtedness referred to in clauses (a) through (f) above secured
by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien upon
or in property (including accounts and contracts rights) owned by
such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness; and (h) all Guaranty
Obligations in respect of Indebtedness or obligations of others
of the kinds referred to in clauses (a) through (g) above. For
all purposes of this Agreement, the Indebtedness of any Person
shall include all recourse Indebtedness of any partnership or
joint venture in which such Person is a general partner or a
joint venturer or a member. For purposes of calculating the
amount of any Indebtedness described in clauses (e) and (g)
above, to the extent that the rights and remedies of the obligee
of such Indebtedness are limited to certain property and are
nonrecourse to the Person owning or pledging such property, the
amount of such Indebtedness shall not exceed the value of such
property.
"Indemnified Liabilities" has the meaning specified in
Section 11.05.
"Indemnified Person" has the meaning specified in Section
11.05.
"Independent Auditor" has the meaning specified in
subsection 7.01(a).
"Insolvency Proceeding" means, with respect to any Person,
(a) any case, action or proceeding with respect to such Person
before any court or other Governmental Authority relating to
bankruptcy, reorganization, insolvency, liquidation,
receivership, dissolution, winding-up or relief of debtors, or
(b) any general assignment for the benefit of creditors,
composition, marshalling of assets for creditors, or other,
similar arrangement in respect of its creditors generally or any
substantial portion of its creditors; undertaken under U.S.
Federal, state or foreign law, including the Bankruptcy Code.
"Interest Expense" of the Company and its Subsidiaries for
any period means the aggregate amount of interest paid, accrued
or scheduled to be paid or accrued in respect of any Indebtedness
(including the interest portion of rentals under Capital Leases)
and all but the principal component of payments in respect of
conditional sales, equipment trust or other title retention
agreements or under a Capital Lease paid, accrued or scheduled to
be paid or accrued by the Company and its Subsidiaries during
such period, in each case determined in accordance with GAAP and
14
excluding periodic maintenance, insurance, taxes and similar
charges not properly characterized as interest expense under
GAAP.
"Interest Payment Date" means, as to any LIBOR Rate Loan,
the last day of each Interest Period applicable to such Loan and,
as to any Base Rate Loan, the last Business Day of each calendar
quarter and each date such Loan is converted into another Type of
Loan, provided, however, that if any Interest Period for a LIBOR
Rate Loan exceeds three months, the date that falls three months
after the beginning of such Interest Period and after each
Interest Payment Date thereafter is also an Interest Payment
Date.
"Interest Period" means, as to any LIBOR Rate Loan, the
period commencing on the Borrowing Date of such Loan or on the
Conversion/Continuation Date on which the Loan is converted into
or continued as a LIBOR Rate Loan, and ending on the date one,
two, three or six months thereafter as selected by the Company in
its Notice of Borrowing or Notice of Conversion/Continuation;
provided that:
(i) if any Interest Period would otherwise end on a
day that is not a Business Day, that Interest Period shall
be extended to the following Business Day unless the result
of such extension would be to carry such Interest Period
into another calendar month, in which event such Interest
Period shall end on the preceding Business Day;
(ii) any Interest Period pertaining to a LIBOR Rate
Loan that begins on the last Business Day of a calendar
month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such
Interest Period) shall end on the last Business Day of the
calendar month at the end of such Interest Period; and
(iii) no Interest Period for any Loan shall extend
beyond the Revolving Termination Date.
"Investment" has the meaning specified in Section 8.04.
"IRS" means the Internal Revenue Service, and any
Governmental Authority succeeding to any of its principal
functions under the Code.
"Issuance Date" has the meaning specified in subsection
3.01(a).
15
"Issue" means, with respect to any Letter of Credit, to
issue or to extend the expiry of, or to renew or increase the
amount of, such Letter of Credit; and the terms "Issued,"
"Issuing" and "Issuance" have corresponding meanings.
"Issuing Bank" means BofA in its capacity as issuer of one
or more Letters of Credit hereunder, together with any
replacement letter of credit issuer arising under subsection
10.01(b) or Section 10.09.
"Joinder Agreement" means each of the Joinder Agreements
which may be executed by additional Banks pursuant to Section
2.08, substantially in the form of Exhibit I.
"Kaiser Acquisition Agreements" means those certain Asset
Sale and Purchase Agreements dated June 5, 1998, one of which is
between PMAT and HMO Texas and the other of which is between
Kaiser-Texas and HMO Texas.
"Kaiser Note" means that certain promissory note in the
principal amount of $35,200,000 and otherwise substantially in
the form of Exhibit H, from HMO Texas in favor of Kaiser Texas.
"Kaiser Texas" means Kaiser Foundation Health Plan of Texas.
"Kaiser-Texas Acquisition" means the transaction pursuant to
which the Company will acquire certain assets of Kaiser Texas and
PMAT.
"Kaiser-Texas Modified EBITDA" means, for the four quarter
period ending on December 31, 1998, a loss of [$5,641,000]; for
the four quarter period ending on March 31, 1999, the product of
(a) 4 times (b) the net income of HMO Texas and PMAT for the
fiscal quarter ending on March 31, 1999 plus to the extent
deducted therefrom, total book taxes, Interest Expense and
depreciation and amortization expenses minus any non-cash
extraordinary gains; for the four quarter period ending on
June 30, 1999, the product of (a) 2 times (b) the net income of
HMO Texas and PMAT for the two fiscal quarters ending on June 30,
1999 plus to the extent deducted therefrom, total book taxes,
Interest Expense and depreciation and amortization expenses minus
any non-cash extraordinary gains; for the four quarter period
ending on September 30, 1999, the product of (a) 4/3 times (b)
the net income of Texas and PMAT for the three fiscal quarters
ending on September 30, 1999 plus to the extent deducted
therefrom, total book taxes, Interest Expense and depreciation
and amortization expenses minus any non-cash extraordinary gains;
and for all periods ending after September 30, 1999, zero.
16
"L/C Advance" means each Bank's participation in any L/C
Borrowing in accordance with its Pro Rata Share.
"L/C Amendment Application" means an application form for
amendment of outstanding standby letters of credit as shall at
any time be in use at the Issuing Bank, as the Issuing Bank shall
request.
"L/C Application" means an application form for issuances of
standby letters of credit as shall at any time be in use at the
Issuing Bank, as the Issuing Bank shall request.
"L/C Borrowing" means an extension of credit resulting from
a drawing under any Letter of Credit which shall not have been
reimbursed on the date when made nor converted into a Borrowing
of Revolving Loans under subsection 3.03(c).
"L/C Commitment" means the commitment of the Issuing Bank to
Issue, and the commitment of the Banks severally to participate
in, Letters of Credit from time to time Issued or outstanding
under Article III, in an aggregate amount not to exceed on any
date the amount of $50,000,000, as the same shall be reduced as a
result of a reduction in the L/C Commitment pursuant to Section
2.05; provided that the L/C Commitment is a part of the combined
Commitments, rather than a separate, independent commitment.
"L/C Obligations" means at any time the sum of (a) the
aggregate undrawn amount of all Letters of Credit then
outstanding, plus (b) the amount of all unreimbursed drawings
under all Letters of Credit, including all outstanding L/C
Borrowings.
"L/C-Related Documents" means the Letters of Credit, the L/C
Applications, the L/C Amendment Applications and any other
document relating to any Letter of Credit, including any of the
Issuing Bank's standard form documents for letter of credit
issuances.
"Lead Arranger" means NationsBanc Montgomery Securities LLC,
a Delaware limited liability company.
"Lender Party" has the meaning specified in the Pledge
Agreements.
"Lending Office" means, as to any Bank, the office or
offices of such Bank specified as its "Lending Office" or
"Domestic Lending Office" or "Offshore Lending Office", as the
case may be, on Schedule 11.02, or such other office or offices
39246619.6 11699 1000P 96246459
17
as such Bank may from time to time notify the Company and the
Agent.
"Letters of Credit" means any standby letters of credit
Issued by the Issuing Bank pursuant to Article III.
"Leverage Ratio" of any Person means the ratio of
Consolidated Funded Debt to Consolidated Adjusted EBITDA.
"LIBOR Rate" means, for any Interest Period, with respect to
LIBOR Rate Loans comprising part of the same Borrowing, the rate
of interest per annum (rounded upward to the next 1/100th of 1%)
determined by the Agent as follows:
LIBOR Rate = LIBOR
1.00 - Eurodollar Reserve Percentage
Where,
"Eurodollar Reserve Percentage" means for any day for
any Interest Period the maximum reserve percentage
(expressed as a decimal, rounded upward to the next 1/100th
of 1%) in effect on such day (whether or not applicable to
any Bank) under regulations issued from time to time by the
FRB for determining the maximum reserve requirement
(including any emergency, supplemental or other marginal
reserve requirement) with respect to Eurocurrency funding
(currently referred to as "Eurocurrency liabilities"); and
"LIBOR" means the rate of interest per annum determined
by the Agent to be the arithmetic mean (rounded upward to
the next 1/16th of 1%) of the rates of interest per annum
notified to the Agent by BofA as the rate of interest at
which dollar deposits in the approximate amount of the
amount of the Loan to be made or continued as, or converted
into, a LIBOR Rate Loan by BofA and having a maturity
comparable to such Interest Period would be offered to major
banks in the London interbank market at their request at
approximately 11:00 a.m. (London time) two Business Days
prior to the commencement of such Interest Period.
The LIBOR Rate shall be adjusted automatically as to
all LIBOR Rate Loans then outstanding as of the effective
date of any change in the Eurodollar Reserve Percentage.
"LIBOR Rate Loan" means a Loan that bears interest based on
the LIBOR Rate.
18
"Lien" means any security interest, mortgage, deed of trust,
pledge, hypothecation, assignment, charge or deposit arrangement,
encumbrance, lien (statutory or other) option, pre-emptive right
or preferential arrangement of any kind or nature whatsoever
having substantially the same effect as any of the foregoing in
respect of any property (including those created by, arising
under or evidenced by any conditional sale or other title
retention agreement, the interest of a lessor under a Capital
Lease, any financing lease having substantially the same economic
effect as any of the foregoing, or the filing of any financing
statement naming the owner of the asset to which such lien
relates as debtor, under the Uniform Commercial Code or any
comparable law), any contingent or other agreement to provide any
of the foregoing (but not including the interest of a lessor
under an operating lease), and including, in the case of stock,
stockholder agreements, voting trust agreements and similar
arrangements.
"Loan" means an extension of credit by a Bank to the Company
under Article II or Article III in the form of a Revolving Loan
or L/C Advance.
"Loan Documents" means this Agreement, any Notes, the
Collateral Documents, the Fee Letter, the L/C-Related Documents,
and all other letters and documents delivered to the Agent,
Syndication Agent, Lead Arranger or any Bank in connection
herewith.
"Majority Banks" means at any time Banks then holding in
excess of 50% of the then aggregate unpaid principal amount of
the Loans, or, if no such principal amount is then outstanding,
Banks then having in excess of 50% of the Commitments.
"Margin Stock" means "margin stock" as such term is defined
in Regulation T, U or X of the FRB.
"Material Adverse Effect" means (a) a material adverse
change in, or a material adverse effect upon, the operations,
business, properties or condition (financial or otherwise) of the
Company or the Company and its Subsidiaries taken as a whole;
(b) a material impairment of the ability of the Company to
perform under any Loan Document and to avoid any Event of
Default; or (c) a material adverse effect upon (i) the legality,
validity, binding effect or enforceability against the Company of
any Loan Document, or (ii) the perfection or priority of any Lien
granted under any of the Collateral Documents.
19
"Multiemployer Plan" means a "multiemployer plan", within
the meaning of Section 4001(a)(3) of ERISA, to which the Company
or any ERISA Affiliate makes, is making, or is obligated to make
contributions or, during the preceding three calendar years, has
made, or been obligated to make, contributions.
"Net Cash Proceeds" shall mean cash payments received from
any sale, lease, transfer or other disposition of equity
securities of a Subsidiary of the Company or property or other
assets of the Company or a Subsidiary thereof (including any cash
payments received by way of deferred payment pursuant to a note
or installment receivable or otherwise, but only as and when
received), in each case net of (A) all accounting, appraisal,
legal, title and recording tax expenses, (B) the amount of any
Indebtedness (other than Indebtedness hereunder) secured by the
property or assets being sold and/or required to be repaid by the
Company or Subsidiaries of the Company on the occasion of such
sale, (C) the amount of accrued employee benefits required to be
paid on the occasion of such, (D) a reserve for amounts, if any,
subject to recapture by Medicare as a consequence of such sale,
(E) commissions and other reasonably estimated income taxes
payable with respect to the fiscal year during which such sale
occurs, as a consequence of such sale, lease, transfer or other
disposition or as a consequence of any repatriation of such cash
payments and (F) all distributions and other payments made to
holders of minority interests in Subsidiaries as a result of such
sale, lease, transfer or other disposition.
"Note" means a promissory note executed by the Company in
favor of a Bank pursuant to subsection 2.02(b), in substantially
the form of Exhibit F.
"Notice of Borrowing" means a notice in substantially the
form of Exhibit A.
"Notice of Conversion/Continuation" means a notice in
substantially the form of Exhibit B.
"Obligations" means all advances, debts, liabilities,
obligations, covenants and duties arising under any Loan Document
owing by the Company to any Bank, the Agent, or any Indemnified
Person, whether direct or indirect (including those acquired by
assignment), absolute or contingent, due or to become due, now
existing or hereafter arising and any obligations owing by the
Company to any Bank under any Swap Contracts permitted under the
terms of this Agreement.
"Organization Documents" means, for any corporation, the
certificate or articles of incorporation, the bylaws, any
certificate of determination or instrument relating to the rights
20
of preferred shareholders of such corporation, any shareholder
rights agreement, and all applicable resolutions of the board of
directors (or any committee thereof) of such corporation.
"Other Taxes" means any present or future stamp, court or
documentary taxes or any other excise or property taxes, charges
or similar levies which arise from any payment made hereunder or
from the execution, delivery, performance, enforcement or
registration of, or otherwise with respect to, this Agreement or
any other Loan Documents.
"Participant" has the meaning specified in subsection
11.08(d).
"PBGC" means the Pension Benefit Guaranty Corporation, or
any Governmental Authority succeeding to any of its principal
functions under ERISA.
"Pension Plan" means a pension plan (as defined in Section
3(2) of ERISA) subject to Title IV of ERISA which the Company
sponsors, maintains, or to which it makes, is making, or is
obligated to make contributions, or in the case of a multiple
employer plan (as described in Section 4064(a) of ERISA) has made
contributions at any time during the immediately preceding five
(5) plan years.
"Permitted Acquisitions" means Acquisitions by the Company
or any of its Subsidiaries of Persons and/or assets involved (or
to be used) in connection with the Health Care Business;
provided, that (i) any Acquisition involving a merger to which
the Company or any of its Subsidiaries is a party must provide
that the Company or such Subsidiary is the surviving corporation
in such merger, (ii) immediately before and after giving effect
to the consummation of each Acquisition, no Default has occurred
and is continuing or will exist; (iii) for each such Acquisition,
the prior, effective written consent or approval to such
Acquisition of the board of directors or equivalent governing
body of the acquiree has been obtained; and (iv) the Company
shall have complied with the requirements of Section 7.15, if
applicable.
"Permitted Liens" has the meaning specified in Section 8.01.
"Person" means an individual, partnership, corporation,
limited liability company, business trust, joint stock company,
trust, unincorporated association, joint venture or Governmental
Authority.
21
"Plan" means an employee benefit plan (as defined in Section
3(3) of ERISA) which the Company sponsors or maintains or to
which the Company makes, is making, or is obligated to make
contributions and includes any Pension Plan.
"Pledge Agreement" means each Pledge Agreement executed and
delivered by the Company or a Pledgor Subsidiary pursuant to
Section 5.0.1(g), substantially in the form of Exhibit G hereto,
as amended, supplemented, restated or otherwise modified from
time to time.
"Pledged Collateral" has the meaning specified in the Pledge
Agreements.
"Pledged Property" has the meaning specified in the Pledge
Agreements.
"Pledged Shares" has the meaning specified in the Pledge
Agreements.
"Pledgor Subsidiary" means any Subsidiary of the Company or
of another Subsidiary executing and delivering a Pledge
Agreement.
"PMAT" means Permanente Medical Association of Texas.
"Prior Credit Agreement" means that certain Credit Agreement
dated as of April 11, 1996, as amended, among the Company, the
lenders party thereto and BofA, as agent.
"Pro Rata Share" means, as to any Bank at any time, the
percentage equivalent (expressed as a decimal, rounded to the
ninth decimal place) at such time of such Bank's Commitment
divided by the combined Commitments of all Banks.
"Prospective Premium Default" shall mean the institution,
with respect to the Company or any of its Subsidiaries by an HMO
Regulator pursuant to applicable HMO Regulations, of a
restriction on the fees or premiums that any HMO Subsidiary of
the Company may charge that is likely to cause the Company to be
in default of one or more of the financial covenants in
Section 8.14 of this Agreement during one or more of the four
fiscal quarters of the Company following the effective date of
such restriction; provided that, in determining such likelihood,
due consideration shall be given of actions the Company proposes
to take, or to have any HMO Subsidiary take, in response to such
restriction to the extent such actions have been communicated to
the Banks within 30 days after such effective date and so long as
22
no other Default (whether or not related to such restriction)
shall then have occurred and be continuing.
"Regulatory Tangible Net Equity" shall mean, for any HMO,
"tangible net equity," "net worth" or such similar financial
concept as defined by any HMO Regulation promulgated by any HMO
Regulator as shall be applicable to HMOs.
"Regulatory Tangible Net Equity Requirement" shall mean, as
to any HMO, the minimum level at which an HMO is required by any
applicable HMO Regulation or HMO Regulator to maintain its
Regulatory Tangible Net Equity.
"Reportable Event" means, any of the events set forth in
Section 4043(b) of ERISA or the regulations thereunder, other
than any such event for which the 30-day notice requirement under
ERISA has been waived in regulations issued by the PBGC.
"Requirement of Law" means, as to any Person, any law
(statutory or common), treaty, rule or regulation or
determination of an arbitrator or of a Governmental Authority, in
each case applicable to or binding upon the Person or any of its
property or to which the Person or any of its property is
subject.
"Responsible Officer" means the chief executive officer or
the president of the Company, the chief financial officer or any
other officer having substantially the same authority and
responsibility; or, with respect to compliance with financial
covenants, the chief financial officer, the treasurer or the
assistant treasurer of the Company, or any other officer having
substantially the same authority and responsibility.
"Revolving Loan" has the meaning specified in Section 2.01,
and may be a Base Rate Loan or a LIBOR Rate Loan (each, a "Type"
of Revolving Loan).
"Revolving Termination Date" means the earlier to occur of:
(a) September 30, 2003; and
(b) the date on which the Commitments terminate in
accordance with the provisions of this Agreement.
"SEC" means the Securities and Exchange Commission, or any
Governmental Authority succeeding to any of its principal
functions.
23
"Sierra Adjusted EBITDA" means, for any period, the net
income of the Company and its consolidated Subsidiaries (other
than, for the fiscal quarters ending on December 31, 1998,
March 31, 1999, June 30, 1999 and September 30, 1999, HMO Texas
and PMAT) plus, to the extent deducted in determining net income,
total book taxes, Interest Expense, depreciation and amortization
expenses and solely for the first three fiscal quarters of 1999,
the Specified Charges, minus any non-cash extraordinary gains.
Sierra Adjusted EBITDA shall be calculated as of the last day of
the most recently ended fiscal quarter of the Company for the
period of four consecutive full fiscal quarters then ended (the
"Measurement Period"), and such calculation shall include, on a
pro forma basis, the Consolidated Adjusted EBITDA of any Person
(other than Kaiser-Texas) acquired by the Company pursuant to an
Acquisition during the Measurement Period, as if such Acquisition
had occurred on the first day of the Measurement Period.
"Significant Subsidiary" shall mean HMO Texas and any other
Subsidiary of the Company of which (i) the revenues (directly and
together with its Subsidiaries) for the most recent fiscal
year of the Company were at least five percent (5%) of the
Company's consolidated revenues for such fiscal year or (ii) the
consolidated total assets as of the last day of the most recent
fiscal year of the Company were at least five percent (5%) of the
Company's consolidated total assets as of such date.
"Specified Charges" means those charges set forth on
Schedule 1.01 hereof.
"Specified Percentage" means a percentage determined by
reference to the Leverage Ratio set forth in the most recent
Compliance Certificate received by the Agent, as follows:
<TABLE>
<CAPTION>
Leverage Ratio Specified Percentage
<S> <C> <C>
Greater than or equal to 3.00 100%
Greater than or equal to 2.00
but less than 3.00 75%
Less than 2.00 50%
</TABLE>
"Subsidiary" of a Person means any corporation, association,
partnership, limited liability company, joint venture or other
business entity of which 50% or more of the voting stock,
membership interests or other equity interests (in the case of
Persons other than corporations), is owned or controlled directly
or indirectly by the Person, or one or more of the Subsidiaries
of the Person, or a combination thereof. Unless the context
otherwise clearly requires, references herein to a "Subsidiary"
refer to a Subsidiary of the Company.
24
"Surety Instruments" means all letters of credit (including
standby and commercial), banker's acceptances, bank guaranties,
shipside bonds, surety bonds and similar instruments.
"Swap Contract" means any agreement, whether or not in
writing, relating to any transaction that is a rate swap, basis
swap, forward rate transaction, commodity swap, commodity option,
equity or equity index swap or option, bond, note or bill option,
interest rate option, forward foreign exchange transaction, cap,
collar or floor transaction, currency swap, cross-currency rate
swap, swaption, currency option or any other, similar transaction
(including any option to enter into any of the foregoing) or any
combination of the foregoing, and, unless the context otherwise
clearly requires, any master agreement relating to or governing
any or all of the foregoing.
"Swap Termination Value" means, in respect of any one or
more Swap Contracts, after taking into account the effect of any
legally enforceable netting agreement relating to such Swap
Contracts, (a) for any date on or after the date such Swap
Contracts have been closed out and termination value(s)
determined in accordance therewith, such termination value(s),
and (b) for any date prior to the date referenced in clause (a)
the amount(s) determined as the mark-to-market value(s) for such
Swap Contracts, as determined by the Company based upon one or
more mid-market or other readily available quotations provided by
any recognized dealer in such Swap Contracts (which may include
any Bank).
"Taxes" means any and all present or future taxes, levies,
assessments, imposts, duties, deductions, fees, withholdings or
similar charges, and all liabilities with respect thereto,
excluding, in the case of each Bank and the Agent, respectively,
taxes imposed on or measured by its net income by the
jurisdiction (or any political subdivision thereof) under the
laws of which such Bank or the Agent, as the case may be, is
organized or maintains a lending office.
"Total Assets" of any Person means all property (whether
real, personal, tangible, intangible or mixed) that, in
accordance with GAAP should be included in determining total
assets as shown on the asset portion of the balance sheet of such
Person.
"Total Liabilities" of any Person means all obligations
that, in accordance with GAAP, would be included in determining
total liabilities as shown on the liabilities side of the balance
sheet of such Person.
25
"2314 Partnership" means 2314 West Charleston Partnership, a
Nevada general partnership of which the general partner is
Southwest Realty, Inc., a Nevada corporation which is a wholly-
owned subsidiary of the Company.
"Type" has the meaning specified in the definition of
"Revolving Loan."
"Unfunded Pension Liability" means the excess of a Plan's
benefit liabilities under Section 4001(a)(16) of ERISA, over the
current value of that Plan's assets, determined in accordance
with the assumptions used for funding the Pension Plan pursuant
to Section 412 of the Code for the applicable plan year.
"United States" and "U.S." each means the United States of
America.
"Wholly-Owned Subsidiary" means any corporation in which
(other than directors' qualifying shares required by law) 100% of
the capital stock of each class having ordinary voting power, in
each case, at the time as of which any determination is being
made, is owned, beneficially and of record, by the Company, or by
one or more of the other Wholly-Owned Subsidiaries, or both.
1.02 Other Interpretive Provisions.
(a) The meanings of defined terms are equally
applicable to the singular and plural forms of the defined terms.
(b) The words "hereof", "herein", "hereunder" and
similar words refer to this Agreement as a whole and not to any
particular provision of this Agreement; and subsection, Section,
Schedule and Exhibit references are to this Agreement unless
otherwise specified.
(c) (i) The term "documents" includes any and all
instruments, documents, agreements, certificates,
indentures, notices and other writings, however evidenced.
(ii) The term "including" is not limiting and
means "including without limitation."
(iii) In the computation of periods of time from a
specified date to a later specified date, the word "from"
means "from and including"; the words "to" and "until" each
mean "to but excluding", and the word "through" means "to
and including."
26
(iv) The term "property" includes any kind of
property or asset, real, personal or mixed, tangible or
intangible.
(d) Unless otherwise expressly provided herein,
(i) references to agreements (including this
Agreement) and other contractual instruments shall be
deemed to include all subsequent amendments and other
modifications thereto, but only to the extent such
amendments and other modifications are not prohibited
by the terms of any Loan Document, and
(ii) references to any statute or regulation
are to be construed as including all statutory and
regulatory provisions consolidating, amending,
replacing, supplementing or interpreting the statute or
regulation.
(e) The captions and headings of this Agreement are
for convenience of reference only and shall not affect the
interpretation of this Agreement.
(f) This Agreement and other Loan Documents may use
several different limitations, tests or measurements to regulate
the same or similar matters. All such limitations, tests and
measurements are cumulative and shall each be performed in
accordance with their terms. Unless otherwise expressly
provided, any reference to any action of the Agent or the Banks
by way of consent, approval or waiver shall be deemed modified by
the phrase "in its/their reasonable discretion."
(g) This Agreement and the other Loan Documents are
the result of negotiations among and have been reviewed by
counsel to the Agent, the Company and the other parties, and are
the products of all parties. Accordingly, they shall not be
construed against the Banks or the Agent merely because of the
Agent's or Banks' involvement in their preparation.
1.03 Accounting Principles.
(a) Unless the context otherwise clearly requires, all
accounting terms not expressly defined herein shall be construed,
and all financial computations required under this Agreement
shall be made, in accordance with GAAP, consistently applied.
(b) References herein to "fiscal year" and "fiscal
quarter" refer to such fiscal periods of the Company.
27
ARTICLE II
THE CREDITS
2.01 Amounts and Terms of Commitments. Each Bank severally
agrees, on the terms and conditions set forth herein, to make
loans to the Company (each such loan, a "Revolving Loan") from
time to time on any Business Day during the period from the
Closing Date to the Revolving Termination Date, in an aggregate
amount not to exceed at any time outstanding the amount set forth
on Schedule 2.01 (such amount as the same may be reduced under
Section 2.05 or increased under Section 2.08 or as a result of
one or more assignments under Section 10.08, the Bank's
"Commitment"); provided, however, that, after giving effect to
any Borrowing of Revolving Loans, the Effective Amount of all
outstanding Revolving Loans and the Effective Amount of all L/C
Obligations, shall not at any time exceed the combined
Commitments; and provided further, that the Effective Amount of
the Revolving Loans of any Bank plus the participation of such
Bank in the Effective Amount of all L/C Obligations shall not at
any time exceed such Bank's Commitment. Within the limits of
each Bank's Commitment, and subject to the other terms and
conditions hereof, the Company may borrow under this section
2.01, prepay under Section 2.06 and reborrow under this section
2.01.
2.02 Loan Accounts.
(a) The Loans made by each Bank and the Letters of
Credit Issued by the Issuing Bank shall be evidenced by one or
more accounts or records maintained by such Bank or Issuing Bank,
as the case may be, in the ordinary course of business. The
accounts or records maintained by the Agent, the Issuing Bank and
each Bank shall be presumptive evidence of the amount of the
Loans made by the Banks to the Company and the Letters of Credit
Issued for the account of the Company, and the interest and
payments thereon. Any failure to so maintain such accounts or
records, or any error in doing so, shall not, however, limit or
otherwise affect the obligation of the Company hereunder to pay
any amount owing with respect to the Loans or any Letter of
Credit.
(b) Upon the request of any Bank made through the
Agent, the Loans made by such Bank may be evidenced by one or
more Notes, instead of or in addition to loan accounts. Each
such Bank shall endorse on the schedules annexed to its Note(s)
the date, amount and maturity of each Loan made by it and the
amount of each payment of principal made by the Company with
28
respect thereto. Each such Bank is irrevocably authorized by the
Company to endorse its Note(s) and each Bank's record shall be
conclusive absent manifest error; provided, however, that the
failure of a Bank to make, or an error in making, a notation
thereon with respect to any Loan shall not limit or otherwise
affect the obligations of the Company hereunder or under any such
Note to such Bank.
2.03 Procedure for Borrowing.
(a) Each Borrowing of Revolving Loans shall be made
upon the Company's irrevocable written notice delivered to the
Agent in the form of a Notice of Borrowing (which notice must be
received by the Agent prior to 10:00 a.m. (San Francisco time)
(i) three Business Days prior to the requested Borrowing Date, in
the case of LIBOR Rate Loans, and (ii) one Business Day prior to
the requested Borrowing Date, in the case of Base Rate Loans,
specifying:
(A) the amount of the Borrowing, which
shall be, in the case of LIBOR Rate Loans, in an
aggregate minimum amount of $5,000,000 or any multiple
of $1,000,000 in excess thereof and, in the case of
Base Rate Loans, in an aggregate minimum amount of
$1,000,000 or any multiple of $100,000 in excess
thereof;
(B) the requested Borrowing Date, which
shall be a Business Day;
(C) the Type of Loans comprising the
Borrowing; and
(D) if such Borrowing is comprised of
LIBOR Rate Loans, the duration of the Interest Period
applicable to such Loans included in such notice. If
the Notice of Borrowing fails to specify the duration
of the Interest Period for any Borrowing comprised of
LIBOR Rate Loans, such Interest Period shall be one
month.
(b) The Agent will promptly notify each Bank of its
receipt of any Notice of Borrowing and of the amount of such
Bank's Pro Rata Share of that Borrowing.
(c) Each Bank will make the amount of its Pro Rata
Share of each Borrowing available to the Agent for the account of
the Company at the Agent's Payment Office by 11:00 a.m. (San
29
Francisco time) on the Borrowing Date requested by the Company in
funds immediately available to the Agent. The proceeds of all
such Loans will then be made available to the Company by the
Agent by wire transfer in accordance with written instructions
provided to the Agent by the Company of like funds as received by
the Agent.
(d) After giving effect to any Borrowing, unless the
Agent shall otherwise consent, there may not be more than ten
(10) different Interest Periods in effect.
2.04 Conversion and Continuation Elections.
(a) The Company may, upon irrevocable written notice
to the Agent in accordance with subsection 2.04(b):
(i) elect, as of any Business Day, in the case of
Base Rate Loans, to convert any such Loans (or any part
thereof in an amount not less than $5,000,000, or that is in
an integral multiple of $1,000,000 in excess thereof) into
LIBOR Rate Loans;
(ii) elect, as of the last day of the
applicable Interest Period, in the case of LIBOR Rate
Loans, to convert any such Loans (or any part thereof
in an amount not less than $1,000,000, or that is in an
integral multiple of $100,000 in excess thereof) into
Base Rate Loans; or
(iii) elect as of the last day of the applicable
Interest Period, in the case of LIBOR Rate Loans, to
continue any such Loans having Interest Periods expiring on
such day (or any part thereof in an amount not less than
$5,000,000, or that is in an integral multiple of $1,000,000
in excess thereof);
provided, that if at any time the aggregate amount of LIBOR Rate
Loans in respect of any Borrowing is reduced, by payment,
prepayment, or conversion of part thereof to be less than
$5,000,000, such LIBOR Rate Loans shall automatically convert
into Base Rate Loans, and on and after such date the right of the
Company to continue such Loans as, and convert such Loans into,
LIBOR Rate Loans, shall terminate.
(b) The Company shall deliver a Notice of
Conversion/Continuation to be received by the Agent not later
than 9:00 a.m. (San Francisco time) at least (i) three Business
Days in advance of the Conversion/ Continuation Date, if the
30
Loans are to be converted into or continued as LIBOR Rate Loans,
and (ii) one Business Day in advance of the Conversion/
Continuation Date, if the Loans are to be converted into Base
Rate Loans, specifying:
(A) the proposed Conversion/Continuation
Date;
(B) the aggregate amount of Loans to be
converted or continued;
(C) the Type of Loans resulting from the
proposed conversion or continuation; and
(D) other than in the case of conversions
into Base Rate Loans, the duration of the requested Interest
Period.
(c) If upon the expiration of any Interest Period
applicable to LIBOR Rate Loans, the Company has failed to select
timely a new Interest Period to be applicable to such LIBOR Rate
Loans, the Company shall be deemed to have elected to convert
such LIBOR Rate Loans into Base Rate Loans effective as of the
expiration date of such Interest Period.
(d) The Agent will promptly notify each Bank of its
receipt of a Notice of Conversion/ Continuation, or, if no timely
notice is provided by the Company, the Agent will promptly notify
each Bank of the details of any automatic conversion. All
conversions and continuations shall be made ratably according to
the respective outstanding principal amounts of the Loans with
respect to which the notice was given held by each Bank.
(e) Unless the Majority Banks otherwise consent,
during the existence of a Default or Event of Default, the
Company may not elect to have a Loan converted into or continued
as a LIBOR Rate Loan.
(f) After giving effect to any conversion or
continuation of Loans, unless the Agent shall otherwise consent,
there may not be more than ten (10) different Interest Periods in
effect.
2.05 Voluntary Termination or Reduction of Commitments. The
Company may, upon not less than three Business Days' prior notice
to the Agent, terminate the Commitments, or permanently reduce
the Commitments by an aggregate minimum amount of $5,000,000 or
any multiple of $1,000,000 in excess thereof; unless, after
31
giving effect thereto and to any prepayments of Loans made on the
effective date thereof, (i) the Effective Amount of all Revolving
Loans and L/C Obligations together would exceed the amount of the
combined Commitments then in effect, or (ii) the Effective Amount
of all L/C Obligations then outstanding would exceed the L/C
Commitment. Once reduced in accordance with this Section, the
Commitments may not be increased. Any reduction of the
Commitments shall be applied to each Bank according to its Pro
Rata Share. If and to the extent specified by the Company in the
notice to the Agent, some or all of the reduction in the combined
Commitments shall be applied to reduce the L/C Commitment. All
accrued commitment and letter of credit fees to, but not
including, the effective date of any reduction or termination of
Commitments, shall be paid on the effective date of such
reduction or termination.
2.06 Optional Prepayments. Subject to Section 4.04, the
Company may, at any time or from time to time, upon not less than
(i) three Business Days' irrevocable notice to the Agent, ratably
prepay LIBOR Rate Loans in whole or in part, in minimum amounts
of $5,000,000 or any multiple of $1,000,000 in excess thereof,
and (ii) one Business Day's irrevocable notice to the Agent,
ratably prepay Base Rate Loans in whole or in part, in minimum
amounts of $1,000,000 or any multiple of $100,000 in excess
thereof. Such notice of prepayment shall specify the date and
amount of such prepayment and the Type(s) of Loans to be prepaid.
The Agent will promptly notify each Bank of its receipt of any
such notice, and of such Bank's Pro Rata Share of such
prepayment. If such notice is given by the Company, the Company
shall make such prepayment and the payment amount specified in
such notice shall be due and payable on the date specified
therein, together with accrued interest to each such date on the
amount prepaid and any amounts required pursuant to Section 4.04.
Amounts so prepaid may be reborrowed subject to the applicable
provisions of this Agreement.
2.07 Mandatory Prepayments of Loans; Mandatory Commitment
Reductions and Repayments.
(a) If on any date the Effective Amount of L/C
Obligations exceeds the L/C Commitment, the Company shall Cash
Collateralize on such date the outstanding Letters of Credit in
an amount equal to the excess of the maximum amount then
available to be drawn under the Letters of Credit over the
Aggregate L/C Commitment. Subject to Section 4.04, if on any
date after giving effect to any Cash Collateralization made on
such date pursuant to the preceding sentence, the Effective
Amount of all Revolving Loans then outstanding plus the Effective
32
Amount of all L/C Obligations exceeds the combined Commitments,
the Company shall immediately, and without notice or demand,
prepay the outstanding principal amount of the Revolving Loans
and L/C Advances by an amount equal to the applicable excess.
(b) On each date set forth below, the aggregate
Commitments shall, without any further action, automatically and
permanently be reduced to the amount set forth opposite such
date:
Date Amount
June 30, 2001 $205,000,000*/
December 31, 2001 $185,000,000
June 30, 2002 $165,000,000
December 31, 2002 $145,000,000
June 30, 2003 $125,000,000
provided, however, that on the Revolving Termination Date, the
aggregate Commitments shall be zero and on such date the Company
shall repay to the Banks the aggregate principal amount of Loans
outstanding on such date.
(c) If the aggregate Commitments equal or exceed
$100,000,000, the aggregate Commitments shall be automatically
and permanently reduced (but not to an amount below $100,000,000)
by an amount equal to seventy-five percent (75%) of the first
$25,000,000 of Net Cash Proceeds and one hundred percent (100%)
of all Net Cash Proceeds in excess thereof received by the
Company or its Subsidiary from a sale or disposition of any asset
(including, without limitation, any sale or disposition by the
Company of any capital stock of any of its Subsidiaries) other
than up to $10,000,000 in any fiscal year of Net Cash Proceeds
from asset sales in the ordinary course of business; provided,
however, that so long as no Default or Event of Default shall
have occurred and then be continuing, the aggregate Commitments
shall not be required to be reduced under this Section 2.07(c) if
and to the extent the Company or one of its Subsidiaries has used
such Net Cash Proceeds within 180 days of the receipt thereof for
Capital Expenditures or Acquisitions (in accordance with the
provisions of Article VI hereof) in the existing lines of
business of the Company; provided, further, that in no event
shall the Net Cash Proceeds used by the Company or its
Subsidiaries in accordance with the previous proviso exceed
$10,000,000 in any fiscal year or $25,000,000 during the term of
this Agreement. The reduction in the aggregate Commitments
- --------
*/Applicable only if the commitments have been increased pursuant
to
Section 2.08.
33
contemplated by this Section 2.07(c) shall occur no later than
the earlier of (i) the tenth day after receipt by the Company or
its Subsidiary of Net Cash Proceeds, unless prior to such date
the Company shall have provided the Agent with written notice of
its intention to reinvest such proceeds in accordance with the
terms of the preceding sentence, or (ii) the date which is 180
days from the date of receipt by the Company or its Subsidiary of
such Net Cash Proceeds subject, in the case of asset sales by
regulated Subsidiaries of the Company, to the compliance by such
Subsidiaries with any applicable Requirements of Law. Any
reduction in the aggregate Commitment pursuant to this Section
2.07(c) shall be applied to reduce any remaining scheduled
installments in inverse order of maturity.
2.08 Increase to the Commitment.
(a) On or before April 30, 1999, the Company may by
written notice to the Agent, request proposed increases to the
amount of the Commitments to be effective on a date to be
specified by the Company (the "Commitment Increase Date"),
provided that (i) as of the Commitment Increase Date, no Default
or Event of Default shall have occurred, (ii) each such request
shall be for an increase in the Commitments which is in an
integral multiple of $5,000,000 and (iii) without the prior
written consent of all of the Banks, no such increase shall
result in the aggregate principal amount of the Commitments being
in excess of $225,000,000. Nothing contained in this Section
2.08 shall be construed as a commitment on behalf of the Agent or
any Bank to assume any increase in the Commitments.
(b) Each Person which assumes any portion of an
increase to the Commitments shall be a Bank or a willing
financial institution which qualifies as an Eligible Assignee and
which is designated by the Agent or the Syndication Agent.
(c) The Borrower, each such Eligible Assignee or Bank
and the Agent shall execute and deliver a Joinder Agreement, and
Company shall deliver a Note to each such Eligible Assignee in
the amount of its Commitment. Upon the Commitment Increase Date,
the Eligible Assignee or Bank named therein shall become a Bank
for all purposes of the Loan Documents, with the Commitment
therein set forth.
(d) By executing and delivering a Joinder Agreement,
the Eligible Assignee or Bank named therein acknowledges and
agrees as of the Commitment Increase Date that (i) it has
received a copy of this Agreement, together with copies of the
most recent financial statements delivered pursuant to Section
7.01 and such other documents and information as it has deemed
34
appropriate to make its own credit analysis and decision to enter
into such Joinder Agreement; (ii) it will, independently and
without reliance upon the Agent, the Syndication Agent or any
Bank and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit
decisions in taking or not taking action under this Agreement;
(iii) it appoints and authorizes the Agent to take such action
and to exercise such powers under this Agreement as are delegated
to the Agent by this Agreement; and (iv) it will perform in
accordance with their terms all of the obligations which by the
terms of this Agreement are required to be performed by it as a
Bank.
(e) The Agent shall maintain a copy of each Joinder
Agreement, shall promptly inform the Banks of the identity of
each Bank which executes a Joinder Agreement and provide each
Bank and the Company with a revised Schedule 2.01 to this
Agreement.
2.09 Interest.
(a) Each Revolving Loan shall bear interest on the
outstanding principal amount thereof from the applicable
Borrowing Date at a rate per annum equal to the LIBOR Rate or the
Base Rate, as the case may be (and subject to the Company's right
to convert to other Types of Loans under Section 2.04), plus the
Applicable Margin.
(b) Interest on each Revolving Loan shall be paid in
arrears on each Interest Payment Date. Interest shall also be
paid on the date of any prepayment of LIBOR Rate Loans under
Section 2.06 or 2.07 for the portion of the Loans so prepaid and
upon payment (including prepayment) in full thereof and, during
the existence of any Event of Default, interest on all Loans
shall be paid on demand of the Agent at the request or with the
consent of the Majority Banks.
(c) Notwithstanding subsection (a) of this Section,
while any Event of Default exists or after acceleration, the
Company shall pay interest (after as well as before entry of
judgment thereon to the extent permitted by law) on the principal
amount of all outstanding Obligations, at a rate per annum which
is determined by adding 2% per annum to the Applicable Margin
then in effect for such Loans and, in the case of Obligations not
subject to an Applicable Margin, at a rate per annum equal to the
Base Rate plus 2%; provided, however, that, on and after the
expiration of any Interest Period applicable to any LIBOR Rate
Loan outstanding on the date of occurrence of such Event of
35
Default or acceleration, the principal amount of such Loan shall,
during the continuation of such Event of Default or after
acceleration, bear interest at a rate per annum equal to the Base
Rate plus the Applicable Margin for Base Rate Loans plus 2%.
(d) Anything herein to the contrary notwithstanding,
the obligations of the Company to any Bank hereunder shall be
subject to the limitation that payments of interest shall not be
required for any period for which interest is computed hereunder,
to the extent (but only to the extent) that contracting for or
receiving such payment by such Bank would be contrary to the
provisions of any law applicable to such Bank limiting the
highest rate of interest that may be lawfully contracted for,
charged or received by such Bank, and in such event the Company
shall pay such Bank interest at the highest rate permitted by
applicable law.
2.10 Fees. In addition to certain fees described in
Section 3.08:
(a) Agents' Fees. The Company shall pay fees to the
Agent and the Syndication Agent for their own account, as
required by the letter agreement ("Fee Letter") between the
Company, the Agent and the Syndication Agent dated October 1,
1998.
(b) Commitment Fees. The Company shall pay to the
Agent for the account of each Bank a commitment fee on the
average daily unused portion of such Bank's Commitment, computed
on a quarterly basis in arrears on the last Business Day of each
fiscal quarter, equal to the product of (i) the Applicable
Commitment Fee Rate and (ii) the average daily unused portion of
such Bank's Commitment during such fiscal quarter. For purposes
of calculating utilization under this subsection, the Commitments
shall be deemed used to the extent of the Effective Amount of
Revolving Loans then outstanding, plus the Effective Amount of
L/C Obligations then outstanding. Such commitment fee shall
accrue from the Closing Date to the Revolving Termination Date
and shall be due and payable quarterly in arrears on the last day
of each March, June, September and December, commencing
December 31, 1998 through the Revolving Termination Date, with
the final payment to be made on the Revolving Termination Date;
provided that, in connection with any reduction or termination of
Commitments under Section 2.05 or Section 2.07, the accrued
commitment fee calculated for the period ending on such date
shall also be paid on the date of such reduction or termination,
with the following quarterly payment being calculated on the
basis of the period from such reduction or termination date to
36
such quarterly payment date. The commitment fees provided in
this subsection shall accrue at all times after the above-
mentioned commencement date, including at any time during which
one or more conditions in Article V are not met.
2.11 Computation of Fees and Interest.
(a) All computations of interest for Base Rate Loans
when the Base Rate is determined by BofA's "reference rate" shall
be made on the basis of a year of 365 or 366 days, as the case
may be, and actual days elapsed. All other computations of fees
and interest shall be made on the basis of a 360-day year and
actual days elapsed (which results in more interest being paid
than if computed on the basis of a 365-day year). Interest and
fees shall accrue during each period during which interest or
such fees are computed from the first day thereof to the last day
thereof.
(b) Each determination of an interest rate by the
Agent shall be conclusive and binding on the Company and the
Banks in the absence of manifest error. The Agent will, at the
request of the Company or any Bank, deliver to the Company or the
Bank, as the case may be, a statement showing the quotations used
by the Agent in determining any interest rate and the resulting
interest rate.
2.12 Payments by the Company.
(a) All payments to be made by the Company shall be
made without set-off, recoupment or counterclaim. Except as
otherwise expressly provided herein, all payments by the Company
shall be made to the Agent for the account of the Banks at the
Agent's Payment Office, and shall be made in dollars and in
immediately available funds, no later than 11:00 a.m. (San
Francisco time) on the date specified herein. The Agent will
promptly distribute to each Bank its Pro Rata Share (or other
applicable share as expressly provided herein) of such payment in
like funds as received. Any payment received by the Agent later
than 11:00 a.m. (San Francisco time) shall be deemed to have been
received on the following Business Day and any applicable
interest or fee shall continue to accrue.
(b) Subject to the provisions set forth in the
definition of "Interest Period" herein, whenever any payment is
due on a day other than a Business Day, such payment shall be
made on the following Business Day, and such extension of time
shall in such case be included in the computation of interest or
fees, as the case may be.
37
(c) Unless the Agent receives notice from the Company
prior to the date on which any payment is due to the Banks that
the Company will not make such payment in full as and when
required, the Agent may assume that the Company has made such
payment in full to the Agent on such date in immediately
available funds and the Agent may (but shall not be so required),
in reliance upon such assumption, distribute to each Bank on such
due date an amount equal to the amount then due such Bank. If
and to the extent the Company has not made such payment in full
to the Agent, each Bank shall repay to the Agent on demand such
amount distributed to such Bank, together with interest thereon
at the Federal Funds Rate for each day from the date such amount
is distributed to such Bank until the date repaid.
2.13 Payments by the Banks to the Agent.
(a) Unless the Agent receives notice from a Bank on or
prior to the Closing Date or, with respect to any Borrowing after
the Closing Date, at least one Business Day prior to the date of
such Borrowing, that such Bank will not make available as and
when required hereunder to the Agent for the account of the
Company the amount of that Bank's Pro Rata Share of the
Borrowing, the Agent may assume that each Bank has made such
amount available to the Agent in immediately available funds on
the Borrowing Date and the Agent may (but shall not be so
required), in reliance upon such assumption, make available to
the Company on such date a corresponding amount. If and to the
extent any Bank shall not have made its full amount available to
the Agent in immediately available funds and the Agent in such
circumstances has made available to the Company such amount, that
Bank shall on the Business Day following such Borrowing Date make
such amount available to the Agent, together with interest at the
Federal Funds Rate for each day during such period. A notice of
the Agent submitted to any Bank with respect to amounts owing
under this subsection (a) shall be conclusive, absent manifest
error. If such amount is so made available, such payment to the
Agent shall constitute such Bank's Loan on the date of Borrowing
for all purposes of this Agreement. If such amount is not made
available to the Agent on the Business Day following the
Borrowing Date, the Agent will notify the Company of such failure
to fund and, upon demand by the Agent, the Company shall pay such
amount to the Agent for the Agent's account, together with
interest thereon for each day elapsed since the date of such
Borrowing, at a rate per annum equal to the interest rate
applicable at the time to the Loans comprising such Borrowing.
(b) The failure of any Bank to make any Loan on any
Borrowing Date shall not relieve any other Bank of any obligation
38
hereunder to make a Loan on such Borrowing Date, but no Bank
shall be responsible for the failure of any other Bank to make
the Loan to be made by such other Bank on any Borrowing Date.
2.14 Sharing of Payments, Etc. If, other than as expressly
provided elsewhere herein, any Bank shall obtain on account of
the Loans made by it any payment (whether voluntary, involuntary,
through the exercise of any right of set-off, or otherwise) in
excess of its ratable share (or other share contemplated
hereunder), such Bank shall immediately (a) notify the Agent of
such fact, and (b) purchase from the other Banks such
participations in the Loans made by them as shall be necessary to
cause such purchasing Bank to share the excess payment pro rata
with each of them; provided, however, that if all or any portion
of such excess payment is thereafter recovered from the
purchasing Bank, such purchase shall to that extent be rescinded
and each other Bank shall repay to the purchasing Bank the
purchase price paid therefor, together with an amount equal to
such paying Bank's ratable share (according to the proportion of
(i) the amount of such paying Bank's required repayment to
(ii) the total amount so recovered from the purchasing Bank) of
any interest or other amount paid or payable by the purchasing
Bank in respect of the total amount so recovered. The Company
agrees that any Bank so purchasing a participation from another
Bank may, to the fullest extent permitted by law, exercise all
its rights of payment (including the right of set-off, but
subject to Section 11.10) with respect to such participation as
fully as if such Bank were the direct creditor of the Company in
the amount of such participation. The Agent will keep records
(which shall be conclusive and binding in the absence of manifest
error) of participations purchased under this Section and will in
each case notify the Banks following any such purchases or
repayments.
2.15 Security. All obligations of the Company under this
Agreement, the Notes all other Loan Documents and any Swap
Contract entered into with a Bank and permitted under this
Agreement shall be secured in accordance with the Collateral
Documents.
ARTICLE III
THE LETTERS OF CREDIT
3.01 The Letter of Credit Subfacility.
(a) On the terms and conditions set forth herein (i)
the Issuing Bank agrees, (A) from time to time on any Business
39
Day during the period from the Closing Date to the Revolving
Termination Date to issue Letters of Credit for the account of
the Company, and to amend or renew Letters of Credit previously
issued by it, in accordance with subsections 3.02(c) and 3.02(d),
and (B) to honor drafts under the Letters of Credit; and (ii) the
Banks severally agree to participate in Letters of Credit Issued
for the account of the Company; provided, that the Issuing Bank
shall not be obligated to Issue, and no Bank shall be obligated
to participate in, any Letter of Credit if as of the date of
Issuance of such Letter of Credit (the "Issuance Date") (1) the
Effective Amount of all L/C Obligations plus the Effective Amount
of all Revolving Loans exceeds the combined Commitments, (2) the
participation of any Bank in the Effective Amount of all L/C
Obligations plus the Effective Amount of the Revolving Loans of
such Bank exceeds such Bank's Commitment, or (3) the Effective
Amount of L/C Obligations exceeds the L/C Commitment. Within the
foregoing limits, and subject to the other terms and conditions
hereof, the Company's ability to obtain Letters of Credit shall
be fully revolving, and, accordingly, the Company may, during the
foregoing period, obtain Letters of Credit to replace Letters of
Credit which have expired or which have been drawn upon and
reimbursed.
(b) The Issuing Bank is under no obligation to Issue
any Letter of Credit if:
(i) any order, judgment or decree of any
Governmental Authority or arbitrator shall by its terms
purport to enjoin or restrain the Issuing Bank from Issuing
such Letter of Credit, or any Requirement of Law applicable
to the Issuing Bank or any request or directive (whether or
not having the force of law) from any Governmental Authority
with jurisdiction over the Issuing Bank shall prohibit, or
request that the Issuing Bank refrain from, the Issuance of
letters of credit generally or such Letter of Credit in
particular or shall impose upon the Issuing Bank with
respect to such Letter of Credit any restriction, reserve or
capital requirement (for which the Issuing Bank is not
otherwise compensated hereunder) not in effect on the
Closing Date, or shall impose upon the Issuing Bank any
unreimbursed loss, cost or expense which was not applicable
on the Closing Date and which the Issuing Bank in good faith
deems material to it;
(ii) the Issuing Bank has received written notice
from any Bank, the Agent or the Company, on or prior to the
Business Day prior to the requested date of Issuance of such
40
Letter of Credit, that one or more of the applicable
conditions contained in Article V is not then satisfied;
(iii) the expiry date of any requested Letter of
Credit is (A) more than 364 days after the date of Issuance,
unless the Majority Banks have approved such expiry date in
writing, or (B) later than thirty days prior to the
Revolving Termination Date;
(iv) any requested Letter of Credit does not
provide for drafts, or is not otherwise in form and
substance acceptable to the Issuing Bank, or the Issuance of
a Letter of Credit shall violate any applicable policies of
the Issuing Bank;
(v) any requested Letter of Credit is for the
purpose of supporting the issuance of any letter of credit
by any other Person; or
(vi) such Letter of Credit is in a face amount
less than $500,000 or to be denominated in a currency other
than Dollars.
3.02 Issuance, Amendment and Renewal of Letters of Credit.
(a) Each Letter of Credit shall be issued upon the
irrevocable written request of the Company received by the
Issuing Bank (with a copy sent by the Company to the Agent) at
least four days (or such shorter time as the Issuing Bank may
agree in a particular instance in its sole discretion) prior to
the proposed date of issuance. Each such request for issuance of
a Letter of Credit shall be by facsimile, confirmed immediately
in an original writing, in the form of an L/C Application, and
shall specify in form and detail satisfactory to the Issuing
Bank:
(i) the proposed date of issuance of the
Letter of Credit (which shall be a Business Day);
(ii) the face amount of the Letter of Credit;
(iii) the expiry date of the Letter of
Credit;
(iv) the name and address of the beneficiary
thereof;
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(v) the documents to be presented by the
beneficiary of the Letter of Credit in case of any
drawing thereunder;
(vi) the full text of any certificate to be
presented by the beneficiary in case of any drawing
thereunder; and
(vii) such other matters as the Issuing Bank
may require.
(b) At least two Business Days prior to the Issuance
of any Letter of Credit, the Issuing Bank will confirm with the
Agent (by telephone or in writing) that the Agent has received a
copy of the L/C Application or L/C Amendment Application from the
Company and, if not, the Issuing Bank will provide the Agent with
a copy thereof. Unless the Issuing Bank has received notice on
or before the Business Day immediately preceding the date the
Issuing Bank is to issue a requested Letter of Credit from the
Agent (A) directing the Issuing Bank not to issue such Letter of
Credit because such issuance is not then permitted under
subsection 3.01(a) as a result of the limitations set forth in
clauses (1) through (3) thereof or subsection 3.01(b)(ii); or
(B) that one or more conditions specified in Article V are not
then satisfied; then, subject to the terms and conditions hereof,
the Issuing Bank shall, on the requested date, issue a Letter of
Credit for the account of the Company in accordance with the
Issuing Bank's usual and customary business practices.
(c) From time to time while a Letter of Credit is
outstanding and prior to the Revolving Termination Date, the
Issuing Bank will, upon the written request of the Company
received by the Issuing Bank (with a copy sent by the Company to
the Agent) at least four days (or such shorter time as the
Issuing Bank may agree in a particular instance in its sole
discretion) prior to the proposed date of amendment, amend any
Letter of Credit issued by it. Each such request for amendment of
a Letter of Credit shall be made by facsimile, confirmed
immediately in an original writing, made in the form of an L/C
Amendment Application and shall specify in form and detail
satisfactory to the Issuing Bank: (i) the Letter of Credit to be
amended; (ii) the proposed date of amendment of the Letter of
Credit (which shall be a Business Day); (iii) the nature of the
proposed amendment; and (iv) such other matters as the Issuing
Bank may require. The Issuing Bank shall be under no obligation
to amend any Letter of Credit if: (A) the Issuing Bank would have
no obligation at such time to issue such Letter of Credit in its
amended form under the terms of this Agreement; or (B) the
42
beneficiary of any such Letter of Credit does not accept the
proposed amendment to the Letter of Credit. The Agent will
promptly notify the Banks of the receipt by it of any L/C
Application or L/C Amendment Application.
(d) The Issuing Bank and the Banks agree that, while a
Letter of Credit is outstanding and prior to the Revolving
Termination Date, at the option of the Company and upon the
written request of the Company received by the Issuing Bank (with
a copy sent by the Company to the Agent) at least four days (or
such shorter time as the Issuing Bank may agree in a particular
instance in its sole discretion) prior to the proposed date of
notification of renewal, the Issuing Bank shall be entitled to
authorize the automatic renewal of any Letter of Credit issued by
it. Each such request for renewal of a Letter of Credit shall be
made by facsimile, confirmed immediately in an original writing,
in the form of an L/C Amendment Application, and shall specify in
form and detail satisfactory to the Issuing Bank: (i) the Letter
of Credit to be renewed; (ii) the proposed date of notification
of renewal of the Letter of Credit (which shall be a Business
Day); (iii) the revised expiry date of the Letter of Credit; and
(iv) such other matters as the Issuing Bank may require. The
Issuing Bank shall be under no obligation so to renew any Letter
of Credit if: (A) the Issuing Bank would have no obligation at
such time to issue or amend such Letter of Credit in its renewed
form under the terms of this Agreement; or (B) the beneficiary of
any such Letter of Credit does not accept the proposed renewal of
the Letter of Credit. If any outstanding Letter of Credit shall
provide that it shall be automatically renewed unless the
beneficiary thereof receives notice from the Issuing Bank that
such Letter of Credit shall not be renewed, and if at the time of
renewal the Issuing Bank would be entitled to authorize the
automatic renewal of such Letter of Credit in accordance with
this subsection 3.02(e) upon the request of the Company but the
Issuing Bank shall not have received any L/C Amendment
Application from the Company with respect to such renewal or
other written direction by the Company with respect thereto, the
Issuing Bank shall nonetheless be permitted to allow such Letter
of Credit to renew, and the Company and the Banks hereby
authorize such renewal, and, accordingly, the Issuing Bank shall
be deemed to have received an L/C Amendment Application from the
Company requesting such renewal.
(e) The Issuing Bank may, at its election (or as
required by the Agent at the direction of the Majority Banks),
deliver any notices of termination or other communications to any
Letter of Credit beneficiary or transferee, and take any other
action as necessary or appropriate, at any time and from time to
43
time, in order to cause the expiry date of such Letter of Credit
to be a date not later than the Revolving Termination Date.
(f) This Agreement shall control in the event of any
conflict with any L/C-Related Document (other than any Letter of
Credit).
(g) The Issuing Bank will also deliver to the Agent,
concurrently or promptly following its delivery of a Letter of
Credit, or amendment to or renewal of a Letter of Credit, to an
advising bank or a beneficiary, a true and complete copy of each
such Letter of Credit or amendment to or renewal of a Letter of
Credit.
3.03 Existing BofA Letters of Credit; Risk Participations,
Drawings and Reimbursements.
(a) On and after the Closing Date, the Existing BofA
Letters of Credit shall be deemed for all purposes, including for
purposes of the fees to be collected pursuant to subsections
3.08(a) and 3.08(b), and reimbursement of costs and expenses to
the extent provided herein, Letters of Credit outstanding under
this Agreement and entitled to the benefits of this Agreement and
the other Loan Documents, and shall be governed by the
applications and agreements pertaining thereto and by this
Agreement. Each Bank shall be deemed to, and hereby irrevocably
and unconditionally agrees to, purchase from the Issuing Bank on
the Closing Date or on the Commitment Increase Date a
participation in each such Letter of Credit and each drawing
thereunder in an amount equal to the product of such Bank's Pro
Rata Share times the maximum amount available to be drawn under
such Letter of Credit and the amount of such drawing,
respectively. For purposes of subsection 2.01(b) and subsection
2.10(b), the Existing BofA Letters of Credit shall be deemed to
utilize pro rata the Commitment of each Bank.
(b) Immediately upon the Issuance of each Letter of
Credit in addition to those described in subsection 3.3(a), each
Bank shall be deemed to, and hereby irrevocably and
unconditionally agrees to, purchase from the Issuing Bank a
participation in such Letter of Credit and each drawing
thereunder in an amount equal to the product of (i) the Pro Rata
Share of such Bank, times (ii) the maximum amount available to be
drawn under such Letter of Credit and the amount of such drawing,
respectively. For purposes of subsection 2.01(b), each Issuance
of a Letter of Credit shall be deemed to utilize the Commitment
of each Bank by an amount equal to the amount of such
participation.
44
(c) In the event of any request for a drawing under a
Letter of Credit by the beneficiary or transferee thereof, the
Issuing Bank will promptly notify the Company. The Company shall
reimburse the Issuing Bank prior to 10:00 a.m. (San Francisco
time), on each date that any amount is paid by the Issuing Bank
under any Letter of Credit (each such date, an "Honor Date"), in
an amount equal to the amount so paid by the Issuing Bank. In
the event the Company fails to reimburse the Issuing Bank for the
full amount of any drawing under any Letter of Credit by 10:00
a.m. (San Francisco time) on the Honor Date, the Issuing Bank
will promptly notify the Agent and the Agent will promptly notify
each Bank thereof, and the Company shall be deemed to have
requested that Base Rate Loans be made by the Banks to be
disbursed on the Honor Date under such Letter of Credit, subject
to the amount of the unutilized portion of the Revolving
Commitment and subject to the conditions set forth in Section
5.02. Any notice given by the Issuing Bank or the Agent pursuant
to this subsection 3.03(c) may be oral if immediately confirmed
in writing (including by facsimile); provided that the lack of
such an immediate confirmation shall not affect the
conclusiveness or binding effect of such notice.
(d) Each Bank shall upon any notice pursuant to
subsection 3.03(c) make available to the Agent for the account of
the relevant Issuing Bank an amount in Dollars and in immediately
available funds equal to its Pro Rata Share of the amount of the
drawing, whereupon the participating Banks shall (subject to
subsection 3.03(e)) each be deemed to have made a Loan consisting
of a Base Rate Loan to the Company in that amount. If any Bank
so notified fails to make available to the Agent for the account
of the Issuing Bank the amount of such Bank's Pro Rata Share of
the amount of the drawing by no later than 12:00 noon (San
Francisco time) on the Honor Date, then interest shall accrue on
such Bank's obligation to make such payment, from the Honor Date
to the date such Bank makes such payment, at a rate per annum
equal to the Federal Funds Rate in effect from time to time
during such period. The Agent will promptly give notice of the
occurrence of the Honor Date, but failure of the Agent to give
any such notice on the Honor Date or in sufficient time to enable
any Bank to effect such payment on such date shall not relieve
such Bank from its obligations under this Section 3.03.
(e) With respect to any unreimbursed drawing that is
not converted into Loans consisting of Base Rate Loans to the
Company in whole or in part, because of the Company's failure to
satisfy the conditions set forth in Section 5.02 or for any other
reason, the Company shall be deemed to have incurred from the
Issuing Bank an L/C Borrowing in the amount of such drawing,
45
which L/C Borrowing shall be due and payable on demand (together
with interest) and shall bear interest at a rate per annum equal
to the Base Rate plus 2% per annum, and each Bank's payment to
the Issuing Bank pursuant to subsection 3.03(d) shall be deemed
payment in respect of its participation in such L/C Borrowing and
shall constitute an L/C Advance from such Bank in satisfaction of
its participation obligation under this Section 3.03.
(f) Each Bank's obligation in accordance with this
Agreement to make the Loans or L/C Advances, as contemplated by
this Section 3.03, as a result of a drawing under a Letter of
Credit, shall be absolute and unconditional and without recourse
to the Issuing Bank and shall not be affected by any
circumstance, including (i) any set-off, counterclaim,
recoupment, defense or other right which such Bank may have
against the Issuing Bank, the Company or any other Person for any
reason whatsoever; (ii) the occurrence or continuance of a
Default, an Event of Default or a Material Adverse Effect; or
(iii) any other circumstance, happening or event whatsoever,
whether or not similar to any of the foregoing; provided,
however, that each Bank's obligation to make Loans under this
Section 3.03 is subject to the conditions set forth in Section
5.02.
3.04 Repayment of Participations.
(a) Upon (and only upon) receipt by the Agent for the
account of the Issuing Bank of immediately available funds from
the Company (i) in reimbursement of any payment made by the
Issuing Bank under the Letter of Credit with respect to which any
Bank has paid the Agent for the account of the Issuing Bank for
such Bank's participation in the Letter of Credit pursuant to
Section 3.03 or (ii) in payment of interest thereon, the Agent
will pay to each Bank, in the same funds as those received by the
Agent for the account of the Issuing Bank, the amount of such
Bank's Pro Rata Share of such funds, and the Issuing Bank shall
receive the amount of the Pro Rata Share of such funds of any
Bank that did not so pay the Agent for the account of the Issuing
Bank.
(b) If the Agent or the Issuing Bank is required at
any time to return to the Company, or to a trustee, receiver,
liquidator, custodian, or any official in any Insolvency
Proceeding, any portion of the payments made by the Company to
the Agent for the account of the Issuing Bank pursuant to
subsection 3.04(a) in reimbursement of a payment made under the
Letter of Credit or interest or fee thereon, each Bank shall, on
demand of the Agent, forthwith return to the Agent or the Issuing
46
Bank the amount of its Pro Rata Share of any amounts so returned
by the Agent or the Issuing Bank plus interest thereon from the
date such demand is made to the date such amounts are returned by
such Bank to the Agent or the Issuing Bank, at a rate per annum
equal to the Federal Funds Rate in effect from time to time.
3.05 Role of the Issuing Bank.
(a) Each Bank and the Company agree that, in paying
any drawing under a Letter of Credit, the Issuing Bank shall not
have any responsibility to obtain any document (other than any
sight draft and certificates expressly required by the Letter of
Credit) or to ascertain or inquire as to the validity or accuracy
of any such document or the authority of the Person executing or
delivering any such document.
(b) No Agent-Related Person nor any of the respective
correspondents, participants or assignees of the Issuing Bank
shall be liable to any Bank for: (i) any action taken or omitted
in connection herewith at the request or with the approval of the
Banks (including the Majority Banks, as applicable); (ii) any
action taken or omitted in the absence of gross negligence or
willful misconduct; or (iii) the due execution, effectiveness,
validity or enforceability of any L/C-Related Document.
(c) The Company hereby assumes all risks of the acts
or omissions of any beneficiary or transferee with respect to its
use of any Letter of Credit; provided, however, that this
assumption is not intended to, and shall not, preclude the
Company's pursuing such rights and remedies as it may have
against the beneficiary or transferee at law or under any other
agreement. No Agent-Related Person, nor any of the respective
correspondents, participants or assignees of the Issuing Bank,
shall be liable or responsible for any of the matters described
in clauses (i) through (vii) of Section 3.06; provided, however,
anything in such clauses to the contrary notwithstanding, that
the Company may have a claim against the Issuing Bank, and the
Issuing Bank may be liable to the Company, to the extent, but
only to the extent, of any direct, as opposed to consequential or
exemplary, damages suffered by the Company which the Company
proves were caused by the Issuing Bank's willful misconduct or
gross negligence or the Issuing Bank's willful failure to pay
under any Letter of Credit after the presentation to it by the
beneficiary of a sight draft and certificate(s) strictly
complying with the terms and conditions of a Letter of Credit. In
furtherance and not in limitation of the foregoing: (i) the
Issuing Bank may accept documents that appear on their face to be
in order, without responsibility for further investigation,
47
regardless of any notice or information to the contrary; and
(ii) the Issuing Bank shall not be responsible for the validity
or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign a Letter of Credit or the rights
or benefits thereunder or proceeds thereof, in whole or in part,
which may prove to be invalid or ineffective for any reason.
3.06 Obligations Absolute. The obligations of the Company
under this Agreement and any L/C-Related Document to reimburse
the Issuing Bank for a drawing under a Letter of Credit, and to
repay any L/C Borrowing and any drawing under a Letter of Credit
converted into Revolving Loans, shall be unconditional and
irrevocable, and shall be paid strictly in accordance with the
terms of this Agreement and each such other L/C-Related Document
under all circumstances, including the following:
(i) any lack of validity or enforceability of this
Agreement or any L/C-Related Document;
(ii) any change in the time, manner or place of
payment of, or in any other term of, all or any of the
obligations of the Company in respect of any Letter of
Credit or any other amendment or waiver of or any consent to
departure from all or any of the L/C-Related Documents;
(iii) the existence of any claim, set-off, defense
or other right that the Company may have at any time against
any beneficiary or any transferee of any Letter of Credit
(or any Person for whom any such beneficiary or any such
transferee may be acting), the Issuing Bank or any other
Person, whether in connection with this Agreement, the
transactions contemplated hereby or by the L/C-Related
Documents or any unrelated transaction;
(iv) any draft, demand, certificate or other
document presented under any Letter of Credit proving to be
forged, fraudulent, invalid or insufficient in any respect
or any statement therein being untrue or inaccurate in any
respect; or any loss or delay in the transmission or
otherwise of any document required in order to make a
drawing under any Letter of Credit;
(v) any payment by the Issuing Bank under any
Letter of Credit against presentation of a draft or
certificate that does not strictly comply with the terms of
any Letter of Credit; or any payment made by the Issuing
Bank under any Letter of Credit to any Person purporting to
be a trustee in bankruptcy, debtor-in-possession, assignee
48
for the benefit of creditors, liquidator, receiver or other
representative of or successor to any beneficiary or any
transferee of any Letter of Credit, including any arising in
connection with any Insolvency Proceeding;
(vi) any exchange, release or non-perfection of
any collateral, or any release or amendment or waiver of or
consent to departure from any other guarantee, for all or
any of the obligations of the Company in respect of any
Letter of Credit; or
(vii) any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing,
including any other circumstance that might otherwise
constitute a defense available to, or a discharge of, the
Company or a guarantor.
3.07 Cash Collateral Pledge. Upon (i) the request of the
Agent, (A) if the Issuing Bank has honored any full or partial
drawing request on any Letter of Credit and such drawing has
resulted in an L/C Borrowing hereunder, or (B) if, as of the
Revolving Termination Date, any Letters of Credit may for any
reason remain outstanding and partially or wholly undrawn, or
(ii) the occurrence of the circumstances described in Section
2.07 requiring the Company to Cash Collateralize Letters of
Credit, then, the Company shall immediately Cash Collateralize
the L/C Obligations in an amount equal to such L/C Obligations.
3.08 Letter of Credit Fees.
(a) The Company shall pay to the Agent for the account
of each of the Banks a letter of credit fee on the average daily
maximum amount available to be drawn of the outstanding Letters
of Credit, computed on a quarterly basis in arrears on the last
Business Day of each calendar quarter based upon Letters of
Credit outstanding for that quarter as calculated by the Agent,
at a rate per annum equal to the Applicable Letter of Credit Fee
Rate. Such letter of credit fees shall be due and payable
quarterly in arrears on the last Business Day of each calendar
quarter during which Letters of Credit are outstanding,
commencing on December 31, 1998, through the Revolving
Termination Date (or such later date upon which the outstanding
Letters of Credit shall expire), with the final payment to be
made on the Revolving Termination Date (or such later expiration
date).
(b) The Company shall pay to the Issuing Bank, for its
sole account, a letter of credit fronting fee for each Letter of
49
Credit Issued by the Issuing Bank equal to .125% of the face
amount (or increased face amount, as the case may be) of such
Letter of Credit. Such Letter of Credit fronting fee shall be
due and payable on each date of Issuance of a Letter of Credit.
(c) The Company shall pay to the Issuing Bank, for its
sole account, from time to time on demand the normal issuance,
presentation, amendment and other processing fees, and other
standard costs and charges, of the Issuing Bank relating to
letters of credit as from time to time in effect.
3.09 Uniform Customs and Practice. The Uniform Customs and
Practice for Documentary Credits as published by the
International Chamber of Commerce most recently at the time of
issuance of any Letter of Credit shall (unless otherwise
expressly provided in the Letters of Credit) apply to the Letters
of Credit.
ARTICLE IV
TAXES, YIELD PROTECTION AND ILLEGALITY
4.01 Taxes.
(a) Any and all payments by the Company to each Bank
or the Agent under this Agreement and any other Loan Document
shall be made free and clear of, and without deduction or
withholding for, any Taxes. In addition, the Company shall pay
all Other Taxes.
(b) If the Company shall be required by law to deduct
or withhold any Taxes or Other Taxes from or in respect of any
sum payable hereunder to any Bank or the Agent, then:
(i) the sum payable shall be increased as
necessary so that, after making all required deductions and
withholdings (including deductions and withholdings
applicable to additional sums payable under this Section),
such Bank or the Agent, as the case may be, receives and
retains an amount equal to the sum it would have received
and retained had no such deductions or withholdings been
made;
(ii) the Company shall make such deductions and
withholdings;
50
(iii) the Company shall pay the full amount
deducted or withheld to the relevant taxing authority or
other authority in accordance with applicable law; and
(iv) the Company shall also pay to each Bank or
the Agent for the account of such Bank, at the time interest
is paid, Further Taxes in the amount that the respective
Bank specifies as necessary to preserve the after-tax yield
the Bank would have received if such Taxes, Other Taxes or
Further Taxes had not been imposed;
provided, that the foregoing obligation of the Company to pay
such additional amounts shall not apply
(A) to any payment to any Bank that is
subject to deduction for or withholding for taxes pursuant
to the Code, unless, as of the Closing Date or the date it
becomes a Bank pursuant to Section 11.08, such Bank is
entitled to submit a Form 1001 (relating to such Bank and
entitling it to a complete exemption from withholding on all
interest to be received by it under this Agreement) or a
Form 4224 (relating to all interest to be received by such
Bank under this Agreement in respect of the Loans) (and, in
that regard, each such Bank shall deliver to the
Administrative Agent and the Company the documentation
required by Section 10.10), or
(B) to any taxes imposed solely by reason of the failure of such Bank to
comply with applicable certification, information, documentation or other
reporting requirements concerning the nationality, residence, identity or
connections with the United States of such Bank if such compliance is required
by statute or regulations of the United States as a precondition to relief or
exemption from such Taxes.
(c) The Company agrees to indemnify and hold harmless
each Bank and the Agent for the full amount of (i) Taxes,
(ii) Other Taxes, and (iii) Further Taxes in the amount that the
respective Bank specifies as necessary to preserve the after-tax
yield the Bank would have received if such Taxes, Other Taxes or
Further Taxes had not been imposed, and any liability (including
penalties, interest, additions to tax and expenses) arising
therefrom or with respect thereto, whether or not such Taxes,
Other Taxes or Further Taxes were correctly or legally asserted.
Payment under this indemnification shall be made within 30 days
after the date the Bank or the Agent makes written demand
therefor.
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(d) Within 30 days after the date of any payment by
the Company of Taxes, Other Taxes or Further Taxes, the Company
shall furnish to each Bank or the Agent the original or a
certified copy of a receipt evidencing payment thereof, or other
evidence of payment satisfactory to such Bank or the Agent.
(e) If the Company is required to pay any amount to
any Bank or the Agent pursuant to subsection (b) or (c) of this
Section, then such Bank shall use reasonable efforts (consistent
with legal and regulatory restrictions) to change the
jurisdiction of its Lending Office so as to eliminate any such
additional payment by the Company which may thereafter accrue, if
such change in the sole judgment of such Bank is not otherwise
disadvantageous to such Bank.
4.02 Illegality.
(a) If any Bank determines that the introduction of
any Requirement of Law, or any change in any Requirement of Law,
or in the interpretation or administration of any Requirement of
Law, has made it unlawful, or that any central bank or other
Governmental Authority has asserted that it is unlawful, for any
Bank or its applicable Lending Office to make LIBOR Rate Loans,
then, on notice thereof by the Bank to the Company through the
Agent, any obligation of that Bank to make LIBOR Rate Loans shall
be suspended until the Bank notifies the Agent and the Company
that the circumstances giving rise to such determination no
longer exist.
(b) If a Bank determines that it is unlawful to
maintain any LIBOR Rate Loan, the Company shall, upon its receipt
of notice of such fact and demand from such Bank (with a copy to
the Agent), prepay in full such LIBOR Rate Loans of that Bank
then outstanding, together with interest accrued thereon and
amounts required under Section 4.04, either on the last day of
the Interest Period thereof, if the Bank may lawfully continue to
maintain such LIBOR Rate Loans to such day, or immediately, if
the Bank may not lawfully continue to maintain such LIBOR Rate
Loan. If the Company is required to so prepay any LIBOR Rate
Loan, then concurrently with such prepayment, the Company shall
borrow from the affected Bank, in the amount of such repayment, a
Base Rate Loan.
(c) If the obligation of any Bank to make or maintain
LIBOR Rate Loans has been so terminated or suspended, the Company
may elect, by giving notice to the Bank through the Agent that
all Loans which would otherwise be made by the Bank as LIBOR Rate
Loans shall be instead Base Rate Loans.
52
4.03 Increased Costs and Reduction of Return.
(a) If any Bank determines that, due to either (i) the
introduction of or any change in or in the interpretation by any
Governmental Authority of any law or regulation or (ii) the
compliance by that Bank with any guideline or request from any
central bank or other Governmental Authority (whether or not
having the force of law), there shall be any increase in the cost
to such Bank of agreeing to make or making, funding or
maintaining any LIBOR Rate Loans or participating in Letters of
Credit, or, in the case of the Issuing Bank, any increase in the
cost to the Issuing Bank of agreeing to issue, issuing or
maintaining any Letter of Credit or of agreeing to make or
making, funding or maintaining any unpaid drawing under any
Letter of Credit, then the Company shall be liable for, and shall
from time to time, upon demand (with a copy of such demand to be
sent to the Agent), pay to the Agent for the account of such
Bank, additional amounts as are sufficient to compensate such
Bank for such increased costs.
(b) If any Bank shall have determined that (i) the
introduction of any Capital Adequacy Regulation, (ii) any change
in any Capital Adequacy Regulation, (iii) any change in the
interpretation or administration of any Capital Adequacy
Regulation by any central bank or other Governmental Authority
charged with the interpretation or administration thereof, or
(iv) compliance by the Bank (or its Lending Office) or any
corporation controlling the Bank with any Capital Adequacy
Regulation, affects or would affect the amount of capital
required or expected to be maintained by the Bank or any
corporation controlling the Bank and (taking into consideration
such Bank's or such corporation's policies with respect to
capital adequacy and such Bank's desired return on capital)
determines that the amount of such capital is increased as a
consequence of its Commitment, loans, credits or obligations
under this Agreement, then, upon demand of such Bank to the
Company through the Agent, the Company shall pay to the Bank,
from time to time as specified by the Bank, additional amounts
sufficient to compensate the Bank for such increase.
4.04 Funding Losses. The Company shall reimburse each Bank
and hold each Bank harmless from any loss or expense which the
Bank may sustain or incur as a consequence of:
(a) the failure of the Company to make on a timely
basis any payment of principal of any LIBOR Rate Loan;
53
(b) the failure of the Company to borrow, continue or
convert a Loan after the Company has given (or is deemed to have
given) a Notice of Borrowing or a Notice of Conversion/
Continuation;
(c) the failure of the Company to make any prepayment
in accordance with any notice delivered under Section 2.06;
(d) the prepayment (including pursuant to Section
2.07) or other payment (including after acceleration thereof) of
a LIBOR Rate Loan on a day that is not the last day of the
relevant Interest Period; or
(e) the automatic conversion under Section 2.04 of any
LIBOR Rate Loan into a Base Rate Loan on a day that is not the
last day of the relevant Interest Period;
including any such loss or expense arising from the liquidation
or reemployment of funds obtained by it to maintain its LIBOR
Rate Loans or from fees payable to terminate the deposits from
which such funds were obtained. For purposes of calculating
amounts payable by the Company to the Banks under this Section
and under subsection 4.03(a), each LIBOR Rate Loan made by a Bank
(and each related reserve, special deposit or similar
requirement) shall be conclusively deemed to have been funded at
the LIBOR used in determining the LIBOR Rate for such LIBOR Rate
Loan by a matching deposit or other borrowing in the interbank
eurodollar market for a comparable amount and for a comparable
period, whether or not such LIBOR Rate Loan is in fact so funded.
4.05 Inability to Determine Rates. If the Agent determines
that for any reason adequate and reasonable means do not exist
for determining the LIBOR Rate for any requested Interest Period
with respect to a proposed LIBOR Rate Loan, or that the LIBOR
Rate applicable pursuant to subsection 2.09(a) for any requested
Interest Period with respect to a proposed LIBOR Rate Loan does
not adequately and fairly reflect the cost to the Banks of
funding such Loan, the Agent will promptly so notify the Company
and each Bank. Thereafter, the obligation of the Banks to make
or maintain LIBOR Rate Loans hereunder shall be suspended until
the Agent revokes such notice in writing. Upon receipt of such
notice, the Company may revoke any Notice of Borrowing or Notice
of Conversion/Continuation then submitted by it. If the Company
does not revoke such Notice, the Banks shall make, convert or
continue the Loans, as proposed by the Company, in the amount
specified in the applicable notice submitted by the Company, but
such Loans shall be made, converted or continued as Base Rate
Loans instead of LIBOR Rate Loans.
54
4.06 Certificates of Banks. Any Bank claiming
reimbursement or compensation under this Article IV shall deliver
to the Company (with a copy to the Agent) a certificate setting
forth in reasonable detail the amount payable to the Bank
hereunder and the reasons therefor and such certificate shall be
conclusive and binding on the Company in the absence of manifest
error.
4.07 Substitution of Banks. If the Company shall receive
notice from any Bank that LIBOR Rate Loans are no longer
available from such Bank pursuant to Section 4.02 or that amounts
are due to such Bank pursuant to Section 4.01 or 4.03, the
Company may (but subject in any such case to the payments
required by Section 4.04), upon at least five Business Days'
prior written or telecopier notice to such Bank and the Agent,
but not more than 90 days after receipt of written notice from
such Bank, identify to the Agent a lending institution acceptable
to the Company and the Agent, which will purchase the
Commitments, the amount of outstanding Loans and any
participations in Letters of Credit from the Bank providing such
notice, and such Bank shall thereupon assign its Commitment, any
Loans owing to such Bank, any participations in Letters of Credit
and the Notes held by such Bank to such replacement lending
institution pursuant to Section 11.08.
4.08 Survival. The agreements and obligations of the
Company in this Article IV shall survive the payment of all other
Obligations.
ARTICLE V
CONDITIONS PRECEDENT
5.01 Conditions of Initial Credit Extensions. The
obligation of each Bank to make its initial Credit Extension
hereunder is subject to the condition that the Agent shall have
received on or before the Closing Date all of the following, in
form and substance satisfactory to the Agent and each Bank, and
in sufficient copies for each Bank:
(a) Credit Agreement and Notes. This Agreement and
the Notes executed by each party thereto;
(b) Resolutions; Incumbency.
(i) Copies of the resolutions of the board of
directors of the Company and each Pledgor Subsidiary
authorizing the transactions contemplated hereby, certified
as of the Closing Date by the Secretary or an Assistant
55
Secretary of the Company and each such Pledgor Subsidiary;
and
(ii) A certificate of the Secretary or Assistant
Secretary of the Company and each Pledgor Subsidiary
certifying the names and true signatures of the officers of
the Company or such Pledgor Subsidiary (as the case may be)
authorized to execute, deliver and perform, as applicable,
this Agreement, and all other Loan Documents to be delivered
by it hereunder;
(c) Organization Documents; Good Standing. Each of
the following documents:
(i) the articles or certificate of incorporation
and the bylaws of the Company as in effect on the Closing
Date, certified by the Secretary or Assistant Secretary of
the Company as of the Closing Date; and
(ii) a good standing and tax good standing
certificate for the Company and each of its domestic
Subsidiaries from the Secretary of State (or similar,
applicable Governmental Authority) of its state of
incorporation and each state where the Company or such
Subsidiary (as the case may be) is qualified to do business
as a foreign corporation as of a recent date, together with
a bring-down certificate by facsimile, dated the Closing
Date;
(d) Legal Opinions. Opinions of (i) Morgan, Lewis &
Bockius, special California counsel to the Company; (ii) internal
Nevada counsel to the Company; and (iii) local counsel to the
Company and its Subsidiaries in such other jurisdictions as the
Agent may reasonably request, each addressed to the Agent and the
Banks and collectively addressing the matters set forth in
Exhibit D with respect to the Company and its Subsidiaries;
(e) Payment of Fees. Evidence of payment by the
Company of all accrued and unpaid fees, costs and expenses to the
extent then due and payable on the Closing Date, other than costs
associated with the Kaiser-Texas Acquisition, together with
Attorney Costs of BofA to the extent invoiced prior to or on the
Closing Date, plus such additional amounts of Attorney Costs as
shall constitute BofA's reasonable estimate of Attorney Costs
incurred or to be incurred by it through the closing proceedings
(provided that such estimate shall not thereafter preclude final
settling of accounts between the Company and BofA); including any
56
such costs, fees and expenses arising under or referenced in
Sections 2.10 and 11.04;
(f) Certificate. A certificate signed by a
Responsible Officer, dated as of the Closing Date, stating that:
(i) the representations and warranties contained
in Article VI are true and correct on and as of such date,
as though made on and as of such date;
(ii) no Default or Event of Default exists or
would result from the Credit Extension;
(iii) there has occurred since December 31, 1997,
no event or circumstance that has resulted or could
reasonably be expected to result in a Material Adverse
Effect; and
(iv) to the best of such Responsible
Officer's knowledge there has not occurred since
December 31, 1997, a material adverse change in, or a
material adverse effect upon, the operations, business,
properties, or condition (financial or otherwise) of
the business being acquired by HMO Texas from Kaiser
Texas or PMAT;
(g) Collateral Documents. The Pledge Agreements,
executed by the Company and each Pledgor Subsidiary, covering the
capital stock of all Subsidiaries other than those Excluded
Subsidiaries listed on Schedule 5.01(g), in appropriate form for
recording, where necessary, together with:
(i) acknowledgment copies of all UCC-1 financing
statements filed, registered or recorded to perfect the
security interests of the Agent for the benefit of the
Banks, or other evidence satisfactory to the Agent that
there has been filed, registered or recorded all financing
statements and other filings, registrations and recordings
necessary and advisable to perfect the Liens of the Agent
for the benefit of the Banks in accordance with applicable
law;
(ii) written advice relating to such Lien and
judgment searches as the Agent shall have requested, and
such termination statements or other documents as may be
necessary to confirm that the Collateral is subject to no
other Liens in favor of any Persons (other than Permitted
Liens);
57
(iii) all certificates and instruments
representing the Pledged Collateral, stock transfer powers
executed in blank with signatures guaranteed as the Agent or
the Banks may specify;
(iv) evidence that all other actions necessary or,
in the opinion of the Agent or the Banks, desirable to
perfect and protect the first priority security interest
created by the Pledge Agreements have been taken;
(v) funds sufficient to pay any filing or
recording tax or fee in connection with any and all UCC-1
financing statements; and
(vi) evidence that all other actions necessary or,
in the opinion of the Agent or the Banks, desirable to
perfect and protect the first priority Lien created by the
Collateral Documents, and to enhance the Agent's ability to
preserve and protect its interests in and access to the
Collateral, have been taken;
(h) Regulatory Compliance. A certificate of a
Responsible Officer on behalf of each of the HMO Subsidiaries to
the effect that such HMO Subsidiary is in compliance in all
material respects with the requirements of all applicable HMO
Regulations, including such Regulatory Tangible Net Equity
Requirements as are applicable to such HMO Subsidiary, and with
all other Requirements of Law;
(i) Prior Credit Agreement. Evidence that all
commitments to lend under the Prior Credit Agreement have been
terminated and that all principal, interest, fees and other sums
then due and payable under the Prior Credit Agreement have been
paid in full;
(j) Kaiser Acquisition Agreements. A certificate
signed by a Responsible Officer of the Company, dated as of the
Closing Date, stating that:
(i) the conditions precedent to the
transactions contemplated by the Kaiser Acquisition
Agreements have been satisfied without waiver or
forbearance;
(ii) to the best of such Responsible
Officer's knowledge, the representations and warranties
of HMO Texas, the Company, PMAT and Kaiser Texas set
58
forth in the Kaiser Acquisition Agreements are true and
correct in all material respects;
(iii) each of PMAT and Kaiser Texas has
certified to HMO Texas that its representations and
warranties set forth in the Kaiser Acquisition
Agreements are true and correct in all material
respects; and
(iv) the Kaiser Acquisition Agreements have
not been amended in any material respect adverse to the
Company;
(k) Litigation. Such evidence as the Agent shall
reasonably require that (i) there exists no litigation
challenging or seeking to restrain or prohibit the consummation
of the transactions contemplated by the Kaiser Acquisition
Agreements, the making of the Loans by the Banks or the
performance of the Obligations and (ii) there exists no judgment,
order, injunction, or other restraint prohibiting the
consummation of the transactions contemplated by the Kaiser
Acquisition Agreements, the making of the Loans by the Banks or
the performance of the Obligations;
(l) Financial Covenant Certificate. A certificate
signed by a Responsible Officer of the Company, dated as of the
Closing Date confirming that after giving effect to the Kaiser-
Texas Acquisition, on a pro forma basis:
(i) the Leverage Ratio, as of September 30,
1998 is not more than 3.50 to 1.00; and
(ii) Sierra Adjusted EBITDA, as of
September 30, 1998 is not less than $70,000,000.
(m) Other Documents. Such other approvals, opinions,
documents or materials as the Agent or any Bank may request.
5.02 Conditions to All Credit Extensions. The obligation
of each Bank to make any Loan to be made by it (including its
initial Loan) and the obligation of the Issuing Bank to Issue any
Letter of Credit (including the initial Letter of Credit) is
subject to the satisfaction of the following conditions precedent
on the relevant Borrowing Date or Issuance Date:
(a) Notice, Application. The Agent shall have
received (with, in the case of the initial Loan only, a copy for
each Bank) a Notice of Borrowing or, in the case of any Issuance
59
of any Letter of Credit, the Issuing Bank and the Agent shall
have received an L/C Application or L/C Amendment Application, as
required under Section 3.02;
(b) Continuation of Representations and Warranties.
The representations and warranties in Article IV hereof and in
the Pledge Agreements shall be true and correct on and as of such
Borrowing Date or Issuance Date (in all material respects if such
date is a date subsequent to the Closing Date) with the same
effect as if made on and as of such Borrowing Date or Issuance
Date (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they shall be
true and correct as of such earlier date); and
(c) No Existing Default. No Default or Event of
Default shall exist or shall result from such Borrowing or
Issuance.
Each Notice of Borrowing and L/C Application or L/C Amendment
Application submitted by the Company hereunder shall constitute a
representation and warranty by the Company hereunder, as of the
date of each such notice and as of each Borrowing Date or
Issuance Date, as applicable, that the conditions in this Section
5.02 are satisfied.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Agent and each
Bank that:
6.01 Corporate Existence and Power. The Company and each
of its Subsidiaries:
(a) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation;
(b) has the corporate power and authority and all
governmental licenses, authorizations, consents and approvals to
own or hold under lease its property and other assets, carry on
its business as currently conducted by it and to execute,
deliver, and perform its obligations under the Loan Documents;
(c) is duly qualified as a foreign corporation and is
licensed and in good standing under the laws of each jurisdiction
where its ownership, lease or operation of property or the
60
conduct of its business requires such qualification or license,
except where the failure to be so licensed or qualified would not
have, individually or in the aggregate, a Material Adverse
Effect; and
(d) is in compliance with all Requirements of Law,
except for such instances of non-compliance as would not have,
individually or in the aggregate, a Material Adverse Effect.
6.02 Corporate Authorization; No Contravention. The
execution, delivery and performance by the Company of this
Agreement, the Pledge Agreements and each other Loan Document to
which the Company or any Pledgor Subsidiary is party, have been
duly authorized by all necessary corporate action, and do not and
will not:
(a) contravene the terms of any of the Company's or
the Pledgor Subsidiaries' Organization Documents;
(b) conflict with or result in any breach or
contravention of, or the creation of any Lien under, any document
evidencing any Contractual Obligation to which the Company is a
party or any order, injunction, writ or decree of any
Governmental Authority to which the Company or any Pledgor
Subsidiary or any of their respective property is subject, except
for such instances as would not have, individually or in the
aggregate, a Material Adverse Effect; or
(c) violate any Requirement of Law.
6.03 Authorization, Approval, etc.
(a) Except as set forth on Schedule 6.03, no approval,
consent, exemption, authorization, or other action by, or notice
to, or filing with, any Governmental Authority or any other
Person (except for recordings or filings in connection with the
Liens granted to the Agent under the Collateral Documents) is
necessary or required in connection with the execution, delivery
or performance by, or enforcement against, the Company or any of
its Subsidiaries of the Agreement, the Pledge Agreements or any
other Loan Document including:
(i) the pledge by the Company and the
Pledgor Subsidiaries of any Collateral pursuant to the
Pledge Agreements or the execution, delivery, and
performance of the Pledge Agreements by the Company and
the Pledgor Subsidiaries; and
61
(ii) the exercise by the Agent of the voting
or other rights provided for in the Pledge Agreements,
or, except with respect to any Pledged Shares, as may
be required in connection with a disposition of such
Pledged Shares by laws affecting the offering and sale
of securities generally, the remedies in respect of the
Collateral pursuant to the Pledge Agreements.
(b) As of the Closing of the Kaiser-Texas Acquisition,
no material approval, consent, exemption, authorization, or other
action by, or notice to, or filing with, any Governmental
Authority is necessary or required for the consummation of the
Kaiser-Texas Acquisition, other than that which has been
obtained.
6.04 Binding Effect. This Agreement, the Pledge Agreements
and each other Loan Document to which the Company or any Pledgor
Subsidiary is a party constitute the legal, valid and binding
obligations of the Company or such Pledgor Subsidiary (as the
case may be), enforceable against the Company or such Pledgor
Subsidiary (as the case may be) in accordance with their
respective terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws affecting the
enforcement of creditors' rights generally or by equitable
principles relating to enforceability.
6.05 Litigation. Except as set forth on Schedule 6.05,
there are no actions, suits, proceedings, claims or disputes
pending which have been served, or to the best knowledge of the
Company, otherwise pending, threatened or contemplated, at law,
in equity, in arbitration or before any Governmental Authority,
against the Company, or its Subsidiaries or any of their
respective properties which:
(a) purport to affect or pertain to this Agreement or
any other Loan Document, or any of the transactions contemplated
hereby or thereby; or
(b) would reasonably be expected to have a Material
Adverse Effect. No injunction, writ, temporary restraining order
or any order of any nature has been issued by any court or other
Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of this Agreement or any other
Loan Document, or directing that the transactions provided for
herein or therein not be consummated as herein or therein
provided.
62
6.06 No Default. No Default or Event of Default exists or
would result from the incurring of any Obligations by the Company
or any of its Subsidiaries or from the grant or perfection of the
Liens of the Agent and the Banks on the Collateral. As of the
Closing Date, neither the Company nor any Subsidiary is in
default under or with respect to any Contractual Obligation in
any respect which, individually or together with all such
defaults, could reasonably be expected to have a Material Adverse
Effect, or that would, if such default had occurred after the
Closing Date, create an Event of Default under subsection
9.01(e).
6.07 Compliance with Laws and ERISA.
(a) Except as set forth on Schedule 6.03, the Company
and its Subsidiaries are in compliance with the requirements of
all applicable laws, rules, regulations and orders of every
governmental authority, the non-compliance with which might
materially adversely affect the business, properties, assets,
operations or condition (financial or otherwise) of the Company
or the value of the Collateral or the worth of the Collateral as
collateral security.
(b) Each Plan is in compliance in all material
respects with the applicable provisions of ERISA, the Code and
other federal or state law. Each Plan which is intended to
qualify under Section 401(a) of the Code has received a favorable
determination letter from the IRS and to the best knowledge of
the Company, nothing has occurred which would cause the loss of
such qualification. The Company and each ERISA Affiliate has
made all required contributions to any Plan subject to Section
412 of the Code, and no application for a funding waiver or an
extension of any amortization period pursuant to Section 412 of
the Code has been made with respect to any Plan.
(c) There are no pending (and served) or, to the best
knowledge of Company, otherwise pending or threatened claims,
actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan which has resulted or could reasonably
be expected to result in a Material Adverse Effect. There has
been no prohibited transaction or violation of the fiduciary
responsibility rules with respect to any Plan which has resulted
or could reasonably be expected to result in a Material Adverse
Effect.
(d) (i) No ERISA Event has occurred or is reasonably
expected to occur;
63
(ii) no Pension Plan has any Unfunded Pension
Liability;
(iii) neither the Company nor any ERISA
Affiliate has incurred, or reasonably expects to incur,
any liability under Title IV of ERISA with respect to
any Pension Plan (other than premiums due and not
delinquent under Section 4007 of ERISA);
(iv) neither the Company nor any ERISA
Affiliate has incurred, or reasonably expects to incur,
any liability (and no event has occurred which, with
the giving of notice under Section 4219 of ERISA, would
result in such liability) under Section 4201 or 4243 of
ERISA with respect to a Multiemployer Plan; and
(v) neither the Company nor any ERISA
Affiliate has engaged in a transaction that could be
subject to Section 4069 or 4212(c) of ERISA.
6.08 Use of Proceeds; Margin Regulations. The proceeds of
the Loans are to be used solely for the purposes set forth in and
permitted by Section 7.12 and Section 8.07. Neither the Company
nor any Subsidiary is generally engaged in the business of
purchasing or selling Margin Stock or extending credit for the
purpose of purchasing or carrying Margin Stock.
6.09 Title to Property and Collateral; No Liens. The
Company and each Subsidiary have good record and marketable title
in fee simple to, or valid leasehold interests in, all real
property necessary or used in the ordinary conduct of their
respective businesses, except for such defects in title as could
not, individually or in the aggregate, have a Material Adverse
Effect. The Company and the Pledgor Subsidiaries are the legal
and beneficial owners of, and have good and marketable title to
(and have full right and authority to pledge, hypothecate,
mortgage and deliver) all the Collateral that is subject to their
respective Pledge Agreements. As of the Closing Date, all the
Collateral and other property of the Company and its Subsidiaries
are subject to no Liens, other than Permitted Liens. Even after
the Closing Date, the Collateral shall continue not to be subject
to any Liens, other than Permitted Liens.
6.10 As to Pledged Shares. Except as disclosed in Schedule
6.10, all Pledged Shares are duly authorized and validly issued,
fully paid, and non-assessable, and constitute all of the issued
and outstanding shares of capital stock of the Subsidiaries whose
shares have been pledged by the Company and the Pledgor
64
Subsidiaries under the Pledge Agreements. Other than the Pledged
Shares, no Subsidiary whose shares have been pledged under the
Pledge Agreements has outstanding any capital stock or other
securities convertible into or exchangeable for any of its
capital stock, nor will it have outstanding any rights to
subscribe for or to purchase, or any warrants or options for the
purchase of, or any agreements (contingent or otherwise)
providing for the issuance of, or any calls, commitments or
claims of any character relating to, any of its capital stock or
any securities convertible into or exchangeable for any of its
capital stock.
6.11 Taxes. The Company and its Subsidiaries have filed
all Federal and other material tax returns and reports required
to be filed, and have paid all Federal and other material taxes,
assessments, fees and other governmental charges levied or
imposed upon them or their properties, income or assets otherwise
due and payable, except those which are being contested in good
faith by appropriate proceedings and for which adequate reserves
have been provided in accordance with GAAP. There is no proposed
tax assessment against the Company or any Subsidiary that would,
if made, have a Material Adverse Effect.
6.12 Financial Condition.
(a) The audited consolidated financial statements of
the Company and its Subsidiaries dated December 31, 1997, and the
related consolidated statements of income or operations,
shareholders' equity and cash flows for the fiscal year ended on
that date:
(i) were prepared in accordance with GAAP
consistently applied throughout the period covered thereby,
except as otherwise expressly noted therein;
(ii) fairly present the financial condition of the
Company and its Subsidiaries as of the date thereof and
results of operations for the period covered thereby; and
(iii) except as specifically disclosed in Schedule
6.12, show all material indebtedness and other liabilities,
direct or contingent, of the Company and its consolidated
Subsidiaries as of the date thereof, including liabilities
for taxes, material commitments and Contingent Obligations.
(b) The audited consolidated financial statements of
Kaiser Texas and its Subsidiaries dated December 31, 1997, and
the related consolidated statements of income of operations,
65
shareholders' equity and cash flows for the fiscal year ended on
that date and the unaudited consolidated financial statements of
Kaiser Texas and its Subsidiaries dated June 30, 1998, and the
related consolidated statements of income or operations,
shareholders' equity and cash flows for the six months ended on
that date:
(i) were prepared in accordance with GAAP
consistently applied throughout the period covered
thereby, except as otherwise expressly noted therein;
(ii) fairly present the financial condition
of Kaiser Texas and its Subsidiaries as of the dates
thereof and results of operations for the period
covered thereby;
(iii) except as specifically disclosed in
Schedule 6.12, show all material indebtedness and other
liabilities, direct or contingent, of Kaiser Texas and
its consolidated Subsidiaries as of the date thereof,
including liabilities for taxes, material commitments
and Contingent Obligations;
except to the extent that departures from the
representations in clauses (i), (ii) or (iii) above could not,
individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect.
(c) Since December 31, 1997, there has been no
Material Adverse Effect.
6.13 Environmental Matters. The Company conducts in the
ordinary course of business a review of the effect of existing
Environmental Laws and existing Environmental Claims on its
business, operations and properties, and as a result thereof the
Company has reasonably concluded that, except as specifically
disclosed in Schedule 6.13, such Environmental Laws and
Environmental Claims could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
6.14 Collateral Documents.
(a) The provisions of the Pledge Agreements and the
delivery of the Collateral pursuant thereto are effective to
create in favor of the Agent for the benefit of the Banks, a
legal, valid and enforceable first priority security interest in
all right, title and interest of the Company and its Subsidiaries
in the Collateral described therein and all proceeds thereof.
66
Except as contemplated by this Agreement, no filing or other
action will be necessary to perfect or protect such security
interest.
(b) All representations and warranties of the Company
and the Pledgor Subsidiaries contained in the Collateral
Documents are true and correct.
6.15 Regulated Entities. None of the Company, any Person
controlling the Company, or any Subsidiary, is an "Investment
Company" within the meaning of the Investment Company Act of
1940. The Company is not subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, any state public utilities code, or any
other Federal or state statute or regulation limiting its ability
to incur Indebtedness.
6.16 No Burdensome Restrictions. Neither the Company nor
any Subsidiary is a party to or bound by any Contractual
Obligation, or subject to any restriction in any Organization
Document, or any Requirement of Law, which could reasonably be
expected to have a Material Adverse Effect.
6.17 Copyrights, Patents, Trademarks and Licenses, etc.
The Company or its Subsidiaries own or are licensed or otherwise
have the right to use all of the patents, trademarks, service
marks, trade names, copyrights, contractual franchises,
authorizations and other rights that are reasonably necessary for
the operation of their respective businesses, without conflict
with the rights of any other Person. To the best knowledge of
the Company, no slogan or other advertising device, product,
process, method, substance, part or other material now employed,
or now contemplated to be employed, by the Company or any
Subsidiary infringes upon any rights held by any other Person.
No claim or litigation regarding any of the foregoing is pending
or threatened, and no patent, invention, device, application,
principle or any statute, law, rule, regulation, standard or code
is pending or, to the knowledge of the Company, proposed, which,
in either case, could reasonably be expected to have a Material
Adverse Effect.
6.18 Subsidiaries. As of the Closing Date, the Company has
no Subsidiaries other than those specifically disclosed in part
(a) of Schedule 6.18 hereto and has no equity investments in any
other corporation or entity constituting 20% or more of the
outstanding equity interests in such corporation or entity other
than those specifically disclosed in part (b) of Schedule 6.18.
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Set forth in part (c) of Schedule 6.18 is a list of all Excluded
Subsidiaries as of the Closing Date.
6.19 Insurance. Except as specifically disclosed in
Schedule 6.19, the properties of the Company and its Subsidiaries
are insured with financially sound and reputable insurance
companies not Affiliates of the Company, in such amounts, with
such deductibles and covering such risks as are customarily
carried by companies engaged in similar businesses and owning
similar properties in localities where the Company or such
Subsidiary operates.
6.20 Swap Obligations. Neither the Company nor any of its
Subsidiaries has incurred any outstanding obligations under any
Swap Contracts except in the ordinary course of business for bona
fide hedging purposes.
6.21 Full Disclosure. None of the representations or
warranties made by the Company or any Subsidiary in the Loan
Documents as of the date such representations and warranties are
made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on
behalf of the Company or any Subsidiary in connection with the
Loan Documents (including the offering and disclosure materials
delivered by or on behalf of the Company to the Banks prior to
the Closing Date), contains any untrue statement of a material
fact or omits any material fact required to be stated therein or
necessary to make the statements made therein, in light of the
circumstances under which they are made, not misleading as of the
time when made or delivered.
6.22 Business Activity. Neither the Company nor any of its
Subsidiaries is engaged in any line or lines of business activity
other than the Health Care Business.
6.23 Licensing, Etc. Each HMO Subsidiary maintains (i) all
licenses and certifications required pursuant to any HMO
Regulation; (ii) all certifications and authorizations necessary
to ensure that each of the HMO Subsidiaries is eligible for all
reimbursements available under the HMO Regulations to the extent
applicable to HMOs of their type; and (iii)all licenses,
permits, authorizations and qualifications required under the HMO
Regulations in connection with the ownership or operation of
HMOs; except where the failure to maintain the items described in
any of the preceding three clauses would not have a Material
Adverse Effect.
6.24 Kaiser Acquisition Agreements.
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(a) Consummation of the transactions contemplated by
the Kaiser Acquisition Agreements by Kaiser Texas, the Company,
PMAT and Kaiser Texas has not and will not:
(i) contravene the terms of any of that
Person's Organization Documents;
(ii) conflict with in any material respect or
result in a breach or contravention of, or the creation
of any Lien under, any document evidencing any material
Contractual Obligation to which such Person is a party
or any order, injunction, writ or decree of any
Governmental Authority to which such Person or its
property is subject; or
(iii) violate any material Requirement of
Law.
(b) The Kaiser Acquisition Agreements constitute the
legal, valid and binding obligations of the Company and, to the
Company's knowledge, PMAT and Kaiser Texas, enforceable against
such Person in accordance with their respective terms, except as
enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws affecting the enforcement of
creditors' rights generally or by equitable principles relating
to enforceability.
6.25 Year 2000 Representation. On the basis of a
comprehensive review and assessment of the Company's and its
Subsidiaries' systems and equipment and inquiry made of the
Company's and its Subsidiaries' material suppliers, vendors and
customers, the Company reasonably believes that the "Year 2000
problem" (that is, the inability of computers, as well as
embedded microchips in non-computing devices, to perform properly
date-sensitive functions with respect to certain dates prior to
and after December 31, 1999), including costs of remediation,
will not result in a Material Adverse Effect. The Company and
its Subsidiaries have developed feasible contingency plans
adequately to ensure uninterrupted and unimpaired business
operation in the event of failure of their own or a third party's
systems or equipment due to the Year 2000 problem, including
those of vendors, customers, and suppliers, as well as a general
failure of or interruption in its communications and delivery
infrastructure.
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ARTICLE VII
AFFIRMATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or
any Loan or other Obligation shall remain unpaid or unsatisfied,
or any Letter of Credit shall remain outstanding, unless the
Majority Banks waive compliance in writing:
7.01 Financial Statements. The Company shall deliver to
the Agent, in form and detail satisfactory to the Agent and the
Majority Banks, with sufficient copies for each Bank:
(a) as soon as available, but not later than 90 days
after the end of each fiscal year (commencing with the fiscal
year ended December 31, 1998), a copy of the audited consolidated
balance sheets of the Company and its Subsidiaries as at the end
of such year and the related consolidated statements of income or
operations, shareholders' equity and cash flows for such year,
setting forth in each case in comparative form the figures for
the previous fiscal year, and accompanied by the opinion of
Deloitte & Touche or another nationally-recognized independent
public accounting firm ("Independent Auditor") which report shall
state that such consolidated financial statements present fairly
the financial position for the periods indicated in conformity
with GAAP applied on a basis consistent with prior years. Such
opinion shall not be qualified or limited because of a restricted
or limited examination by the Independent Auditor of any material
portion of the Company's or any Subsidiary's records;
(b) as soon as available, but not later than 45 days
after the end of each of the first three fiscal quarters of each
fiscal year (commencing with the fiscal quarter ended March 31,
1999), a copy of the unaudited consolidated balance sheets of the
Company and its Subsidiaries as of the end of such quarter and
the related consolidated statements of income and cash flows for
the period commencing on the first day and ending on the last day
of such quarter, and certified by a Responsible Officer as fairly
presenting, in accordance with GAAP (subject to ordinary, good
faith year-end audit adjustments), the financial position and the
results of operations of the Company and the Subsidiaries;
(c) as soon as available, but not later than 90 days
after the end of each fiscal year (commencing with the fiscal
year ended December 31, 1998), (i) a copy of an unaudited
consolidating balance sheets of the Company and its Subsidiaries
as at the end of such year and the related consolidating
statements of income for such year, certified by a Responsible
Officer as having been developed and used in connection with the
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preparation of the financial statements referred to in subsection
7.01(a) and (ii) a copy of a statement of financial position for
any of the Company's Subsidiaries for which the Company provides
a guaranty of reserve liabilities, as of the end of such quarter,
certified by a Responsible Officer; and
(d) as soon as available, but not later than 45 days
after the end of each of the first three fiscal quarters of each
fiscal year (commencing with the fiscal quarter ended March 31,
1999), (i) a copy of the unaudited consolidating balance sheets
of the Company and its Subsidiaries, and the related
consolidating statements of income for such quarter, all
certified by a Responsible Officer as having been developed and
used in connection with the preparation of the financial
statements referred to in subsection 7.01(b) and (ii) a copy of a
statement of financial position for any of the Company's
Subsidiaries for which the Company provides a guaranty of reserve
liabilities, as of the end of such quarter, certified by a
Responsible Officer.
7.02 Certificates; Other Information. The Company shall
furnish to the Agent, with sufficient copies for each Bank:
(a) concurrently with the delivery of the financial
statements referred to in subsection 7.01(a), a certificate of
the Independent Auditor stating that in making the examination
necessary therefor no knowledge was obtained of any Default or
Event of Default, except as specified in such certificate;
(b) concurrently with the delivery of the financial
statements referred to in subsections 7.01(a) and (b), a
Compliance Certificate executed by a Responsible Officer;
(c) promptly, copies of all financial statements and
reports that the Company sends to its shareholders, and copies of
all financial statements and regular, periodical or special
reports (including Forms 10K, 10Q and 8K) that the Company or any
Subsidiary may make to, or file with, the SEC;
(d) promptly following the receipt of the same, a copy
of each notice relating to the loss by the Company or any HMO
Subsidiary of any material operating permit, license or
certification by any HMO Regulator;
(e) promptly following the receipt of the same, all
material correspondence received by the Company or any Subsidiary
(other than correspondence in draft form) from an HMO Regulator
which asserts that the Company or any HMO Subsidiary is not in
71
substantial compliance with any HMO Regulation or which threatens
the taking of any action against the Company or any Subsidiary
under any HMO Regulation which would reasonably be expected to
have a Material Adverse Effect;
(f) from time to time upon receipt of a written
request by the Agent or any Bank specifying in reasonable detail
the types of documents to be provided, copies of any and all
statements, audits, studies or reports submitted by or on behalf
of the Company or any HMO Subsidiary to any HMO Regulator; and
(g) promptly, such additional information regarding
the business, financial or corporate affairs of the Company or
any Subsidiary as the Agent, at the request of any Bank, may from
time to time reasonably request in writing.
7.03 Notices. The Company shall promptly notify the Agent
and each Bank:
(a) of the occurrence of any Default or Event of
Default, and of the occurrence or existence of any event or
circumstance that could, with reasonable foreseeability, become a
Default or Event of Default;
(b) of any matter that has resulted or may reasonably
be expected to result in a Material Adverse Effect, including
(i) breach or non-performance of, or any default under, a
Contractual Obligation of the Company or any Subsidiary; (ii) any
dispute, litigation, investigation, proceeding or suspension
between the Company or any Subsidiary and any Governmental
Authority; or (iii) the commencement of, or any material
development in, any litigation or proceeding affecting the
Company or any Subsidiary; including pursuant to any applicable
Environmental Laws;
(c) of the occurrence of any of the following events
affecting the Company or any ERISA Affiliate (but in no event
more than 10 days after such event), and deliver to the Agent and
each Bank a copy of any notice with respect to such event that is
filed with a Governmental Authority and any notice delivered by a
Governmental Authority to the Company or any ERISA Affiliate with
respect to such event:
(i) an ERISA Event,
(ii) a material increase in the Unfunded Pension
Liability of any Pension Plan,
72
(iii) the adoption of, or the commencement of
contributions to, any Plan subject to Section 412 of the
Code by the Company or any ERISA Affiliate, or
(iv) the adoption of any amendment to a Plan
subject to Section 412 of the Code, if such amendment
results in a material increase in contributions or Unfunded
Pension Liability;
(d) of any material change in accounting policies or
financial reporting practices by the Company or any of its
consolidated Subsidiaries; and
(e) of the creation or acquisition of Subsidiary and a
statement as to whether or not such Subsidiary is an Excluded
Subsidiary.
Each notice under this Section shall be accompanied by a written
statement by a Responsible Officer setting forth details of the
occurrence referred to therein, and stating what action the
Company or any affected Subsidiary proposes to take with respect
thereto and at what time. Each notice under subsection 7.03(a)
shall describe with particularity any and all clauses or
provisions of this Agreement or other Loan Document that have
been (or could with reasonable foreseeability be) breached or
violated.
7.04 Preservation of Corporate Existence, Etc. The Company
shall, and shall cause each Subsidiary to:
(a) preserve and maintain in full force and effect its
corporate existence and good standing under the laws of its state
or jurisdiction of incorporation;
(b) preserve and maintain in full force and effect all
governmental rights, privileges, qualifications, permits,
licenses and franchises necessary or desirable in the normal
conduct of its business, including all licenses and
certifications required pursuant to any HMO Regulation, all
certifications and authorizations necessary to ensure that each
of the HMO Subsidiaries is eligible for all reimbursements
available under the HMO Regulation to the extent applicable to
HMOs of their type, and all licenses, permits, authorization and
qualifications required under the HMO Regulations in connection
with the ownership or operation of HMOs;
(c) use reasonable efforts, in the ordinary course of
business, to preserve its business organization and goodwill; and
73
(d) preserve or renew all of its registered patents,
trademarks, trade names and service marks, the non-preservation
of which could reasonably be expected to have a Material Adverse
Effect.
7.05 Maintenance of Property. The Company shall maintain,
and shall cause each Subsidiary to maintain, and preserve all its
property which is used or useful in its business in good working
order and condition, ordinary wear and tear excepted and make all
necessary repairs thereto and renewals and replacements thereof
except where the failure to do so could not reasonably be
expected to have a Material Adverse Effect.
7.06 Insurance. Except as specifically disclosed in
Schedule 6.19, in addition to insurance requirements set forth in
the Collateral Documents, the Company shall maintain, and shall
cause each Subsidiary to maintain, with financially sound and
reputable independent insurers, insurance with respect to its
properties and business against loss or damage of the kinds
customarily insured against by Persons engaged in the same or
similar business, of such types and in such amounts as are
customarily carried under similar circumstances by such other
Persons, of such types and in such amounts as are customarily
carried under similar circumstances by such other Persons;
including workers' compensation insurance, public liability and
property and casualty insurance which amount shall not be
reduced by the Company in the absence of 30 days' prior notice to
the Agent. Upon request of the Agent or any Bank, the Company
shall furnish the Agent, with sufficient copies for each Bank, at
reasonable intervals (but not more than once per calendar year) a
certificate of a Responsible Officer of the Company (and, if
requested by the Agent, any insurance broker of the Company)
setting forth the nature and extent of all insurance maintained
by the Company and its Subsidiaries in accordance with this
Section or any Collateral Documents (and which, in the case of a
certificate of a broker, were placed through such broker).
7.07 Payment of Obligations. The Company shall, and shall
cause each Subsidiary to, pay and discharge as the same shall
become due and payable, all their respective obligations and
liabilities, including:
(a) all tax liabilities, assessments and governmental
charges or levies upon it or its properties or assets, unless the
same are being contested in good faith by appropriate proceedings
and adequate reserves in accordance with GAAP are being
maintained by the Company or such Subsidiary;
74
(b) all lawful claims which, if unpaid, would by law
become a Lien upon its property; and
(c) all Indebtedness, as and when due and payable, but
subject to any subordination provisions contained in any
instrument or agreement evidencing such Indebtedness.
7.08 Compliance with Laws. The Company shall comply, and
shall cause each Subsidiary to comply, in all material respects
with all Requirements of Law of any Governmental Authority having
jurisdiction over it or its business (including all HMO
Regulations and the Federal Fair Labor Standards Act), except
such as may be contested in good faith or as to which a bona fide
dispute may exist.
7.09 Compliance with ERISA. The Company shall, and shall
cause each of its ERISA Affiliates to: (a) maintain each Plan in
compliance in all material respects with the applicable
provisions of ERISA, the Code and other federal or state law;
(b) cause each Plan which is qualified under Section 401(a) of
the Code to maintain such qualification; and (c) make all
required contributions to any Plan subject to Section 412 of the
Code.
7.10 Inspection of Property and Books and Records. The
Company shall maintain and shall cause each Subsidiary to
maintain proper books of record and account, in which full, true
and correct entries in conformity with GAAP consistently applied
shall be made of all financial transactions and matters involving
the assets and business of the Company and such Subsidiary. The
Company shall permit, and shall cause each Subsidiary to permit,
representatives and independent contractors of the Agent or any
Bank to visit and inspect any of their respective properties, to
examine their respective corporate, financial and operating
records, and make copies thereof or abstracts therefrom, and to
discuss their respective affairs, finances and accounts with
their respective directors, officers, and independent public
accountants, all at the expense of the Company and at such
reasonable times during normal business hours and as often as may
be reasonably desired, upon reasonable advance notice to the
Company.
7.11 Environmental Laws. The Company shall, and shall
cause each Subsidiary to, conduct its operations and keep and
maintain its property in material compliance with all
Environmental Laws.
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7.12 Use of Proceeds. The Company shall use the proceeds of
the Loans for the Kaiser-Texas Acquisition, for general working
capital purposes and for general corporate purposes (other than
for Acquisitions that are not Permitted Acquisitions) not in
contravention of any Requirement of Law or of any Loan Document.
7.13 Further Assurances.
(a) The Company shall ensure that all written
information, exhibits and reports furnished to the Agent or the
Banks do not and will not contain any untrue statement of a
material fact and do not and will not omit to state any material
fact or any fact necessary to make the statements contained
therein not misleading in light of the circumstances in which
made, and will promptly disclose to the Agent and the Banks and
correct any defect or error that may be discovered therein or in
any Loan Document or in the execution, acknowledgment or
recordation thereof.
(b) Promptly upon request by the Agent or the Majority
Banks, the Company shall (and shall cause any of its
Subsidiaries, including Pledgor Subsidiaries, to) do, execute,
acknowledge, deliver, record, re-record, file, re-file, register
and re-register, any and all such further acts, deeds,
conveyances, security agreements, mortgages, assignments,
estoppel certificates, financing statements and continuations
thereof, termination statements, notices of assignment,
transfers, certificates, assurances and other instruments the
Agent or such Banks, as the case may be, may reasonably require
from time to time in order (i) to carry out more effectively the
purposes of this Agreement or any other Loan Document, (ii) to
subject to the Liens created by any of the Collateral Documents
any of the Collateral, properties, rights or interests covered by
any of the Collateral Documents, (iii) to perfect, protect and
maintain the validity, effectiveness and priority of any of the
Collateral Documents and the Liens intended to be created
thereby, and (iv) to better assure, convey, grant, assign,
transfer, preserve, protect and confirm to the Agent and Banks
the rights granted or now or hereafter intended to be granted to
the Banks under any Loan Document or under any other document
executed in connection therewith.
7.14 Dividends of Subsidiaries During Default. Promptly
upon (but in no case more than five Business Days after) the
occurrence of a Default, the Company shall cause each HMO
Subsidiary of the Company to declare and pay dividends (in cash,
property, or obligations) on, or to make payments or
distributions on account of, the shares of all classes of stock
76
of such entity in an amount equal to the maximum amount permitted
by applicable law at such time to such Subsidiary for the payment
of dividends; provided, however, that no such Subsidiary shall be
required to pay dividends under this Section 7.14 to the extent
that doing so would cause the Regulatory Tangible Net Equity of
such Subsidiary to be less than 105 percent of any Regulatory
Tangible Net Equity Requirement applicable to such Subsidiary.
7.15 Acquisitions. Prior to consummating any Permitted
Acquisition for aggregate consideration (whether consisting of
cash, securities, other property, assumption of Indebtedness or
other obligations, or any combination thereof) having a value in
excess of $25,000,000, the Company shall have delivered to the
Agent (in form and detail satisfactory to each Bank and in
sufficient copies for each Bank) the following:
(i) At least 15 days' prior written notice from a
Responsible Officer of the Company, stating the Company's
intention to consummate a Permitted Acquisition, together
with a brief summary of the substantive terms thereof;
(ii) At least 10 days prior to the consummation of
such Permitted Acquisition, a certified copy of the executed
purchase contract or merger agreement relating to such
Permitted Acquisition; and
(iii) An officer's certificate, executed by a
Responsible Officer of the Company, dated the date of
consummation of such Permitted Acquisition, certifying that
immediately before and after giving effect to such Permitted
Acquisition (A) no Default has occurred and is continuing or
will exist after giving effect to the Permitted Acquisition
and (B) that the Company will be in compliance on a pro
forma basis with each of the financial ratios specified in
Section 8.14 as of the end of the fiscal quarter immediately
preceding such Acquisition for the twelve-month period
preceding such fiscal quarter end, together with a
reasonably detailed worksheet setting forth the calculations
of such ratios, which calculations shall be acceptable to
the Banks.
ARTICLE VIII
NEGATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or
any Loan or other Obligation shall remain unpaid or unsatisfied,
77
or any Letter of Credit shall remain outstanding, unless the
Majority Banks waive compliance in writing:
8.01 Limitation on Liens. The Company shall not, and shall
not suffer or permit any Subsidiary to, directly or indirectly,
make, create, incur, assume or suffer to exist any Lien upon or
with respect to any part of its property, whether now owned or
hereafter acquired, other than the following ("Permitted Liens"):
(a) any Lien existing on property of the Company or
any Subsidiary on the Closing Date and set forth in Schedule 8.01
securing Indebtedness outstanding on such date and any
refinancing or refunding thereof;
(b) any Lien created under any Loan Document;
(c) Liens for taxes, fees, assessments or other
governmental charges which are not delinquent or remain payable
without penalty, or to the extent that non-payment thereof is
permitted by Section 7.07, provided that no notice of lien has
been filed or recorded under the Code;
(d) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other similar Liens arising in the
ordinary course of business which are not delinquent or remain
payable without penalty;
(e) Liens (other than any Lien imposed by ERISA)
consisting of pledges or deposits required in the ordinary course
of business in connection with workers' compensation,
unemployment insurance and other social security legislation;
(f) easements, rights-of-way, restrictions and other
similar encumbrances incurred in the ordinary course of business
which, in the aggregate, are not substantial in amount, and which
do not in any case materially detract from the value of the
property subject thereto or interfere with the ordinary conduct
of the businesses of the Company and its Subsidiaries;
(g) purchase money security interests on any property
acquired or held by the Company or its Subsidiaries in the
ordinary course of business, securing Indebtedness incurred or
assumed for the purpose of financing all or any part of the cost
of acquiring such property; provided that (i) any such Lien
attaches to such property concurrently with or within 20 days
after the acquisition thereof, (ii) such Lien attaches solely to
the property so acquired in such transaction, (iii) the principal
amount of the Indebtedness secured thereby does not exceed 100%
78
of the cost of such property, and (iv) the principal amount of
the Indebtedness secured by any and all such purchase money
security interests shall not at any time exceed $25,000,000;
(h) mortgage Liens in connection with the financing of
existing, unencumbered real property of the Company or its
Subsidiaries securing Indebtedness having an aggregate principal
amount of up to $100,000,000 so long as the Specified Percentage
of the net proceeds thereof are applied, within ten days after
receipt thereof, by the Company to the scheduled reductions of
the Commitment pursuant to Section 2.07(b), and such payments are
applied to reduce the ratable reduction of the remaining
installments under Section 2.07(b);
(i) mortgage Liens on any real property acquired or
constructed by the Company or its Subsidiaries subsequent to the
Closing Date in the ordinary course of business, securing
Indebtedness incurred or assumed for the purpose of financing all
or any part of the cost of acquiring or constructing such
property; provided that (i) any such Lien attaches to such
property concurrently with or within 90 days after such property
is placed in service by the Company, (ii) such Lien attaches
solely to the property so acquired or constructed in such
transaction, (iii) the principal amount of the Indebtedness
secured thereby does not exceed 100% of the fair market value of
such property, (iv) such Indebtedness is without recourse to the
Company or any of its Subsidiaries and (v) the aggregate amount
of all such Indebtedness does not exceed $25,000,000;
(j) Liens securing obligations in respect of Capital
Leases, limited to the assets subject to such leases, provided
that such Capital Leases are otherwise permitted hereunder;
(k) Liens on any property of HMO Texas, securing the
Kaiser Note; provided that such Indebtedness is without recourse
to the Company or any of its Subsidiaries (other than HMO Texas
to the extent set forth in the Kaiser Note);
(l) Liens securing letters of credit, each of which
has an individual face amount less than $500,000 and the
aggregate face amounts of which are less than $1,000,000; and
(m) Liens securing obligations of the Company to a
Subsidiary permitted pursuant to Section 8.05(g).
8.02 Disposition of Assets. The Company shall not, and
shall not suffer or permit any Subsidiary to, directly or
indirectly, sell, assign, lease, convey, transfer or otherwise
dispose of (whether in one or a series of transactions) any
79
property (including accounts and notes receivable, with or
without recourse) or enter into any agreement to do any of the
foregoing, except:
(a) dispositions of inventory, or used, worn-out or
surplus equipment, all in the ordinary course of business;
(b) the sale of equipment to the extent that such
equipment is exchanged for credit against the purchase price of
similar replacement equipment, or the proceeds of such sale are
reasonably promptly applied to the purchase price of such
replacement equipment;
(c) sales by the Company in the ordinary course of
business of marketable securities held in its investment
portfolios;
(d) dispositions of assets (including all, but not
less than all of the capital stock of any Subsidiary) acquired
subsequent to December 31, 1997, to the extent advisable in the
best business judgment of the Company; and
(e) dispositions not otherwise permitted hereunder of
assets (including all, but not less than all, of the capital
stock of any Subsidiary) listed on the balance sheet of the
Company at December 31, 1997, which are made for fair market
value; provided, that (i) at the time of any disposition, no
Event of Default shall exist or shall result from such
disposition, (ii) the aggregate sales price from such disposition
shall be paid in cash, (iii) the aggregate value of all assets so
sold by the Company and its Subsidiaries prior to the Revolving
Loan Termination Date, together, shall not exceed 10% of the
Consolidated Tangible Assets listed on the December 31, 1997
balance sheet.
8.03 Consolidations and Mergers. The Company shall not,
and shall not suffer or permit any Subsidiary to, merge,
consolidate with or into, or convey, transfer, lease or otherwise
dispose of (whether in one transaction or in a series of
transactions all or substantially all of its assets (whether now
owned or hereafter acquired) to or in favor of any Person,
except:
(a) any Subsidiary may merge with the Company,
provided that the Company shall be the continuing or surviving
corporation, or with any one or more Subsidiaries, provided that
if any transaction shall be between a Subsidiary and a Wholly-
Owned Subsidiary, the Wholly-Owned Subsidiary shall be the
continuing or surviving corporation;
(b) any Subsidiary may sell all or substantially all
of its assets (upon voluntary liquidation or otherwise), to the
Company or another Wholly-Owned Subsidiary; and
(c) Permitted Acquisitions.
8.04 Loans and Investments. The Company shall not purchase
or acquire, or suffer or permit any Subsidiary to purchase or
acquire, or make any commitment therefor, any capital stock,
equity interest, or any obligations or other securities of, or
any interest in, any Person, or make or commit to make any
Acquisitions, or make or commit to make any advance, loan,
extension of credit or capital contribution to or any other
investment in, any Person including any Affiliate of the Company
(together, "Investments"), except for:
(a) Investments held by the Company or Subsidiary in
the form of cash equivalents or marketable securities in the
ordinary course of business;
(b) extensions of credit in the nature of accounts
receivable or notes receivable arising from the sale or lease of
goods or services in the ordinary course of business;
(c) extensions of credit by the Company to any of its
Wholly-Owned Subsidiaries or by any of its Wholly-Owned
Subsidiaries to another of its Wholly-Owned Subsidiaries;
(d) Investments in Subsidiaries;
(e) the Investments as of the Closing Date listed on
Schedule 8.04;
(f) loans or advances to officers and employees in an
aggregate amount not to exceed $2,500,000; and
(g) other Investments consisting of equity holdings in
2314 Partnership and Persons other than Subsidiaries in an
aggregate amount not exceeding 15% of the Company's Net Worth at
any one time outstanding.
8.05 Limitation on Indebtedness. The Company shall not,
and shall not suffer or permit any Subsidiary to, create, incur,
assume, suffer to exist, or otherwise become or remain directly
or indirectly liable with respect to, any Indebtedness, except:
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(a) Indebtedness incurred pursuant to this Agreement;
(b) Indebtedness consisting of Contingent Obligations
permitted pursuant to Section 8.08;
(c) Indebtedness existing on the Closing Date and set
forth in Schedule 8.05 (including, without limitation, the
Indebtedness evidenced by the Kaiser Note);
(d) Indebtedness secured by Liens permitted by
subsections 8.01(g), (h) and (i);
(e) Indebtedness incurred for the purpose of
refinancing all (but not less than all) of any item of
Indebtedness incurred pursuant to subsections (b) or (c) above;
provided, that the aggregate outstanding principal amount of such
Indebtedness shall not at any time exceed the aggregate
outstanding principal amount thereof at the Closing Date, minus
the aggregate amount of all payments and prepayments of principal
which as of such time shall have been made after the date of this
Agreement in respect of Indebtedness incurred pursuant to
subsections (b) and (c) or pursuant to this subsection (e); and
(f) loans or advances to officers and employees of the
Company and its Subsidiaries permitted pursuant to Section
8.04(f);
(g) loans from any Subsidiary of the Company to the
Company;
(h) Indebtedness in an aggregate principal amount at
any one time outstanding not in excess of $25,000,000 in respect
of Capital Leases; and
(i) additional unsecured Indebtedness not otherwise
permitted under this Section 8.05, in an aggregate principal
amount not to exceed $15,000,000 at any one time outstanding;
provided that not more than $7,500,000 of such Indebtedness may
be Indebtedness of the Company's Subsidiaries.
8.06 Transactions with Affiliates. The Company shall not,
and shall not suffer or permit any Subsidiary to, enter into any
transaction with any Affiliate of the Company, except upon fair
and reasonable terms no less favorable to the Company or such
Subsidiary than would obtain in a comparable arm's-length
transaction with a Person not an Affiliate of the Company or such
Subsidiary.
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8.07 Use of Proceeds.
(a) The Company shall not, and shall not suffer or
permit any Subsidiary to, use any portion of the Loan proceeds or
any Letter of Credit, directly or indirectly, (i) to purchase or
carry Margin Stock, (ii) to repay or otherwise refinance
indebtedness of the Company or others incurred to purchase or
carry Margin Stock, (iii) to extend credit for the purpose of
purchasing or carrying any Margin Stock, (iv) to acquire any
security in any transaction that is subject to Section 13 or 14
of the Exchange Act, or (v) for any purpose which violated
Regulations T, U or X of the FRB.
(b) The Company shall not, directly or indirectly, use
any portion of the Loan proceeds or any Letter of Credit
(i) knowingly to purchase Ineligible Securities from the Agent or
any of its Affiliates during any period in which the Agent or any
of its Affiliates makes a market in such Ineligible Securities,
(ii) knowingly to purchase during the underwriting or placement
period Ineligible Securities being underwritten or privately
placed by the Agent or any of its Affiliates, or (iii) to make
payments of principal or interest on Ineligible Securities
underwritten or privately placed by the Agent or any of its
Affiliates and issued by or for the benefit of the Company or any
Affiliate of the Company. Certain Affiliates of the Agent are
registered broker-dealers and permitted to underwrite and deal in
certain Ineligible Securities; and "Ineligible Securities" means
securities which may not be underwritten or dealt in by member
banks of the Federal Reserve System under Section 16 of the
Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as amended.
8.08 Contingent Obligations. The Company shall not, and
shall not suffer or permit any Subsidiary to, create, incur,
assume or suffer to exist any Contingent Obligations except:
(a) endorsements for collection or deposit in the
ordinary course of business;
(b) Contingent Obligations of the Company and its
Subsidiaries existing as of the Closing Date and listed in
Schedule 8.08;
(c) Contingent Obligations under Swap Contracts; and
(d) Contingent Obligations with respect to Surety
Instruments incurred in the ordinary course of business;
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(e) Guarantees by the Company of leases by its
Subsidiaries of office and medical space; and
(f) Guarantees by the Company of reserve obligations
and similar obligations of its Subsidiaries under applicable
Requirements of Law.
8.09 Lease Obligations. The Company shall not, and shall
not suffer or permit any Subsidiary to, create or suffer to exist
any obligations for the payment of rent for any property under
lease or agreement to lease, except for:
(a) leases of the Company and of Subsidiaries in
existence on the Closing Date and any renewal, extension or
refinancing thereof;
(b) operating leases entered into by the Company or
any Subsidiary after the Closing Date in the ordinary course of
business; and
(c) Capital Leases other than those permitted under
clause (a) of this Section, entered into by the Company or any
Subsidiary after the Closing Date to finance the acquisition of
equipment, to the extent permitted pursuant to Section 8.05.
8.10 Restricted Payments.
(a) So long as there are any Obligations outstanding,
the Company shall not, and shall not suffer or permit any
Subsidiary to, (x) purchase, redeem, retire or otherwise acquire
for value, or set apart any money for a sinking, defeasance or
other analogous fund for, the purchase, redemption, retirement or
other acquisition of, or make any voluntary prepayment of, the
principal of the Convertible Debt or the Kaiser Note prior to the
scheduled maturity thereof, (y) declare or make any dividend
payment or other distribution of assets, properties, cash,
rights, obligations or securities on account of any shares of any
class of its capital stock, or purchase, redeem or (z) otherwise
acquire for value any shares of its capital stock or any
warrants, rights or options to acquire such shares, now or
hereafter outstanding (each, a "Restricted Payment") unless
(i) at the time of, and immediately after giving
effect to, such Restricted Payment, no Default or Event of
Default shall have occurred and be continuing,
(ii) after giving effect to such Restricted
Payment, the aggregate amount of all Restricted Payments
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made in any fiscal year does not exceed $15,000,000;
provided, however that if the Company's Leverage Ratio as of
the end of any fiscal quarter shall be less than 2.5 to 1.0,
the annual limitation on Restricted Payments for the fiscal
year in which such fiscal quarter falls and in each
following fiscal year shall be $20,000,000, and
(iii) after giving effect to such Restricted
Payment, the aggregate amount of all Restricted
Payments after the Closing Date does not exceed
$50,000,000;
notwithstanding the foregoing, the Company may refinance the
Convertible Debt or the Kaiser Note with equity securities or
with Indebtedness so long as, in the case of Indebtedness, the
terms of the replacement Indebtedness (including, without
limitation, interest rate, maturity, average life and collateral
therefore) are no less favorable to the Company or the Banks than
those of the Indebtedness so refinanced.
(b) The Company shall not, and shall not suffer or
permit any Subsidiary to make any regularly scheduled payment of
the principal of or interest on, or any other amount owing in
respect of the Convertible Debt unless both before and after
giving effect thereof, no Default or Event of Default shall have
occurred and be continuing.
8.11 ERISA. The Company shall not, and shall not suffer or
permit any of its ERISA Affiliates to:
(a) engage in a prohibited transaction or violation of
the fiduciary responsibility rules with respect to any Plan which
has resulted or could reasonably expected to result in liability
of the Company in an aggregate amount in excess of $2,000,000; or
(b) engage in a transaction that could be subject to
Section 4069 or 4212(c) of ERISA.
8.12 Change in Business. The Company shall not, and shall
not suffer or permit any Subsidiary to, engage in any material
line of business other than the Health Care Business.
8.13 Accounting Changes. The Company shall not, and shall
not suffer or permit any Subsidiary to, make any significant
change in accounting treatment or reporting practices, except as
required by GAAP, or change the fiscal year of the Company or of
any Subsidiary.
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8.14 Financial Covenants. The Company shall not:
(a) permit its Leverage Ratio at the end of any fiscal
quarter set forth below to exceed the ratio set forth below
opposite such date:
For the Quarter Ended: Ratio
December 31, 1998 3.75 to 1.00
March 31, 1999 3.50 to 1.00
June 30, 1999 3.25 to 1.00
September 30, 1999 3.25 to 1.00
December 31, 1999 3.00 to 1.00
March 31, 2000 3.00 to 1.00
June 30, 2000 2.75 to 1.00
September 30, 2000 2.75 to 1.00
Thereafter 2.50 to 1.00
(b) permit its Consolidated Net Worth to be less than
the sum of (i) 85% of its Consolidated Net Worth as of the
Closing Date (after giving effect to the Kaiser-Texas
Acquisition) plus (ii) 75% of cumulative consolidated net income
(without giving effect to any consolidated net losses) for the
period commencing on the Closing Date and ending on the date of
determination, plus (iii) 75% of the amount by which its
Consolidated Net Worth is increased by issuances of equity
securities (except to the extent such issuance is made in
connection with an Acquisition or securities issued pursuant to
the Company's long term incentive plans, stock option plans and
employee stock purchase plans);
(c) permit its Fixed Charges Coverage Ratio at the end
of any fiscal quarter set forth below to be less than the ratio
set forth below opposite such date:
For the Quarter Ended: Ratio
December 31, 1998 1.50 to 1.00
March 31, 1999 1.50 to 1.00
June 30, 1999 1.50 to 1.00
September 30, 1999 1.50 to 1.00
December 31, 1999 1.50 to 1.00
March 31, 2000 1.75 to 1.00
June 30, 2000 2.00 to 1.00
September 30, 2000 2.25 to 1.00
December 31, 2000 2.50 to 1.00
Thereafter 3.00 to 1.00
(d) incur, make or enter into any contractual
undertaking for Capital Expenditures in any fiscal year in excess
of [6% of the Company's Consolidated Tangible Assets as of the
last day of the most recently ended fiscal year.]
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8.15 Limitation on Payment Restrictions Affecting
Subsidiaries. Except as set forth in this Agreement, the Company
shall not, and shall not permit any of its Subsidiaries, directly
or indirectly, to create or suffer to exist or allow to become
effective any consensual encumbrance or restriction on the
ability of (i) any of the Subsidiaries of the Company to
(a) declare and pay dividends on such Subsidiaries' stock or pay
any obligation, liability or any Indebtedness owed to the Company
or any of its other Subsidiaries, (b) make loans or advances to
the Company or its other Subsidiaries or (c) transfer any of its
properties or assets to the Company or any of its other
Subsidiaries, or (ii) the Company or any of its Subsidiaries to
receive or retain vis-a-vis the transferor any such amounts set
forth in clauses (i)(a), (i)(b) or (i)(c) above, except for
encumbrances or restrictions existing under or by reason of HMO
Regulations and other applicable law.
8.16 Pledged Shares. The Company shall, and shall cause
each of its Subsidiaries to, pledge to the Agent, for the benefit
of the Banks, all of the shares of capital stock of each of their
respective Subsidiaries (other than the shares of Excluded
Subsidiaries) from time to time pursuant to a Pledge Agreement.
8.17 Acquisitions. The Company will not, nor will it
permit any of its Subsidiaries to, make any Acquisition unless:
(i) immediately before and after giving effect
to the consummation of each Acquisition, no Default has
occurred and is continuing or will exist;
(ii) for each such Acquisition involving the
purchase of a majority of the stock of another party,
the prior, effective written consent or approval to
such Acquisition of the board of directors or
equivalent governing body of the other party or parties
has been obtained;
(iii) the aggregate value of the cash or other
non-stock consideration (including Indebtedness assumed
by the Company or its Subsidiaries in connection
therewith) for all Acquisitions (other than those
described in the following proviso) does not exceed
$25,000,000 in any fiscal year or $50,000,000 after the
Closing Date; and
(iv) the aggregate value of all consideration
(including Indebtedness assumed by the Company and its
Subsidiaries in connection therewith) for all such
Acquisitions (other than those described in the
86
following proviso) does not exceed $75,000,000 in any
fiscal year or $150,000,000 after the Closing Date;
provided, however, that notwithstanding the foregoing, any
Subsidiary of the Company may be merged or consolidated with or
into the Company if the Company shall be the continuing or
surviving corporation or with or into any other Subsidiary of the
Company.
ARTICLE IX
EVENTS OF DEFAULT
9.01 Event of Default. Any of the following shall
constitute an "Event of Default":
(a) Non-Payment. The Company fails to pay, (i) when
and as required to be paid herein, any amount of principal of or
interest on any Loan or of any L/C Obligation, or (ii) within
three days after the same becomes due, any fee or any other
amount payable hereunder or under any other Loan Document; or
(b) Representation or Warranty. Any representation or
warranty by the Company or any Subsidiary made or deemed made
herein, in any other Loan Document, or which is contained in any
certificate, document or financial or other statement by the
Company, any Subsidiary, or any Responsible Officer, furnished at
any time under this Agreement, or in or under any other Loan
Document, is incorrect in any material respect on or as of the
date made or deemed made; or
(c) Specific Defaults. The Company fails to perform
or observe any term, covenant or agreement contained in any of
Section 7.01, 7.02, 7.03 or 7.09 or in Article VIII; or
(d) Other Defaults. The Company fails to perform or
observe any other term or covenant contained in this Agreement or
any other Loan Document, and such default shall continue
unremedied for a period of 20 days after the earlier of (i) the
date upon which a Responsible Officer had Actual Knowledge of
such failure or (ii) the date upon which written notice thereof
is given to the Company by the Agent or any Bank; or
(e) Cross-Default. The Company or any Subsidiary
(A) fails to make any payment in respect of any Indebtedness or
Contingent Obligation, having an aggregate principal amount of
more than $10,000,000 when due (whether by scheduled maturity,
required prepayment, acceleration, demand, or otherwise); or
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(B) fails to perform or observe any other condition or covenant,
or any other event shall occur or condition exist, under any
agreement or instrument relating to any such Indebtedness or
Contingent Obligation, and such failure continues after the
applicable grace or notice period, if any, specified in the
relevant document on the date of such failure if the effect of
such failure, event or condition is to cause, or to permit the
holder or holders of such Indebtedness or beneficiary or
beneficiaries of such Indebtedness (or a trustee or agent on
behalf of such holder or holders or beneficiary or beneficiaries)
to cause such Indebtedness to be declared to be due and payable
prior to its stated maturity, or such Contingent Obligation to
become payable or cash collateral in respect thereof to be
demanded; or
(f) Insolvency; Voluntary Proceedings. The Company or
any Significant Subsidiary (i) ceases or fails to be solvent, or
generally fails to pay, or admits in writing its inability to
pay, its debts as they become due, subject to applicable grace
periods, if any, whether at stated maturity or otherwise;
(ii) voluntarily ceases to conduct its business in the ordinary
course; (iii) commences any Insolvency Proceeding with respect to
itself; or (iv) takes any action to effectuate or authorize any
of the foregoing; or
(g) Involuntary Proceedings. (i) Any involuntary
Insolvency Proceeding is commenced or filed against the Company
or any Significant Subsidiary, or any writ, judgment, warrant of
attachment, execution or similar process, is issued or levied
against a substantial part of the Company's or any Significant
Subsidiary's properties, and any such proceeding or petition
shall not be dismissed, or such writ, judgment, warrant of
attachment, execution or similar process shall not be released,
vacated or fully bonded within 60 days after commencement, filing
or levy; (ii) the Company or any Significant Subsidiary admits
the material allegations of a petition against it in any
Insolvency Proceeding, or an order for relief (or similar order
under non-U.S. law) is ordered in any Insolvency Proceeding; or
(iii) the Company or any Significant Subsidiary acquiesces in the
appointment of a receiver, trustee, custodian, conservator,
liquidator, mortgagee in possession (or agent therefor), or other
similar Person for itself or a substantial portion of its
property or business; or
(h) ERISA. (i) An ERISA Event shall occur with
respect to a Pension Plan or Multiemployer Plan which has
resulted or could reasonably be expected to result in liability
of the Company under Title IV of ERISA to the Pension Plan,
88
Multiemployer Plan or the PBGC in an aggregate amount in excess
of $2,000,000; the aggregate amount of Unfunded Pension Liability
among all Pension Plans at any time exceeds $2,000,000; or
(iii) the Company or any ERISA Affiliate shall fail to pay when
due, after the expiration of any applicable grace period, any
installment payment with respect to its withdrawal liability
under Section 4201 of ERISA under a Multiemployer Plan in an
aggregate amount in excess of $2,000,000; or
(i) Monetary Judgments. One or more non-interlocutory
judgments, non-interlocutory orders, decrees or arbitration
awards is entered against the Company or any Subsidiary involving
in the aggregate a liability (to the extent not covered by
independent third-party insurance as to which the insurer does
not dispute coverage) as to any single or related series of
transactions, incidents or conditions, of $5,000,000 or more, and
the same shall remain unvacated and unstayed pending appeal for a
period of 10 days after the entry thereof; or
(j) Non-Monetary Judgments. Any non-monetary
judgment, order or decree is entered against the Company or any
Subsidiary which does or would reasonably be expected to have a
Material Adverse Effect, and there shall be any period of 10
consecutive days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; or
(k) Change of Control. There occurs any Change of
Control; or
(l) Loss of Licenses. Any HMO Regulator or any other
Governmental Authority revokes or fails to renew any material
license, permit or franchise of the Company or any Subsidiary, or
the Company or any Subsidiary for any reason loses any material
license, permit or franchise, or the Company or any Subsidiary
suffers the imposition of any restraining order, escrow,
suspension or impound of funds in connection with any proceeding
(judicial or administrative) with respect to any material
license, permit or franchise; or
(m) HMO Event. An HMO Event shall have occurred and
remain unremedied for the lesser of 30 days after the occurrence
of such event or five days after the duration of any cure period
imposed for the cure of such HMO Event by the HMO Regulator
administering the pertinent HMO Regulations; or
(n) Prospective Premium Default. A Prospective
Premium Default shall have occurred; or
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(o) Adverse Change. There occurs a Material Adverse
Effect; or
(p) Invalidity of Subordination Provisions. The
subordination provisions of the Convertible Debt is for any
reason revoked or invalidated, or otherwise cease to be in full
force and effect, or any Person contests in any manner (with a
reasonable likelihood of success) the validity or enforceability
thereof or denies that it has any further liability or obligation
thereunder, or the Indebtedness hereunder is for any reason
subordinated or does not have the priority contemplated by this
Agreement or such subordination provisions.
9.02 Remedies. If any Event of Default occurs, the Agent
shall, at the request of, or may, with the consent of, the
Majority Banks,
(a) declare the commitment of each Bank to make Loans
and any obligation of the Issuing Bank to Issue Letters of Credit
to be terminated, whereupon such commitments and obligation shall
be terminated;
(b) declare an amount equal to the maximum aggregate
amount that is or at any time thereafter may become available for
drawing under any outstanding Letters of Credit (whether or not
any beneficiary shall have presented, or shall be entitled at
such time to present, the drafts or other documents required to
draw under such Letters of Credit) to be immediately due and
payable, and declare the unpaid principal amount of all
outstanding Loans, all interest accrued and unpaid thereon, and
all other amounts owing or payable hereunder or under any other
Loan Document to be immediately due and payable, without
presentment, demand, protest or other notice of any kind, all of
which are hereby expressly waived by the Company; and
(c) exercise on behalf of itself and the Banks all
rights and remedies available to it and the Banks under the Loan
Documents or applicable law;
provided, however, that upon the occurrence of any event
specified in subsection (f) or (g) of Section 9.01 (in the case
of clause (i) of subsection (g) upon the expiration of the 60-day
period mentioned therein), the obligation of each Bank to make
Loans and any obligation of the Issuing Bank to Issue Letters of
Credit shall automatically terminate and the unpaid principal
amount of all outstanding Loans and all interest and other
amounts as aforesaid shall automatically become due and payable
without further act of the Agent, the Issuing Bank or any Bank.
90
NOTWITHSTANDING THE FOREGOING, THE AGENT AND THE BANKS EXPRESSLY
ACKNOWLEDGE AND AGREE THAT ANY TRANSFER OF THE PLEDGED SHARES, OR
ANY EXERCISE OF CONTROL WITH RESPECT THERETO, IS SUBJECT TO, AND
SHALL BE EFFECTED SOLELY IN COMPLIANCE WITH, APPLICABLE
REGULATORY REQUIREMENTS; PROVIDED THAT THIS ACKNOWLEDGMENT AND
AGREEMENT IS MADE SOLELY FOR THE BENEFIT OF APPLICABLE
GOVERNMENTAL AND REGULATORY AUTHORITIES AND SHALL NOT BE
CONSTRUED AS A COVENANT AS BETWEEN THE AGENT AND THE BANKS, ON
THE ONE HAND, AND THE COMPANY OR ANY OF ITS SUBSIDIARIES, ON THE
OTHER HAND.
9.03 Rights Not Exclusive. The rights provided for in this
Agreement and the other Loan Documents are cumulative and are not
exclusive of any other rights, powers, privileges or remedies
provided by law or in equity, or under any other instrument,
document or agreement now existing or hereafter arising.
ARTICLE X
THE AGENT
10.01 Appointment and Authorization; "Agent".
(a) Each Bank hereby irrevocably (subject to Section
10.09) appoints, designates and authorizes the Agent to take such
action on its behalf under the provisions of this Agreement and
each other Loan Document and to exercise such powers and perform
such duties as are expressly delegated to it by the terms of this
Agreement or any other Loan Document, together with such powers
as are reasonably incidental thereto. Notwithstanding any
provision to the contrary contained elsewhere in this Agreement
or in any other Loan Document, the Agent shall not have any
duties or responsibilities, except those expressly set forth
herein, nor shall the Agent have or be deemed to have any
fiduciary relationship with any Bank, and no implied covenants,
functions, responsibilities, duties, obligations or liabilities
shall be read into this Agreement or any other Loan Document or
otherwise exist against the Agent. Without limiting the
generality of the foregoing sentence, the use of the term "agent"
in this Agreement with reference to the Agent is not intended to
connote any fiduciary or other implied (or express) obligations
arising under agency doctrine of any applicable law. Instead,
such term is used merely as a matter of market custom, and is
intended to create or reflect only an administrative relationship
between independent contracting parties.
(b) The Issuing Bank shall act on behalf of the Banks
with respect to any Letters of Credit Issued by it and the
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documents associated therewith until such time and except for so
long as the Agent may agree at the request of the Majority
Lenders to act for such Issuing Bank with respect thereto;
provided, however, that the Issuing Bank shall have all of the
benefits and immunities (i) provided to the Agent in this Article
X with respect to any acts taken or omissions suffered by the
Issuing Bank in connection with Letters of Credit Issued by it or
proposed to be Issued by it and the application and agreements
for letters of credit pertaining to the Letters of Credit as
fully as if the term "Agent", as used in this Article X, included
the Issuing Bank with respect to such acts or omissions, and
(ii) as additionally provided in this Agreement with respect to
the Issuing Bank.
10.02 Delegation of Duties. The Agent may execute any of
its duties under this Agreement or any other Loan Document by or
through agents, employees or attorneys-in-fact and shall be
entitled to advice of counsel concerning all matters pertaining
to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it
selects with reasonable care.
10.03 Liability of Agent. None of the Agent-Related
Persons shall (i) be liable for any action taken or omitted to be
taken by any of them under or in connection with this Agreement
or any other Loan Document or the transactions contemplated
hereby (except for its own gross negligence or willful
misconduct), or (ii) be responsible in any manner to any of the
Banks for any recital, statement, representation or warranty made
by the Company or any Subsidiary or Affiliate of the Company, or
any officer thereof, contained in this Agreement or in any other
Loan Document, or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent
under or in connection with, this Agreement or any other Loan
Document, or the validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Loan
Document, or for any failure of the Company or any other party to
any Loan Document to perform its obligations hereunder or
thereunder. No Agent-Related Person shall be under any
obligation to any Bank to ascertain or to inquire as to the
observance or performance of any of the agreements contained in,
or conditions of, this Agreement or any other Loan Document, or
to inspect the properties, books or records of the Company or any
of the Company's Subsidiaries or Affiliates.
10.04 Reliance by Agent.
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(a) The Agent shall be entitled to rely, and shall be
fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, facsimile,
telex or telephone message, statement or other document or
conversation believed by it to be genuine and correct and to have
been signed, sent or made by the proper Person or Persons, and
upon advice and statements of legal counsel (including counsel to
the Company), independent accountants and other experts selected
by the Agent. The Agent shall be fully justified in failing or
refusing to take any action under this Agreement or any other
Loan Document unless it shall first receive such advice or
concurrence of the Majority Banks as it deems appropriate and, if
it so requests, it shall first be indemnified to its satisfaction
by the Banks against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any
such action. The Agent shall in all cases be fully protected in
acting, or in refraining from acting, under this Agreement or any
other Loan Document in accordance with a request or consent of
the Majority Banks and such request and any action taken or
failure to act pursuant thereto shall be binding upon all of the
Banks.
(b) For purposes of determining compliance with the
conditions specified in Section 5.01, each Bank that has executed
this Agreement shall be deemed to have consented to, approved or
accepted or to be satisfied with, each document or other matter
either sent by the Agent to such Bank for consent, approval,
acceptance or satisfaction, or required thereunder to be
consented to or approved by or acceptable or satisfactory to the
Bank.
10.05 Notice of Default. The Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default or
Event of Default, except with respect to defaults in the payment
of principal, interest and fees required to be paid to the Agent
for the account of the Banks, unless the Agent shall have
received written notice from a Bank or the Company referring to
this Agreement, describing such Default or Event of Default and
stating that such notice is a "notice of default". The Agent
will notify the Banks of its receipt of any such notice. The
Agent shall take such action with respect to such Default or
Event of Default as may be requested by the Majority Banks in
accordance with Article IX; provided, however, that unless and
until the Agent has received any such request, the Agent may (but
shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of
Default as it shall deem advisable or in the best interest of the
Banks.
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10.06 Credit Decision. Each Bank acknowledges that none of
the Agent-Related Persons has made any representation or warranty
to it, and that no act by the Agent hereinafter taken, including
any review of the affairs of the Company and its Subsidiaries,
shall be deemed to constitute any representation or warranty by
any Agent-Related Person to any Bank. Each Bank represents to
the Agent that it has, independently and without reliance upon
any Agent-Related Person and based on such documents and
information as it has deemed appropriate, made its own appraisal
of and investigation into the business, prospects, operations,
property, financial and other condition and creditworthiness of
the Company and its Subsidiaries, and all applicable bank
regulatory laws relating to the transactions contemplated hereby,
and made its own decision to enter into this Agreement and to
extend credit to the Company hereunder. Each Bank also
represents that it will, independently and without reliance upon
any Agent-Related Person and based on such documents and
information as it shall deem appropriate at the time, continue to
make its own credit analysis, appraisals and decisions in taking
or not taking action under this Agreement and the other Loan
Documents, and to make such investigations as it deems necessary
to inform itself as to the business, prospects, operations,
property, financial and other condition and creditworthiness of
the Company. Except for notices, reports and other documents
expressly herein required to be furnished to the Banks by the
Agent, the Agent shall not have any duty or responsibility to
provide any Bank with any credit or other information concerning
the business, prospects, operations, property, financial and
other condition or creditworthiness of the Company which may come
into the possession of any of the Agent-Related Persons.
10.07 Indemnification of Agent. Whether or not the
transactions contemplated hereby are consummated, the Banks shall
indemnify upon demand the Agent-Related Persons (to the extent
not reimbursed by or on behalf of the Company and without
limiting the obligation of the Company to do so), pro rata, from
and against any and all Indemnified Liabilities; provided,
however, that no Bank shall be liable for the payment to the
Agent-Related Persons of any portion of such Indemnified
Liabilities resulting solely from such Person's gross negligence
or willful misconduct. Without limitation of the foregoing, each
Bank shall reimburse the Agent upon demand for its ratable share
of any costs or out-of-pocket expenses (including Attorney Costs)
incurred by the Agent in connection with the preparation,
execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or
otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Loan Document,
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or any document contemplated by or referred to herein, to the
extent that the Agent is not reimbursed for such expenses by or
on behalf of the Company. The undertaking in this Section shall
survive the payment of all Obligations hereunder and the
resignation or replacement of the Agent.
10.08 Agent in Individual Capacity. BofA and its
Affiliates may make loans to, issue letters of credit for the
account of, accept deposits from, acquire equity interests in and
generally engage in any kind of banking, trust, financial
advisory, underwriting or other business with the Company and its
Subsidiaries and Affiliates as though BofA were not the Agent or
the Issuing Bank hereunder and without notice to or consent of
the Banks. The Banks acknowledge that, pursuant to such
activities, BofA or its Affiliates may receive information
regarding the Company or its Affiliates (including information
that may be subject to confidentiality obligations in favor of
the Company or such Subsidiary) and acknowledge that the Agent
shall be under no obligation to provide such information to them.
With respect to its Loans, BofA shall have the same rights and
powers under this Agreement as any other Bank and may exercise
the same as though it were not the Agent or the Issuing Bank.
10.09 Successor Agent. The Agent may, and at the request
of the Majority Banks shall, resign as Agent upon 30 days' notice
to the Banks. If the Agent resigns under this Agreement, the
Majority Banks shall appoint from among the Banks a successor
agent for the Banks. If no successor agent is appointed prior to
the effective date of the resignation of the Agent, the Agent may
appoint, after consulting with the Banks and the Company, a
successor agent from among the Banks. Upon the acceptance of its
appointment as successor agent hereunder, such successor agent
shall succeed to all the rights, powers and duties of the
retiring Agent and the term "Agent" shall mean such successor
agent and the retiring Agent's appointment, powers and duties as
Agent shall be terminated. After any retiring Agent's resignation
hereunder as Agent, the provisions of this Article X and Sections
11.04 and 11.05 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this
Agreement. If no successor agent has accepted appointment as
Agent by the date which is 30 days following a retiring Agent's
notice of resignation, the retiring Agent's resignation shall
nevertheless thereupon become effective and the Banks shall
perform all of the duties of the Agent hereunder until such time,
if any, as the Majority Banks appoint a successor agent as
provided for above. Notwithstanding the foregoing, however, BofA
may not be removed as the Agent at the request of the Majority
Banks unless BofA shall also simultaneously be replaced as
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"Issuing Bank" hereunder pursuant to documentation in form and
substance reasonably satisfactory to BofA.
10.10 Withholding Tax.
(a) If any Bank is a "foreign corporation, partnership
or trust" within the meaning of the Code and such Bank claims
exemption from, or a reduction of, U.S. withholding tax under
Sections 1441 or 1442 of the Code, such Bank agrees with and in
favor of the Agent and the Company, to deliver to the Agent:
(i) if such Bank claims an exemption from, or a
reduction of, withholding tax under a United States tax
treaty, two properly completed and executed copies of IRS
Form 1001 before the payment of any interest in the first
calendar year and before the payment of any interest in each
third succeeding calendar year during which interest may be
paid under this Agreement;
(ii) if such Bank claims that interest paid under
this Agreement is exempt from United States withholding tax
because it is effectively connected with a United States
trade or business of such Bank, two properly completed and
executed copies of IRS Form 4224 before the payment of any
interest is due in the first taxable year of such Bank and
in each succeeding taxable year of such Bank during which
interest may be paid under this Agreement; and
(iii) such other form or forms as may be required
under the Code or other laws of the United States as a
condition to exemption from, or reduction of, United States
withholding tax.
Such Bank agrees to promptly notify the Agent and the Company of
any change in circumstances which would modify or render invalid
any claimed exemption or reduction.
(b) If any Bank claims exemption from, or reduction
of, withholding tax under a United States tax treaty by providing
IRS Form 1001 and such Bank sells, assigns, grants a
participation in, or otherwise transfers all or part of the
Obligations of the Company to such Bank, such Bank agrees to
notify the Agent of the percentage amount in which it is no
longer the beneficial owner of Obligations of the Company to such
Bank. To the extent of such percentage amount, the Agent will
treat such Bank's IRS Form 1001 as no longer valid.
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(c) If any Bank claiming exemption from United States
withholding tax by filing IRS Form 4224 with the Agent sells,
assigns, grants a participation in, or otherwise transfers all or
part of the Obligations of the Company to such Bank, such Bank
agrees to undertake sole responsibility for complying with the
withholding tax requirements imposed by Sections 1441 and 1442 of
the Code.
(d) If any Bank is entitled to a reduction in the
applicable withholding tax, the Agent may withhold from any
interest payment to such Bank an amount equivalent to the
applicable withholding tax after taking into account such
reduction. However, if the forms or other documentation required
by subsection (a) of this Section are not delivered to the Agent,
then the Agent may withhold from any interest payment to such
Bank not providing such forms or other documentation an amount
equivalent to the applicable withholding tax imposed by Sections
1441 and 1442 of the Code, without reduction.
(e) If the IRS or any other Governmental Authority of
the United States or other jurisdiction asserts a claim that the
Agent or the Company did not properly withhold tax from amounts
paid to or for the account of any Bank (because the appropriate
form was not delivered or was not properly executed, or because
such Bank failed to notify the Agent of a change in circumstances
which rendered the exemption from, or reduction of, withholding
tax ineffective, or for any other reason) such Bank shall
indemnify the Agent and the Company fully for all amounts paid,
directly or indirectly, by the Agent or the Company as tax or
otherwise, including penalties and interest, and including any
taxes imposed by any jurisdiction on the amounts payable to the
Agent under this Section, together with all costs and expenses
(including Attorney Costs). The obligation of the Banks under
this subsection shall survive the payment of all Obligations and
the resignation or replacement of the Agent.
10.11 Syndication Agent. The Bank identified on the facing
page or signature pages of this Agreement as the "syndication
agent" shall not have any right, power, obligation, liability,
responsibility or duty under this Agreement other than those
applicable to all Banks as such. Without limiting the foregoing,
the Bank so identified as the "syndication agent" shall not have
or be deemed to have any fiduciary relationship with any Bank.
Each Bank acknowledges that it has not relied, and will not rely,
on the Bank so identified in deciding to enter into this
Agreement or in taking or not taking any action hereunder.
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ARTICLE XI
MISCELLANEOUS
11.01 Amendments and Waivers. No amendment or waiver of
any provision of this Agreement or any other Loan Document, and
no consent with respect to any departure by the Company
therefrom, shall be effective unless the same shall be in writing
and signed by the Majority Banks (or by the Agent at the written
request of the Majority Banks) and the Company and acknowledged
by the Agent, and then any such waiver or consent shall be
effective only in the specific instance and for the specific
purpose for which given; provided, however, that no such waiver,
amendment, or consent shall, unless in writing and signed by all
the Banks and the Company and acknowledged by the Agent, do any
of the following:
(a) increase or extend the Commitment of any Bank (or
reinstate any Commitment terminated pursuant to Section 8.02);
(b) postpone or delay any date fixed by this Agreement
or any other Loan Document for any payment of principal,
interest, fees or other amounts due to the Banks (or any of them)
hereunder or under any other Loan Document;
(c) reduce the principal of, or the rate of interest
specified herein on any Loan, or (subject to clause (iii) below)
any fees or other amounts payable hereunder or under any other
Loan Document;
(d) change the percentage of the Commitments or of the
aggregate unpaid principal amount of the Loans which is required
for the Banks or any of them to take any action hereunder; or
(e) amend this Section, or Section 2.14, or any
provision herein providing for consent or other action by all
Banks;
and, provided further, that (i) no amendment, waiver or consent
shall, unless in writing and signed by the Issuing Bank in
addition to the Majority Banks or all the Banks, as the case may
be, affect the rights or duties of the Issuing Bank under this
Agreement or any L/C-Related Document relating to any Letter of
Credit Issued or to be Issued by it, (ii) no amendment, waiver or
consent shall, unless in writing and signed by the Agent in
addition to the Majority Banks or all the Banks, as the case may
be, affect the rights or duties of the Agent under this Agreement
or any other Loan Document, and (iii) the Fee Letters may be
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amended, or rights or privileges thereunder waived, in a writing
executed by the parties thereto.
11.02 Notices.
(a) All notices, requests, consents, approvals,
waivers and other communications shall be in writing (including,
unless the context expressly otherwise provides, by facsimile
transmission, provided that any matter transmitted by the Company
by facsimile (i) shall be immediately confirmed by a telephone
call to the recipient at the number specified on Schedule 11.02,
and (ii) shall be followed promptly by delivery of a hard copy
original thereof) and mailed, faxed or delivered, to the address
or facsimile number specified for notices on Schedule 11.02; or,
as directed to the Company or the Agent, to such other address as
shall be designated by such party in a written notice to the
other parties, and as directed to any other party, at such other
address as shall be designated by such party in a written notice
to the Company and the Agent.
(b) All such notices, requests and communications
shall, when transmitted by overnight delivery, or faxed, be
effective when delivered for overnight (next-day) delivery, or
transmitted in legible form by facsimile machine, respectively,
or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery;
except that notices pursuant to Article II, III or X to the Agent
shall not be effective until actually received by the Agent, and
notices pursuant to Article III to the Issuing Bank shall not be
effective until actually received by the Issuing Bank at the
address specified for the "Issuing Bank" on the applicable
signature page hereof.
(c) Any agreement of the Agent and the Banks herein to
receive certain notices by telephone or facsimile is solely for
the convenience and at the request of the Company and the Pledgor
Subsidiaries. The Agent and the Banks shall be entitled to rely
on the authority of any Person purporting to be a Person
authorized by the Company or any Pledgor Subsidiary to give such
notice and the Agent and the Banks shall not have any liability
to the Company, any Pledgor subsidiary or other Person on account
of any action taken or not taken by the Agent or the Banks in
reliance upon such telephonic or facsimile notice. The
obligation of the Company to repay the Loans and L/C Obligations
shall not be affected in any way or to any extent by any failure
by the Agent and the Banks to receive written confirmation of any
telephonic or facsimile notice or the receipt by the Agent and
the Banks of a confirmation which is at variance with the terms
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understood by the Agent and the Banks to be contained in the
telephonic or facsimile notice.
11.03 No Waiver; Cumulative Remedies. No failure to
exercise and no delay in exercising, on the part of the Agent or
any Bank, any right, remedy, power or privilege hereunder, shall
operate as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of
any other right, remedy, power or privilege.
11.04 Costs and Expenses. The Company shall:
(a) whether or not the transactions contemplated
hereby are consummated, pay or reimburse BofA (including in its
capacity as Agent and Issuing Bank) within five Business Days
after demand (subject to subsection 5.01(e)) for all reasonable
costs and expenses incurred by BofA (including in its capacity as
Agent and Issuing Bank) in connection with the development,
preparation, delivery, administration and execution of, and any
amendment, supplement, waiver or modification to (in each case,
whether or not consummated), this Agreement, any Loan Document
and any other documents prepared in connection herewith or
therewith, and the consummation of the transactions contemplated
hereby and thereby, including reasonable Attorney Costs incurred
by or on behalf of BofA (including in its capacity as Agent and
Issuing Bank) with respect thereto; and
(b) pay or reimburse the Agent and each Bank within
five Business Days after demand (subject to subsection 5.01(e))
for all reasonable costs and expenses (including Attorney Costs)
incurred by them in connection with the enforcement, attempted
enforcement, or preservation of any rights or remedies under this
Agreement or any other Loan Document during the existence of an
Event of Default or after acceleration of the Loans (including in
connection with any "workout" or restructuring regarding the
Loans, and including in any Insolvency Proceeding or appellate
proceeding).
11.05 Company Indemnification. Whether or not the
transactions contemplated hereby are consummated, the Company
shall indemnify, defend and hold the Agent-Related Persons, and
each Bank and each of its respective officers, directors,
employees, counsel, agents and attorneys-in-fact (each, an
"Indemnified Person") harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, charges, expenses and disbursements
(including of experts and agents and Attorney Costs which all
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shall be paid upon demand by the Agent) of any kind or nature
whatsoever which may at any time (including at any time following
repayment of the Loans, the termination of the Letters of Credit
and the termination, resignation or replacement of the Agent or
replacement of any Bank) be imposed on, incurred by or asserted
against any such Person in any way relating to or arising out of:
this Agreement, the Pledge Agreements or any document
contemplated by or referred to herein; the administration of the
Loan Documents; the custody, preservation, use or operation of or
the sale of, collection from, or other realization upon, any of
the Collateral; the exercise or enforcement of any of the rights
of the Agent under the Pledge Agreements or any other Loan
Document; the failure by the Company to perform or observe any of
the provisions of the Pledge Agreements or any other Loan
Document; the transactions contemplated hereby; or any other
action taken or omitted by any such Person under or in connection
with any of the foregoing, including with respect to any
investigation, litigation or proceeding (including any Insolvency
Proceeding or appellate proceeding) related to or arising out of
this Agreement or the Loans or Letters of Credit or the use of
the proceeds thereof, whether or not any Indemnified Person is a
party thereto (all the foregoing, collectively, the "Indemnified
Liabilities"); provided, that the Company shall have no
obligation hereunder to any Indemnified Person with respect to
Indemnified Liabilities resulting solely from the gross
negligence or willful misconduct of such Indemnified Person. The
agreements in this Section shall survive payment of all other
Obligations.
11.06 Payments Set Aside. To the extent that the Company
makes a payment to the Agent or the Banks, or the Agent or the
Banks exercise their right of set-off, and such payment or the
proceeds of such set-off or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside
or required (including pursuant to any settlement entered into by
the Agent or such Bank in its discretion) to be repaid to a
trustee, receiver or any other party, in connection with any
Insolvency Proceeding or otherwise, then (a) to the extent of
such recovery the obligation or part thereof originally intended
to be satisfied shall be revived and continued in full force and
effect as if such payment had not been made or such set-off had
not occurred, and (b) each Bank severally agrees to pay to the
Agent upon demand its pro rata share of any amount so recovered
from or repaid by the Agent.
11.07 Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns,
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except that the Company may not assign or transfer any of its
rights or obligations under this Agreement without the prior
written consent of the Agent and each Bank.
11.08 Assignments, Participations, etc.
(a) Any Bank may, with the written consent of the
Company at all times other than during the existence of an Event
of Default and the Agent and the Issuing Bank, which consents
shall not be unreasonably withheld, at any time assign and
delegate to one or more Eligible Assignees (provided that no
written consent of the Company, the Agent or the Issuing Bank
shall be required in connection with any assignment and
delegation by a Bank to an Eligible Assignee that is an Affiliate
of such Bank) (each an "Assignee") all, or any ratable part of
all, of the Loans, the Commitments, the L/C Obligations and the
other rights and obligations of such Bank hereunder, in a minimum
amount of $5,000,000; provided, however, that after giving effect
thereto, such Bank shall either retain a Commitment in a minimum
amount of $5,000,000 or have no ongoing Commitment and provided
further that the Company and the Agent may continue to deal
solely and directly with such Bank in connection with the
interest so assigned to an Assignee until (i) written notice of
such assignment, together with payment instructions, addresses
and related information with respect to the Assignee, shall have
been given to the Company and the Agent by such Bank and the
Assignee; (ii) such Bank and its Assignee shall have delivered to
the Company and the Agent an Assignment and Acceptance in the
form of Exhibit E ("Assignment and Acceptance") together with any
Note or Notes subject to such assignment and (iii) the assignor
Bank or Assignee has paid to the Agent a processing fee in the
amount of $3,500.
(b) From and after the date that the Agent notifies
the assignor Bank that it has received (and provided its consent
with respect to) an executed Assignment and Acceptance and
payment of the above-referenced processing fee, (i) the Assignee
thereunder shall be a party hereto and, to the extent that rights
and obligations hereunder have been assigned to it pursuant to
such Assignment and Acceptance, shall have the rights and
obligations of a Bank under the Loan Documents, and (ii) the
assignor Bank shall, to the extent that rights and obligations
hereunder and under the other Loan Documents have been assigned
by it pursuant to such Assignment and Acceptance, relinquish its
rights and be released from its obligations under the Loan
Documents.
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(c) Within five Business Days after its receipt of
notice by the Agent that it has received an executed Assignment
and Acceptance and payment of the processing fee, (and provided
that it consents to such assignment in accordance with subsection
11.08(a)), the Company shall execute and deliver to the Agent,
new Notes evidencing such Assignee's assigned Loans and
Commitment and, if the assignor Bank has retained a portion of
its Loans and its Commitment, replacement Notes in the principal
amount of the Loans retained by the assignor Bank (such Nots to
be in exchange for, but not in payment of, the Notes held by such
Bank). Immediately upon each Assignee's making its processing
fee payment under the Assignment and Acceptance, this Agreement
shall be deemed to be amended to the extent, but only to the
extent, necessary to reflect the addition of the Assignee and the
resulting adjustment of the Commitments arising therefrom. The
Commitment allocated to each Assignee shall reduce such
Commitments of the assigning Bank pro tanto.
(d) Any Bank may at any time sell to one or more
commercial banks or other Persons not Affiliates of the Company
(a "Participant") participating interests in any Loans, the
Commitment of that Bank and the other interests of that Bank (the
"originating Bank") hereunder and under the other Loan Documents;
provided, however, that (i) the originating Bank's obligations
under this Agreement shall remain unchanged, (ii) the originating
Bank shall remain solely responsible for the performance of such
obligations, (iii) the Company, the Issuing Bank and the Agent
shall continue to deal solely and directly with the originating
Bank in connection with the originating Bank's rights and
obligations under this Agreement and the other Loan Documents,
and (iv) no Bank shall transfer or grant any participating
interest under which the Participant has rights to approve any
amendment to, or any consent or waiver with respect to, this
Agreement or any other Loan Document, except to the extent such
amendment, consent or waiver would require unanimous consent of
the Banks as described in the first proviso to Section 11.01. In
the case of any such participation, the Participant shall be
entitled to the benefit of Sections 4.01, 4.03 and 11.05 as
though it were also a Bank hereunder, and if amounts outstanding
under this Agreement are due and unpaid, or shall have been
declared or shall have become due and payable upon the occurrence
of an Event of Default, each Participant shall be deemed to have
the right of set-off in respect of its participating interest in
amounts owing under this Agreement to the same extent as if the
amount of its participating interest were owing directly to it as
a Bank under this Agreement.
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(e) Notwithstanding any other provision in this
Agreement, any Bank may at any time create a security interest
in, or pledge, all or any portion of its rights under and
interest in this Agreement and the Note held by it in favor of
any Federal Reserve Bank in accordance with Regulation A of the
FRB or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal
Reserve Bank may enforce such pledge or security interest in any
manner permitted under applicable law.
11.09 Set-off. In addition to any rights and remedies of
the Banks provided by law, if an Event of Default exists or the
Loans have been accelerated, each Bank is authorized at any time
and from time to time, without prior notice to the Company, any
such notice being waived by the Company to the fullest extent
permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any
time held by, and other indebtedness at any time owing by, such
Bank to or for the credit or the account of the Company against
any and all Obligations owing to such Bank, now or hereafter
existing, irrespective of whether or not the Agent or such Bank
shall have made demand under this Agreement or any Loan Document
and although such Obligations may be contingent or unmatured.
Each Bank agrees promptly to notify the Company and the Agent
after any such set-off and application made by such Bank;
provided, however, that the failure to give such notice shall not
affect the validity of such set-off and application.
11.10 Automatic Debits of Fees. With respect to any
commitment fee, arrangement fee, letter of credit fee or other
fee, or any other cost or expense (including Attorney Costs) due
and payable to the Agent, the Issuing Bank, the Arranger or the
Banks under the Loan Documents, the Company hereby irrevocably
authorizes BofA to debit any deposit account of the Company with
BofA in an amount such that the aggregate amount debited from all
such deposit accounts does not exceed such fee or other cost or
expense. If there are insufficient funds in such deposit accounts
to cover the amount of the fee or other cost or expense then due,
such debits will be reversed (in whole or in part, in BofA's sole
discretion) and such amount not debited shall be deemed to be
unpaid. No such debit under this Section shall be deemed a set-
off.
11.11 Notification of Addresses, Lending Offices, Etc.
Each Bank shall notify the Agent in writing of any changes in the
address to which notices to the Bank should be directed, of
addresses of any Lending Office, of payment instructions in
respect of all payments to be made to it hereunder and of such
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other administrative information as the Agent shall reasonably
request.
11.12 Counterparts. This Agreement may be executed in any
number of separate counterparts, each of which, when so executed,
shall be deemed an original, and all of said counterparts taken
together shall be deemed to constitute but one and the same
instrument.
11.13 Severability. Wherever possible each provision of
this Agreement, the Pledge Agreements or any other instrument
agreement required hereunder shall be interpreted in such manner
as to be effective and valid under applicable law, but if any
provision of this Agreement, the Pledge Agreements or any other
instrument or agreement required hereunder shall be prohibited by
or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining
provisions of such agreement or instrument.
11.14 No Third Parties Benefited. This Agreement is made
and entered into for the sole protection and legal benefit of the
Company, the Banks, the Agent and the Agent-Related Persons, and
their permitted successors and assigns, and no other Person shall
be a direct or indirect legal beneficiary of, or have any direct
or indirect cause of action or claim in connection with, this
Agreement or any of the other Loan Documents.
11.15 Governing Law and Jurisdiction.
(a) THIS AGREEMENT, THE PLEDGE AGREEMENTS AND THE
NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAW OF THE STATE OF CALIFORNIA EXCEPT TO THE EXTENT THAT THE
VALIDITY OR PERFECTION OF ANY SECURITY INTERESTS OR REMEDIES
UNDER ANY LOAN DOCUMENTS ARE GOVERNED BY THE LAWS OF A STATE
OTHER THAN CALIFORNIA; PROVIDED THAT THE AGENT AND THE BANKS
SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
(b) ANY LEGAL ACTION, PROCEEDING OR LITIGATION BASED
HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
AGREEMENT, THE PLEDGE AGREEMENTS OR ANY OTHER LOAN DOCUMENT, OR
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
ORAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE BANKS OR THE
COMPANY MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF THE STATE
OF CALIFORNIA OR IN THE UNITED STATES DISTRICT COURT FOR THE
CENTRAL DISTRICT OF CALIFORNIA; PROVIDED, HOWEVER, THAT ANY SUIT
SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY
BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY
105
JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE
FOUND. BY THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE
PLEDGE AGREEMENTS, EACH OF THE COMPANY, THE BANKS AND THE AGENT
HEREBY CONSENTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY AND
EXPRESSLY AND IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF CALIFORNIA AND OF THE
UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF
CALIFORNIA FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH
ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED
THEREBY IN CONNECTION WITH SUCH LITIGATION. THE AGENT, THE BANKS
AND THE COMPANY FURTHER IRREVOCABLY CONSENT TO THE SERVICE OF
PROCESS BY ANY MEANS PERMITTED BY CALIFORNIA LAW INCLUDING BY
REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN
OR WITHOUT THE STATE OF CALIFORNIA. THE AGENT, THE BANKS AND THE
COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVE, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH THEY MAY HAVE OR
HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION
BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT
ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
TO THE EXTENT THAT THE AGENT, THE BANKS AND THE COMPANY HAVE OR
HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT
OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE,
ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR
OTHERWISE) WITH RESPECT TO THEM OR THEIR PROPERTY, THE AGENT, THE
BANKS AND THE COMPANY HEREBY IRREVOCABLY WAIVE SUCH IMMUNITY IN
RESPECT OF THEIR OBLIGATIONS UNDER THIS AGREEMENT, THE PLEDGE
AGREEMENTS AND THE OTHER LOAN DOCUMENTS.
11.16 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE
AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR
RELATED TO THIS AGREEMENT, THE PLEDGE AGREEMENTS, THE OTHER LOAN
DOCUMENTS, ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE COMPANY, THE PLEDGOR
SUBSIDIARIES, THE BANKS OR THE AGENT, OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR
OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES
AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT
OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT
CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH
AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A
COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE
PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY
JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION,
COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN
PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS
AGREEMENT, THE PLEDGE AGREEMENTS, OR THE OTHER LOAN DOCUMENTS OR
ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY
106
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO
THIS AGREEMENT, THE PLEDGE AGREEMENTS, AND THE OTHER LOAN
DOCUMENTS. THE COMPANY ACKNOWLEDGES AND AGREES THAT IT HAS
RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION
(AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT
IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE AGENT AND THE BANKS ENTERING INTO THIS AGREEMENT AND EACH
SUCH OTHER LOAN DOCUMENT.
11.17 Entire Agreement. This Agreement, together with the
Pledge Agreements and the other Loan Documents, embodies the
entire agreement and understanding among the Company, the Pledgor
Subsidiaries, the Banks and the Agent, and supersedes all prior
or contemporaneous agreements and understandings of such Persons,
verbal or written, relating to the subject matter hereof and
thereof.
[remainder of page intentionally left blank]
107
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered in Los Angeles,
California by their proper and duly authorized officers as of the
day and year first above written.
SIERRA HEALTH SERVICES, INC.
By:______________________________
Title:___________________________
108
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent
By:______________________________
Title:___________________________
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Issuing
Bank
By:______________________________
Title:___________________________
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Bank
By:______________________________
Title:___________________________
109
FIRST UNION NATIONAL BANK
By:______________________________
Title:___________________________
110
SCHEDULE 1.01
SPECIFIED CHARGES
1. Acquisition and integration expenses up to $10,000,000
recorded in the fourth quarter of 1998
related to the Kaiser-Texas Acquisition
2. Legal and related costs to settle the up to $12,000,000
TRICARE Region 1 bid protest.
3. Acquisition and integration expenses up to $2,000,000
related to the acquisition from Mutual of
Omaha and subsidiaries
111
SCHEDULE 2.01
COMMITMENTS AND PRO RATA SHARES
Bank Commitment Pro Rata Share
Bank of America National
Trust and Savings
Association $120,000,000 60%
First Union National Bank $ 80,000,000 40%
TOTAL $200,000,000 100%
112
SCHEDULE 3.03
EXISTING BofA LETTERS OF CREDIT
Letter of Credit Amount Expires
3001796 $4,242,000 March 3, 1999
113
SCHEDULE 5.01(G)
EXCLUDED SUBSIDIARIES
A. CII Financial, Inc. and its subsidiaries
1. CII Leasing, Inc. (California)
2. CII Premium Finance Company (California)
3. Direct Rehabilitation Services (California)
4. Finance Assurance Co., Ltd. (Cayman Islands)
5. K & L Insurance Services, Inc. (California)
6. CII Insurance Agency (California)
7. California Indemnity Insurance Company and its subsidiaries
(California)
a. E & E Insurance Agency, Inc. (Nevada)
b. Sierra Insurance Company of Texas (Texas)
c. Commerical Casualty Insurance Company (California)
d. CII Insurance Company (California)
B. Intermed, Inc. (Arizona)
C. Midwest Health, Inc. (Illinois)
D. Nevada Administrators, Inc. (Nevada)
E. Northern Nevada Health Network, Inc. (Nevada)
F. Elias F. Ghanem, Ltd. (Nevada)
G. M.E.G.A., Inc. (Nevada)
H. Sierra Behavioral Health, Inc. (Nevada)
I. Sierra Health & Life Insurance Company, Inc. (California)
J. Sierra Health Holdings, Inc. (Nevada) and its subsidiary
1. Texas Health Choice, L.C. (Texas LLC)
K. 2314 West Charleston Partnership
SCHEDULE 6.03
REQUIRED APPROVALS
1. The Company or certain of its Subsidiaries will be required, following the
Closing, to notify applicable insurance regulators of the transaction
evidenced by the Loan Documents by filing amendments to their Insurance
Holding Company System Registration Statement or equivalent statement.
2. Prior to obtaining ownership and/or control, or transferring ownership
and/or control of the Pledged Shares of Subsidiaries subject to regulation
by state insurance regulatory authorities, the Agent and the Banks may need
to make certain filings with those authorities and obtain requisite
regulatory approval. Under apllicable anti-affiliation statutes, banks and
certain other financial institutions may be prohibited from owning or
controlling any subsidiary subject to state insurance legislation.
3. Section 18442 of the California Financial Code states that "(a)n industrial
loan company shall not make any loan of money or property to or guarantee the
obligation of any person upon the security of its capital (including the
shares of capital stock) of the company, its holding company, or its
affiliates." Although Section 18442 may be read to prohibit the pledge of
shares of a corporation which owns an industrial loan company (such as in the
case of CIIF and CII Premium Finance Company), a representative of the
Industrial Loan Department of the Department of Corporations has taken the
position in a telephonic conversation that Section 18442 is not intended to
prohibit the pledge of shares of the parent company.
SCHEDULE 6.05
LITIGATION
PCA v. Sierra Health Services, Inc. (United States District Court, Southern
District of Florida). PCA filed on March 18, 1997 and seeks specific
performance of a terminated merger agreement and monetary damages exceeding
$20,000,000. The court dismissed the action without prejudice for failure
to join an indespensable party.
Sierra Health Services, Inc. v. PCA (Court of Chancery of Delaware). The
Company filed on March 27, 1997 and seeks damages and declaratory relief for
breach of the merger agreement and fraud. On July 31, 1998, the Company
filed a Second Amended Complaint that also alleges negligent misrepresentation.
The action is currently pending.
Harbor House Cafe, Inc. and other similarly situated v. California Indemnity
Insurance Company and Does 1-20 (No. 787823-5, Superior Court of the State of
California for the County of Alameda) Class action alleging non-disclosure of
inability to pay policyholder dividends to certain policyholders.
Harbor House Cafe, Inc. and other similarly situated v. California Indemnity
Insurance Company and Does 1-100 (No. 7879920-9, Superior Court of the State of
California for the County of Alameda) One of approximately 35 class actions
against various insurers and the California state insurance fund seeking
damages growing out of administration by the defendants of experience
readjustments.
SCHEDULE 6.12
PERMITTED LIABILITIES
None.
SCHEDULE 6.13
ENVIRONMENTAL MATTERS
None
SCHEDULE 6.18
SUBSIDIARIES & MINORITY INTERESTS
(A) Subsidiaries of Sierra Health Services, Inc.
A. Behavioral Healthcare Options, Inc. (Nevada)
B. CII Financial, Inc. and its subsidiaries
1. CII Leasing, Inc. (California)
2. CII Premium Finance Company (California)
3. Direct Rehabilitation Services (California)
4. Finance Assurance Co., Ltd. (Cayman Islands)
5. K & L Insurance Services, Inc. (California)
6. CII Insurance Agency (California)
7. California Indemnity Insurance Company and its subsidiaries
(California)
a. California Indemnity Insurance Company (Nevada)
b. Sierra Insurance Company of Texas (Texas)
c. Commercial Casualty Insurance Company (California)
d. CII Insurance Company (California)
C. Family Healthcare Services (Nevada)
D. Family Home Hospice, Inc. (Nevada)
E. Health Plan of Nevada (Nevada)
F. Intermed, Inc. (Arizona)
G. Midwest Health, Inc. (Illinois)
H. Nevada Administrators, Inc. (Nevada)
I. Northern Nevada Health Network, Inc. (Nevada)
J. Prime Holdings, Inc. (Nevada) and its subsidiaries
1. Med One Health Plan (Nevada)
2. Elias F. Ghanem, Ltd. (Nevada)
3. M.E.G.A., Inc. (Nevada)
4. Prime Health, Inc. (Nevada)
K. Sierra Acquisition, Inc. (Delaware)
L. Sierra Behavioral Health, Inc. (Nevada)
M. Sierra Health & Life Insurance Company, Inc. (California)
N. Sierra Health Holdings, Inc. (Nevada) and its subsidiary
1. Texas Health Choice, L.C. (Texas LLC)
O. Sierra Health-Care Options, Inc. (Nevada)
P. Sierra Home Medical Products, Inc. (Nevada)
Q. Sierra Medical Management, Inc. (Nevada) and its subsidiaries
1. Mohave Valley Hospital, Inc. (Arizona)
2. Tolemac, Inc. (Arizona)
R. Sierra Military Health Services, Inc. (Delaware)
S. Sierra Texas Systems, Inc. (Texas)
T. Southwest Medical Associates, Inc. (Nevada)
U. Southwest Realty, Inc. (Nevada)
1. 2314 W. Charleston Partnership
(B) Equity Investments:
A. Integrated Health Services at Silvercrest, Inc.
B. Triwest Healthcare Alliance Corp.
(C) Excluded Subsidiaries
See Schedule 5.01(g)
SCHEDULE 6.19
INSURANCE MATTERS
The Company does not carry a separate errors and omissions policy.
SCHEDULE 8.01
PERMITTED LIENS
See Schedule 8.05
SCHEDULE 8.04
EXISTING INVESTMENTS
1. Mortgage loans to former officers and employees of CII in a principal
amount outstanding on the date hereof of approximately $4,954,000.
2. Loans to Dr. Anthony Marlon in a principal amount outstanding on the date
hereof of approximately $2,650,000 secured by a pledge of options to purchase
Company stock.
3. See Schedule 6.18(B).
SCHEDULE 8.05
PERMITTED INDEBTEDNESS
1. 7.11% Mortgage Note in favor of BofA, Nevada secured by a deed of trust,
assignment of rents and leases, and a security agreement covering the newly
constructed portion of the Company's administrative headquarters complex
and underlying real property.
2. 7.5% Convertible Subordinated Debentures due 2001 of CII.
3. 7 3/8% Mortgage Note in favor of BofA, Nevada secured by a deed of trust,
assignment of rents and leases, and a security agreement covering a portion
of the Company's administrative headquarters.
4. Master Lease and Security Agreement dated as of December 31, 1997
between Sumitomo Bank Leasing and Finance, Inc. as lessor and Sierra Health
Services, Inc. as lessee.
5. The Kaiser Note.
6. Other existing debt of approximately $7,158,000 in principal.
7. Earn-out under the Kaiser Acquisition Agreement.
8. Earn-out in connection with the in-market acquisition of certain assets
from Mutual of Omaha or affiliates not to exceed $15,000,000 over three years.
SCHEDULE 8.08
CONTINGENT OBLIGATIONS
None
SCHEDULE 8.17
PERMITTED ACQUISITIONS
The in-market acquisition of certain assets from Mutual of Omaha or affiliates
for a price not to exceed $15,000,000 over three years.
SCHEDULE 11.02
OFFSHORE AND DOMESTIC LENDING OFFICES,
ADDRESSES FOR NOTICES
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Administrative Agent
Notices (other than Borrowing Notices and Notices of
Conversion/Continuation):
Bank of America National Trust
and Savings Association
Agency Management Services #20529
555 South Flower Street, 11th Floor
Los Angeles, CA 90071
Attention: Ms. Gina Meador
Vice President
Telephone: 213/228-5245
Facsimile: 213/228-2299
AGENT'S PAYMENT OFFICE:
Notices for Extensions of Credit and Conversion/Continuation:
Bank of America National Trust
and Savings Association
Agency Administrative Services #5596
1850 Gateway Boulevard, Fifth Floor
Concord, CA 94520
Attention: Nicole Burish
Telephone: 925/675-8437
Facsimile: 925/675-8500
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as a Bank
Domestic and Offshore Lending Office:
GPO-Domestic Account Administration #5693
1850 Gateway Boulevard, Third Floor
Concord, CA 94520
1
Attention: Elvira Karpat
Telephone: 925/675-8255
Facsimile: 925/675-7531/7532
Notices (other than Borrowing notices and Notices of
Conversion/Continuation):
Bank of America National Trust
and Savings Association
Health Care Finance #9173
555 South Flower Street, 11th Floor
Los Angeles, CA 90071
Attention: J. Gregory Seibly
Vice President
Telephone: 213/228-2953
Facsimile: 213/228-2756
EXHIBIT 10.5
FIRST AMENDMENT TO
CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT is made and dated as of November
23, 1998 (the "First Amendment") among SIERRA HEALTH SERVICES, INC. (the
"Company"), the Banks now party to the Credit Agreement referred to below, the
financial institutions listed on the signature page hereof that are joining the
Credit Agreement as Banks (the "New Banks") and BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, a national banking association, as Administrative Agent
(the "Agent"), and amends that certain Credit Agreement dated as of October 30,
1998 (as further amended or modified from time to time, the "Credit Agreement").
RECITALS
WHEREAS, the Company has requested the Agent and the Banks to amend
certain provisions of the Credit Agreement, and the Agent and the Banks are
willing to do so, on the terms and conditions specified herein;
WHEREAS, the New Banks wish to be added to the Credit Agreement as
Banks, and the Company, the Agent and the existing Banks are willing to permit
the New Banks to be so added;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. Terms. All terms used herein shall have the same meanings as in the
Credit Agreement unless otherwise defined herein.
2. Amendment. The Credit Agreement is hereby amended as follows:
2.1 Amendments to Section 1.01.
(a) There shall be added to Section 1.01 of the Credit
Agreement, in appropriate alphabetical sequence, the following definitions:
"First Union" shall mean First Union National Bank.
"Workers' Compensation Business" shall mean the
business of underwriting workers' compensation insurance and
performing administrative functions related thereto.
"Workers' Compensation Event" shall mean failure by
the Company or any of its Workers' Compensation Subsidiaries
to comply in any material respect with any of the terms and
provisions of any applicable Workers'
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<PAGE>
Compensation Regulation pertaining to the fiscal soundness,
solvency or financial condition of the Company or any of its
Workers' Compensation Subsidiaries, or the assertion in
writing, after the Closing Date, by a Workers' Compensation
Regulator that it intends to take administrative action
against the Company or any of its Workers' Compensation
Subsidiaries to revoke or modify any Governmental Approval of,
or to enforce the fiscal soundness, solvency or financial
provisions or requirements of such Workers' Compensation
Regulations against, the Company or any of its Workers'
Compensation Subsidiaries, if such action, modification or
enforcement is reasonably likely to have a Material Adverse
Effect.
"Workers' Compensation Regulations" shall mean all
Requirements of Law applicable to any Workers' Compensation
Subsidiary under federal or state law and any regulations,
orders and directives promulgated or issued pursuant to the
foregoing in connection with the operation of its Workers
Compensation Business.
"Workers' Compensation Regulator" means any Person
charged with the administration, oversight or enforcement of a
Workers' Compensation Regulation, whether primarily,
secondarily, or jointly.
"Workers' Compensation Subsidiary" shall mean any
current or future Subsidiary of the Company that is primarily
involved in the Workers' Compensation Business.
(b) The second sentence following the chart in the definition
of the term "Applicable Commitment Fee Rate" in Section 1.01 of the Credit
Agreement is hereby amended and restated in its entirety to read as follows:
"Thereafter, the Applicable Commitment Fee Rate shall
be the actual Level reflected on the Compliance Certificate
and shall be effective from and including the date on which
the Agent receives such Compliance Certificate to but
excluding the date on which the Agent receives the next
Compliance Certificate; provided, however, that if the Agent
does not receive a Compliance Certificate by the date required
by subsection 7.02(b), the Applicable Commitment Fee Rate
shall, effective as of such date, be Level 6 to but excluding
the date the Agent receives such Compliance Certificate (on
which such date the Applicable Commitment Fee Rate shall be
the actual Level reflected on such Compliance Certificate)."
(c) The second sentence following the chart in the definition
of the term "Applicable Margin" in Section 1.01 of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
39251439.4 12199 1610P 96246459
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<PAGE>
"Thereafter, the Applicable Margin shall be the
actual Level reflected on the Compliance Certificate and shall
be effective from and including the date on which the Agent
receives a Compliance Certificate to but excluding the date on
which the Agent receives the next Compliance Certificate;
provided, however, that if the Agent does not receive a
Compliance Certificate by the date required by subsection
7.02(b), the Applicable Margin shall, effective as of such
date, be Level 6 to but excluding the date the Agent receives
such Compliance Certificate (on which such date the Applicable
Margin shall be the actual Level reflected on such Compliance
Certificate)."
(d) Clause (d) of the definition of the term "Eligible
Assignee" in Section 1.01 of the Credit Agreement is hereby amended and restated
in its entirety to read as follows:
"(d) any insurance company, mutual fund or other financial institution or
fund."
(e) Clause (a) of the definition of the term "Health Care
Business" in Section 1.01 of the Credit Agreement is hereby amended by adding
"including without limitation the provision of Medicare and Medicaid services"
at the end thereof.
(f) The definition of the term "HMO Texas" in Section 1.01 of
the Credit Agreement is hereby amended and restated in its entirety to read as
follows:
"HMO Texas" means Texas Health Choice L.C., a Texas limited
liability company, formerly known as HMO Texas, L.C., which is an
indirect Subsidiary of the Company.
(g) The definition of the term "Honor Date" in Section 1.01 of
the Credit Agreement is hereby amended by deleting "subsection 3.03(b)" and
replacing it with "subsection 3.03(c)".
(h) The definition of the term "L/C-Related Documents" in
Section 1.01 of the Credit Agreement is hereby amended by adding "the Existing
BofA Letters of Credit," after "Letters of Credit," in the first line thereof.
(i) The definition of the term "Kaiser Acquisition Agreements"
in Section 1.01 of the Credit Agreement is hereby amended and restated in its
entirety to read as follows:
"Kaiser Acquisition Agreements" means that certain
Asset Sale and Purchase Agreement dated June 5, 1998 between
PMAT and HMO Texas, as amended, that certain Asset Sale and
Purchase Agreement dated June 5, 1998, as amended, between
Kaiser-Texas and HMO Texas and that certain Master
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<PAGE>
Sale and Purchase Agreement dated June 5, 1998 between
Kaiser-Texas and HMO Texas, as amended.
(j) The definition of the term "Majority Banks" in Section
1.01 of the Credit Agreement is hereby amended and restated in its entirety to
read as follows:
"Majority Banks" means at any time that BofA and
First Union shall collectively hold in excess of 50% of the
Commitments, Banks holding in excess of 75% of the then
aggregate unpaid principal amount of the Loans, or, if no such
principal amount is then outstanding, Banks having in excess
of 75% of the Commitments; at any time that BofA and First
Union shall collectively hold in excess of 42.5% of the
Commitments but not more than 50% of the Commitments, Banks
holding in excess of 66 2/3% of the then aggregate unpaid
principal amount of the Loans, or, if no such principal amount
is then outstanding, Banks having in excess of 66 2/3% of the
Commitments; and at any time that BofA and First Union shall
collectively hold 42.5% or less of the Commitments, Banks
holding in excess of 60% of the then aggregate unpaid
principal amount of the Loans, or, if no such principal amount
is then outstanding, Banks having in excess of 60% of the
Commitments.
2.2 Amendment to Section 2.07.
(a) The first sentence of clause (c) of Section 2.07 of the
Credit Agreement is hereby amended by inserting "excluding sales or dispositions
in the ordinary course of business by the Company of securities in its
investment portfolio" immediately after "in the existing lines of business of
the Company" appearing in the eleventh line thereof.
2.3 Amendment to Section 3.01.
(a) The first sentence of clause (a) of Section 3.01 of the
Credit Agreement is hereby amended by inserting "to the day thirty days prior"
immediately after "Closing Date" in the third line thereof.
2.4 Amendments to Section 3.03.
(a) Clause (b) of Section 3.03 of the Credit Agreement is
hereby amended by deleting "subsection 3.3(a)" and replacing it with "subsection
3.03(a)" in the second line thereof.
2.5 Amendments to Section 3.06.
(a) Clause (iii) of Section 3.06 of the Credit Agreement is
hereby amended by adding "(including without limitation any Bank)" after
"Person" in the sixth line thereof.
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<PAGE>
2.6 Amendments to Section 5.01.
(a) Clause (i) of Section 5.01 of the Credit Agreement is
hereby amended by adding "and the collateral thereunder has been released" to
the end thereof.
2.7 Amendments to Section 6.01.
(a) Clause (d) of Section 6.01 of the Credit Agreement is
hereby amended by adding "including without limitation all Workers' Compensation
Regulations," after "Requirements of Law" in the first line thereof.
2.8 Amendments to Section 6.02.
(a) Clause (c) of Section 6.02 of the Credit Agreement is
hereby amended by adding "including without limitation all Workers' Compensation
Regulations," after "Requirement of Law" in the first line thereof.
2.9 Amendments to Section 6.05.
(a) Clause (a) of Section 6.05 of the Credit Agreement is
hereby amended by adding "or impair the Banks ability to effect rights and
remedies" to the end thereof.
2.10 Amendments to Section 6.07.
(a) Clause (a) of Section 6.07 of the Credit Agreement is
hereby amended by deleting "the requirements of all applicable laws, rules,
regulations and orders of every governmental authority" and replacing it with
"Requirements of Law of every Governmental Authority".
2.11 Amendments to Section 6.21.
(a) Section 6.21 of the Credit Agreement is hereby amended by
adding "and the Kaiser Acquisition Agreements" after "Loan Documents" in the
third line thereof and adding "or the Kaiser Acquisition Agreements" after
"Closing Date)" in the ninth line thereof.
2.12 Amendments to Section 6.23.
(a) Section 6.23 of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"6.23 Licensing, Etc. Each HMO Subsidiary maintains in full force and
effect (i) all licenses and certifications required pursuant to any HMO
Regulation; (ii) all certifications and authorizations necessary to ensure that
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<PAGE>
each of the HMO Subsidiaries is eligible for all
reimbursements available under the HMO Regulations to the
extent applicable to HMOs of their type; and (iii) all
licenses, permits, authorizations and qualifications required
under the HMO Regulations in connection with the ownership or
operation of HMOs; except where the failure to maintain the
items described in any of the preceding three clauses would
not have a Material Adverse Effect. Each Workers' Compensation
Subsidiary maintains in full force and effect (i) all licenses
and certifications required pursuant to any Workers'
Compensation Regulation; and (ii) all licenses, permits,
authorizations and qualifications required under the Workers'
Compensation Regulations in connection with the ownership or
operation of a Workers' Compensation Business; except where
the failure to maintain the items described in any of the
preceding three clauses would not have a Material Adverse
Effect."
2.13 Amendments to Section 6.25.
(a) The first sentence of Section 6.25 of the Credit Agreement
is hereby amended by adding "or Event of Default" after "Material Adverse
Effect" in the tenth line thereof.
(b) The second sentence of Section 6.25 of the Credit
Agreement is hereby amended by adding the following clause prior to the end
thereof:
", all to the extent necessary to insure that any such failure will not
result in a Material Adverse Effect."
2.14 Amendments to Section 7.02.
(a) Clauses (d), (e) and (f) of Section 7.02 of the Credit
Agreement are hereby amended and restated in their entirety to read as follows:
"(d) promptly following the receipt of the same, a
copy of each notice relating to the loss or threatened loss by
the Company, any Workers' Compensation Subsidiary or any HMO
Subsidiary of any material operating permit, license or
certification by any Workers' Compensation Regulator or any
HMO Regulator;
(e) promptly following the receipt of the same, all
material correspondence received by the Company or any
Subsidiary (other than correspondence in draft form) from (i)
an HMO Regulator which asserts that the Company or any HMO
Subsidiary is not in substantial compliance with any HMO
Regulation or which threatens the taking of any action against
the Company or any Subsidiary under any HMO Regulation which
would reasonably be expected to have a Material Adverse Effect
or (ii) a Workers'
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<PAGE>
Compensation Regulator which asserts that the Company or any
Workers' Compensation Subsidiary is not in substantial
compliance with any Workers' Compensation Regulation or which
threatens the taking of any action against the Company or any
Subsidiary under any Workers' Compensation Regulation which
would reasonably be expected to have a Material Adverse
Effect;
(f) from time to time upon receipt of a written
request by the Agent or any Bank specifying in reasonable
detail the types of documents to be provided, copies of any
and all statements, audits, studies or reports submitted by or
on behalf of (i) the Company or any HMO Subsidiary to any HMO
Regulator or (ii) the Company and any Workers' Compensation
Subsidiary to any Workers' Compensation Regulator (except to
the extent that the delivery of such documents could result in
the waiver by the Company of any privilege it might have under
applicable law); and"
2.15 Amendments to Section 7.08.
(a) Section 7.08 of the Credit Agreement is hereby amended by
adding ", all Workers' Compensation Regulations" after "HMO Regulations" in the
fifth line thereof.
2.16 Amendments to Section 7.16.
(a) There shall be added to the Credit Agreement a new section
7.16 reading in its entirety as follows:
7.16 Accreditation. The Company will use reasonable
commercial efforts to (i) maintain the current accreditation
by the National Committee for Quality Assurance ("NCQA") for
Health Plan of Nevada at the "Full Accreditation" level, and
(ii) obtain within a reasonable period of time and thereafter
maintain accreditation by NCQA for its Dallas area HMO
operations at the "Provisional Accreditation", "One-Year
Accreditation" or "Full Accreditation" levels.
2.17 Amendments to Section 8.02.
(a) Subsection (c) of Section 8.02 of the Credit Agreement is
hereby amended by deleting the date "December 31, 1997" and substituting
therefor the date "November 2, 1998".
(b) Subsection (d) of Section 8.02 of the Credit Agreement is
hereby amended and restated to read in its entirety as follows:
"(d) dispositions not otherwise permitted hereunder of assets (including
all, but not less than all, of the capital stock of any Subsidiary) owned by
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<PAGE>
the Company or any Subsidiary as of November 2, 1998, which are made
for fair market value; provided, that (i) at the time of any
disposition, no Event of Default shall exist or shall result from such
disposition, (ii) the aggregate sales price from such disposition shall
be paid in cash, (iii) the aggregate value of all assets so sold by the
Company and its Subsidiaries prior to the Revolving Loan Termination
Date, together, shall not exceed 10% of the Consolidated Tangible
Assets of the Company and its Subsidiaries as of November 2, 1998."
2.18 Amendments to Section 8.17.
(a) Subsections (iii) and (iv) of Section 8.17 of the Credit
Agreement are hereby re-numbered as subsections (iv) and (v).
(b) A new subsection (iii) shall be added to Section 8.17 of
the Credit Agreement reading in its entirety as follows:
"(iii) if the aggregate value of all consideration (including
Indebtedness assumed by the Company and its Subsidiaries in connection
therewith) for any single Acquisition exceeds $25,000,000, the Company
shall have obtained the prior written approval of the Majority Banks."
2.19 Amendments to Section 9.02.
(a) Clause (a) of Section 9.02 of the Credit Agreement is
hereby amended by adding "and participate in Letters of Credit" after "Loans" in
the first line thereof and replacing "commitments" with "Commitments" in the
third line thereof.
2.20 Amendments to Section 10.07.
(a) Section 10.07 of the Credit Agreement is hereby amended by
deleting "solely" after "resulting" in line 9 thereof.
2.21 Amendments to Section 11.01.
(a) Clause (a) of Section 11.01 of the Credit Agreement is
hereby amended by replacing "Section 8.02" with "Section 9.02" in the second
line thereof.
(b) Clause (b) of Section 11.01 of the Credit Agreement is
hereby amended by adding the following immediately prior to the end thereof:
"or postpone or delay any date set forth in Section 2.07(b) for the
reduction of the Commitments"
39251439.4 12199 1610P 96246459
8
<PAGE>
(c) There shall be added to Section 11.01 of the Credit
Agreement a new Clause (f) reading in its entirety as follows:
"(f) release any portion of the Pledged Collateral;"
2.22 Amendment of Schedules.
(a) Schedule 2.01 of the Credit Agreement is hereby amended
and restated to read in its entirety as set forth on Schedule 2.01 hereto.
(b) Schedule 5.01(g) of the Credit Agreement is hereby amended
and restated to read in its entirety as set forth on Schedule 5.01(g) hereto.
(c) Schedule 11.02 of the Credit Agreement is hereby amended
and restated to read in its entirety as set forth on Schedule 11.02 hereto.
2.23 Addition of New Banks.
(a) Upon the effectiveness of this First Amendment, each of
the New Banks shall (i) be a party to the Credit Agreement; (ii) assume all of
the rights and obligations of a Bank under the Credit Agreement with a
Commitment in the amount set forth opposite such Bank's name in Schedule 2.01
attached hereto; and (iii) be secured by the Collateral. The Commitments of the
New Banks and the revised Commitments of the existing Banks will be effective as
of November 25, 1998 (the "New Commitment Effective Date"). As of the date of
this First Amendment, there are three outstanding Borrowings of LIBOR Rate Loans
(the "Outstanding Loans"). It is the intention of the parties that on the New
Commitment Effective Date the New Banks shall purchase assignments in each of
the Outstanding Loans in an amount equal to each such Bank's respective Pro Rata
Share. The interest rate payable by the Company on the Outstanding Loans shall
remain unchanged; however, the interest rate distributable to the New Banks on
their portion of the New Loans shall be equal to the LIBOR Rate for an Interest
Period of three months, determined as of November 23, 1998, plus the Applicable
Margin for LIBOR Rate Loans. On the New Commitment Effective Date, each New Bank
shall pay to the Agent (for delivery to BofA and First Union) its Pro Rata Share
of the aggregate principal amount of the Outstanding Loans. The obligation of
each New Bank to so provide its purchase price to the Agent shall be absolute
and unconditional and shall not be affected by the occurrence of a Default or
Event of Default. Each New Bank that has provided to the Agent the purchase
price due for its assignment in such Loans shall thereupon acquire a pro rata
participation, to the extent of such payment, in the claim of BofA and First
Union against the Company for principal and shall share, in accordance with its
Pro Rata Share, in any principal payment made by the Company with respect to
such claim.
(b) From and after the New Commitment Effective Date, the New
Banks shall be entitled to their Pro Rata Share of all interest and fees
thereafter accruing under this
39251439.4 12199 1610P 96246459
9
<PAGE>
Credit Agreement (including, without limitation, interest on each such New
Bank's Pro Rata Share of the Outstanding Loans). All Loans made after the New
Commitment Effective Date shall be made by the Banks pursuant to the Pro Rata
Shares set forth in Schedule 2.01 attached hereto.
(c) Each of the New Banks hereby (i) warrants and represents
that it is authorized to become a party to the Credit Agreement; (ii) appoints
and authorizes the Agent to take such action, exercise such powers, and perform
such duties under the Credit Agreement as are specifically delegated to or
required of the Agent by the terms of the Credit Agreement, together with such
other powers as are reasonably incidental thereto; and (iii) agrees that it will
abide and be bound by all of the terms, covenants and agreements, and perform
all of the obligations, which by the terms of the Credit Agreement are required
to be abided and performed by it as a Bank and shall be entitled to all of the
rights, benefits and privileges available or accruing to Banks under the Loan
Documents.
3. Representations and Warranties. The Company represents and warrants
to the Agent and the Banks that, on and as of the date hereof, and after giving
effect to this First Amendment:
3.1 Authorization. The execution, delivery and performance by
the Company of this First Amendment has been duly authorized by all necessary
corporate action, and this First Amendment has been duly executed and delivered
by the Company.
3.2 Binding Obligation. This First Amendment constitutes the
legal, valid and binding obligation of the Company, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.
3.3 No Legal Obstacle to Amendment. The execution, delivery
and performance of this First Amendment will not (a) contravene the Organization
Documents of the Company; (b) constitute a breach or default under any
contractual restriction or violate or contravene any law or governmental
regulation or court decree or order binding on or affecting the Company which
individually or in the aggregate does or could reasonably be expected to have a
Material Adverse Effect; or (c) result in, or require the creation or imposition
of, any Lien on any of the Company's properties. No approval or authorization of
any governmental authority is required to permit the execution, delivery or
performance by the Company of this First Amendment, or the transactions
contemplated hereby.
3.4 Incorporation of Certain Representations. After giving
effect to the terms of this First Amendment, the representations and warranties
of the Company set forth in Article VI of the Credit Agreement are true and
correct in all respects on and as of the date hereof as though made on and as of
the date hereof, except as to such representations made as of an earlier
specified date.
39251439.4 12199 1610P 96246459
10
<PAGE>
3.5 Default. No Default or Event of Default under the Credit
Agreement has occurred and is continuing.
4. Conditions, Effectiveness. The effectiveness of this First Amendment
shall be subject to the compliance by the Company with its agreements herein
contained, and to the delivery of the following to Agent in form and substance
satisfactory to Agent of the following on or before November 30, 1998:
4.1 Authorized Signatories. A certificate, signed by the
Secretary or an Assistant Secretary of the Company and dated the date of this
First Amendment, as to the incumbency of the person or persons authorized to
execute and deliver this First Amendment and any instrument or agreement
required hereunder on behalf of the Company.
4.2 Organization Documents. The articles or certificate of
incorporation and the bylaws of each Pledgor Subsidiary as in effect on the date
of this First Amendment, and resolutions authorizing the transactions by the
Pledgor Subsidiaries contemplated by the Credit Agreement, each certified by the
Secretary or Assistant Secretary of the each Pledgor Subsidiary as of the date
of this First Amendment.
4.3 Pledge Agreement Affirmations. The Agent shall have
received affirmation letters in respect of the Pledge Agreement, substantially
in the form of Exhibit A, from each Pledgor Subsidiary.
4.4 Notes. The Agent shall have received for each Bank,
including without limitation each New Bank, a duly executed Note in the amount
of such Bank's Commitment.
4.5 Regulatory Certificate. A certificate of a Responsible
Officer on behalf of each of the Workers' Compensation Subsidiaries to the
effect that such Workers' Compensation Subsidiary is in compliance in all
material respects with the requirements of all applicable Workers' Compensation
Regulations and with all other Requirements of Law.
4.6 Reliance Letters. Letters from Morgan, Lewis & Bockius and
the internal counsel of the Company authorizing the New Banks to rely on the
opinions delivered pursuant to the Credit Agreement.
4.7 Other Evidence. Such other evidence with respect to the
Company or any other person as the Agent or any Bank may reasonably request to
establish the consummation of the transactions contemplated hereby, the taking
of all corporate action in connection with this First Amendment and the Credit
Agreement and the compliance with the conditions set forth herein.
39251439.4 12199 1610P 96246459
11
<PAGE>
5. Miscellaneous.
5.1 Effectiveness of the Credit Agreement and the Notes.
Except as hereby expressly amended, the Credit Agreement and the Notes shall
each remain in full force and effect, and are hereby ratified and confirmed in
all respects on and as of the date hereof.
5.2 Waivers. This First Amendment is limited solely to the
matters expressly set forth herein and is specific in time and in intent and
does not constitute, nor should it be construed as, a waiver or amendment of any
other term or condition, right, power or privilege under the Credit Agreement or
under any agreement, contract, indenture, document or instrument mentioned
therein; nor does it preclude or prejudice any rights of the Agent or the Banks
thereunder, or any exercise thereof or the exercise of any other right, power or
privilege, nor shall it require the Majority Banks to agree to an amendment,
waiver or consent for a similar transaction or on a future occasion, nor shall
any future waiver of any right, power, privilege or default hereunder, or under
any agreement, contract, indenture, document or instrument mentioned in the
Credit Agreement, constitute a waiver of any other right, power, privilege or
default of the same or of any other term or provision.
5.3 Counterparts. This First Amendment may be executed in any
number of counterparts, and all of such counterparts taken together shall be
deemed to constitute one and the same instrument. All provisions of this First
Amendment shall become effective when the Company, the Agent and the Majority
Banks shall have signed a copy hereof and the same shall have been delivered to
the Agent.
5.4 Governing Law. This First Amendment shall be governed by and construed
in accordance with the laws of the State of California.
39251439.4 12199 1610P 96246459
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed and delivered as of the date first written above.
SIERRA HEALTH SERVICES, INC.
By:
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Administrative
Agent
By:
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Bank
By:
Name:
Title:
FIRST UNION NATIONAL BANK, as a Bank
By:
Name:
Title:
39251439.4 12199 1610P 96246459
13
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH, as
a New Bank
By:
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
as a New Bank
By:
Name:
Title:
NORWEST BANK NEVADA N.A., as a New
Bank
By:
Name:
Title:
UNION BANK OF CALIFORNIA, N.A., as a
New Bank
By:
Name:
Title:
39251439.4 12199 1610P 96246459
14
<PAGE>
SCHEDULE 2.01
COMMITMENTS AND PRO RATA SHARES
<TABLE>
<CAPTION>
Bank Commitment Pro Rata Share
Bank of America National
Trust and Savings
<S> <C> <C>
Association $ 66,666,667 33.333333333%
First Union National Bank $ 53,333,333 26.666666667%
Credit Lyonnais
New York Branch $ 20,000,000 10.000000000%
The First National Bank
of Chicago $ 20,000,000 10.000000000%
Norwest Bank Nevada N.A. $ 20,000,000 10.000000000%
Union Bank of California, N.A. $ 20,000,000 10.000000000%
TOTAL $200,000,000 100%
</TABLE>
39251439.4 12199 1610P 96246459
<PAGE>
SCHEDULE 11.02
OFFSHORE AND DOMESTIC LENDING OFFICES,
ADDRESSES FOR NOTICES
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Administrative Agent
Notices (other than Borrowing Notices and Notices of Conversion/Continuation):
Bank of America National Trust
and Savings Association
Agency Management Services #20529
555 South Flower Street, 11th Floor
Los Angeles, CA 90071
Attention: Ms. Gina Meador
Vice President
Telephone: 213/228-5245
Facsimile: 213/228-2299
AGENT'S PAYMENT OFFICE:
Notices for Extensions of Credit and Conversion/Continuation:
Bank of America National Trust
and Savings Association
Agency Administrative Services #5596
1850 Gateway Boulevard, Fifth Floor
Concord, CA 94520
Attention: Kathy Eddy
Telephone: 925/675-8458
Facsimile: 925/675-8500
39251439.4 12199 1610P 96246459
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as a Bank
Domestic and Offshore Lending Office:
GPO-Domestic Account Administration #5583
The Harnor Building, 19th Floor
333 S. Beaudry Ave.
Los Angeles, CA 90017-1486
Attention: Sandra Ibarra
Telephone: 213/345-6536
Facsimile: 213/345-6550
Notices (other than Borrowing notices and Notices of Conversion/Continuation):
Bank of America National Trust
and Savings Association
Health Care Finance #9173
555 South Flower Street, 11th Floor
Los Angeles, CA 90071
Attention: J. Gregory Seibly
Vice President
Telephone: 213/228-2953
Facsimile: 213/228-2756
FIRST UNION NATIONAL BANK
Domestic and Offshore Lending Office:
One First Union Center
Charlotte, North Carolina 28288
Attention: Sue Patterson
Telephone: 704/374-7121
Facsimile: 704/374-6537
with a copy of all Notices (other
than Borrowing Notices or Notices
of Conversion/Continuation):
39251439.4 12199 1610P 96246459
<PAGE>
First Union National Bank
One First Union Center
Charlotte, North Carolina 28288
Attention: Valerie Cline
Telephone: 704/383-6237
Facsimile: 704/383-9144
CREDIT LYONNAIS NEW YORK BRANCH
Domestic and Offshore Lending Office:
1301 Avenue of the Americas
New York, New York 10019
Attention: Kenia A. Perez
Telephone: 212/261-7788
Facsimile: 212/261-3440
THE FIRST NATIONAL BANK OF CHICAGO
Domestic and Offshore Lending Office:
One First National Plaza
Chicago, Illinois 60670
Attention: Ken Fecko
Telephone: 312/732-4616
Facsimile: 312-732-4303
NORWEST BANK NEVADA N.A.
Domestic and Offshore Lending Office:
3300 West Sahara Avenue
Las Vegas, Nevada 89102
Attention: Sue Norton
Telephone: 702/765-3180
Facsimile: 702/765-3888
39251439.4 12199 1610P 96246459
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
Domestic and Offshore Lending Office:
Commercial Customer Service Unit
1980 Saturn Street
Monterey Park, CA 91755
Attention: Gohar Karapetyan
Telephone: 323/720-2679
Facsimile: 323/724-6198
39251439.4 12199 1610P 96246459
<PAGE>
EXHIBIT A to
First Amendment
to Credit Agreement
November 23, 1998
Sierra Health Services, Inc.
Sierra Medical Management, Inc.
Prime Holdings, Inc.
c/o Sierra Health Services, Inc.
2724 North Tenaya Way
Las Vegas, Nevada 89128
Re: Sierra Health Services, Inc.
Gentlemen:
Please refer to (1) the Credit Agreement, dated as of October 30, 1998
(the "Credit Agreement"), by and among Sierra Health Services, Inc., as the
Borrower, the commercial lending institutions party thereto (collectively, the
"Lenders") and Bank of America National Trust and Savings Association, as agent
(herein, in such capacity, called the "Agent") and (2) the Pledge Agreements
dated October 30, 1998 from each of the addressees in favor of the Lenders and
the Agent (the "Pledge Agreements"). Pursuant to an amendment dated of even date
herewith, a copy of which is attached hereto, certain terms of the Credit
Agreement were amended. We hereby request that you (i) acknowledge and reaffirm
all of your obligations and undertakings under your Pledge Agreement and (ii)
acknowledge and agree that your Pledge Agreement is and shall remain in full
force and effect in accordance with the terms thereof.
Please indicate your agreement to the foregoing by signing in the space
provided below, and returning the executed copy to the undersigned.
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Agent
By:______________________________
39251439.4 12199 1610P 96246459
<PAGE>
Title:
Acknowledged and Agreed to
as of November 20, 1998
SIERRA HEALTH SERVICES, INC.
SIERRA MEDICAL MANAGEMENT, INC.
PRIME HOLDINGS, INC.
By:____________________________
Its:________________________
39251439.4 12199 1610P 96246459
<PAGE>
EXHIBIT 10.6
SECOND AMENDMENT TO
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT is made and dated as of
January 15, 1999 (the "Second Amendment") among SIERRA HEALTH SERVICES, INC.
(the "Company"), the Banks now party to the Credit Agreement referred to below,
DEUTSCHE BANK AG, New York and/or Cayman Island Branches (the "New Bank") and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking
association, as Administrative Agent (the "Agent"), and amends that certain
Credit Agreement dated as of October 30, 1998, as amended by that certain First
Amendment dated as of November 23, 1998 (as further amended or modified from
time to time, the "Credit Agreement").
RECITALS
WHEREAS, the Company has requested the Agent and the Banks to amend certain
provisions of the Credit Agreement, and the Agent and the Banks are willing to
do so, on the terms and conditions specified herein;
WHEREAS, the New Bank wishes to be added to the Credit Agreement as a Bank,
and the Company, the Agent and the existing Banks are willing to permit the New
Bank to be so added;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. Terms. All terms used herein shall have the same meanings as in the
Credit Agreement unless otherwise defined herein.
2. Amendment. The Credit Agreement is hereby amended as follows:
2.1 Amendment to Section 8.10.
(a) Section 8.10 of the Credit Agreement is hereby amended by adding the
following clause immediately after the phrase "notwithstanding the foregoing,"
in the seventh line from the end of such Section:
"(i) any Wholly-Owned Subsidiaries may declare and pay dividends to the
Company and (ii) "
2.2 Amendment to Section 8.14.
(a) Clause (ii) of subsection (b) of Section 8.14 of the Credit Agreement
is hereby amended by replacing the phrase "for the period commencing on the
Closing Date and
1
ending on the date of determination" and with the following phrase: "for
each Fiscal Quarter ending after the Closing Date and on or before the date of
determination,".
2.3 Amendment to Section 8.17.
(a) The proviso at the end of Section 8.17 of the Credit Agreement is
hereby amended by inserting the following clause immediately after the word
"foregoing": "the Company may consummate any of the transactions set forth on
Schedule 8.17 and".
2.4 Amendment to Section 9.02.
(a) The following sentence shall be added to the end of the first sentence
of Section 9.02: "Upon any acceleration of the Loans pursuant to the foregoing
provisions, the Company shall deposit with the Agent cash collateral in an
amount equal to the aggregate undrawn amount of all Letters of Credit then
outstanding (the "Maximum Available Amount"); provided that in the event of any
drawing under any Letter of Credit thereafter, the Agent shall use such cash
collateral to reimburse such drawing and provided further that, in the event of
any cancellation or expiration of any Letter of Credit, the Agent shall apply
the difference between the Maximum Available Amount immediately prior to such
cancellation or expiration and the Maximum Available Amount immediately after
such cancellation or reduction, first, to the payment in full of any outstanding
Obligations, and second, to the Company or to such other Person who may be
lawfully entitled to receive such funds or as a court of competent jurisdiction
may direct."
2.5 Amendment to Section 10.10. Section 10.10 of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
10.10 Withholding Tax.
(a) If any Bank is a "foreign corporation, partnership or trust" within the
meaning of the Code and such Bank claims exemption from, or a reduction of, U.S.
withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with
and in favor of the Agent and the Company, to deliver to the Agent:
(i) if such Bank claims an exemption from, or a reduction of, withholding
tax under a United States tax treaty, two properly completed and executed copies
of IRS Form 1001 before the payment of any interest in the first calendar year
and before the payment of any interest in each third succeeding calendar year
during which interest may be paid under this Agreement;
(ii) if such Bank claims that interest paid under this Agreement is exempt
from United States withholding tax because it is effectively connected with a
United States trade or business of such Bank, two properly completed and
executed copies of IRS Form 4224 before the payment of any interest is due in
the first taxable year of
2
such Bank and in each succeeding taxable year of such Bank during which
interest may be paid under this Agreement; and
(iii) to the extent it is legally able to do so, such other form or forms
as may be required under the Code or other laws of the United States as a
condition to exemption from, or reduction of, United States withholding tax.
Such Bank agrees to promptly notify the Agent and the Company of any change
in circumstances which would modify or render invalid any claimed exemption or
reduction.
(b) If any Bank claims exemption from, or reduction of, withholding tax
under a United States tax treaty by providing IRS Form 1001 and such Bank sells,
assigns, grants a participation in, or otherwise transfers all or part of the
Obligations of the Company to such Bank, such Bank agrees to notify the Agent of
the percentage amount in which it is no longer the beneficial owner of
Obligations of the Company to such Bank. To the extent of such percentage
amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid.
(c) If any Bank claiming exemption from United States withholding tax by
filing IRS Form 4224 with the Agent grants a participation in all or part of the
Obligations of the Company to such originating Bank, such originating Bank
agrees to undertake sole responsibility for complying with the withholding tax
requirements imposed by Sections 1441 and 1442 of the Code with respect to its
participant.
(d) If any Bank is entitled to a reduction in the applicable withholding
tax, the Agent may withhold from any interest payment to such Bank an amount
equivalent to the applicable withholding tax after taking into account such
reduction. However, if the forms or other documentation required by subsection
(a) of this Section are not delivered to the Agent, then the Agent may withhold
from any interest payment to such Bank not providing such forms or other
documentation an amount equivalent to the applicable withholding tax imposed by
Sections 1441 and 1442 of the Code, without reduction.
(e) If the IRS or any other Governmental Authority of the United States or
other jurisdiction asserts a claim that the Agent or the Company did not
properly withhold tax from amounts paid to or for the account of any Bank
(because such Bank failed to notify the Agent of a change in circumstances which
rendered the exemption from, or reduction of, withholding tax ineffective) such
Bank shall indemnify the Agent and the Company fully for all amounts paid,
directly or indirectly, by the Agent or the Company as tax or otherwise,
including penalties and interest, and including any taxes imposed by any
jurisdiction on the amounts payable to the Agent under this Section, together
with all costs and expenses (including Attorney Costs). The obligation of the
Banks under this subsection shall survive the payment of all Obligations and the
resignation or replacement of the Agent.
3
2.6 Amendment of Schedules.
(a) Schedule 2.01 of the Credit Agreement is hereby amended and restated to
read in its entirety as set forth on Schedule 2.01 hereto.
(b) Schedule 11.02 of the Credit Agreement is hereby amended and restated
to read in its entirety as set forth on Schedule 11.02 hereto.
2.7 Addition of New Bank.
(a) Upon the date of effectiveness of this Second Amendment (the "Effective
Date"), the New Bank shall (i) be a party to the Credit Agreement; (ii) assume
all of the rights and obligations of a Bank under the Credit Agreement with a
Commitment in the amount set forth opposite such Bank's name in Schedule 2.01
attached hereto; and (iii) be secured by the Collateral. On the Effective Date,
the New Bank shall purchase and assume, and BofA and First Union shall each sell
to the New Bank, 25% of its Commitment under the Credit Agreement, including 25%
of each of the outstanding Loans of BofA and First Union (with such purchase,
assumption and sale being deemed to have been completed upon payment of the
purchase price in the manner referred to below). As of the date of this Second
Amendment, there are four outstanding Borrowings of LIBOR Rate Loans, the terms
of which are more particularly described on Exhibit A hereto. The interest rate
payable by the Company on its outstanding Loans shall not change; however, the
interest rate distributable to the New Bank on its portion of the Loans
purchased from BofA and First Union shall be equal to the LIBOR Rate for an
Interest Period of one or three months (as described on Exhibit A), determined
as of January 15, 1999, plus the Applicable Margin for LIBOR Rate Loans. On the
Effective Date, the New Bank shall assume the Commitment of, and pay to the
Agent (for delivery to BofA and First Union) the purchase price for the Loans
sold by, BofA and First Union. The obligation of the New Bank to so provide its
purchase price to the Agent shall be absolute and unconditional and shall not be
affected by the occurrence of a Default or Event of Default. Upon the delivery
by the New Bank to the Agent of the purchase price due for such Loans, the New
Bank shall thereupon hold an assignment, to the extent of such payment, in the
claim of BofA and First Union against the Company for principal and shall share,
in accordance with its Pro Rata Share, in any principal payment made by the
Company with respect to such claim.
(b) From and after the New Commitment Effective Date, the New Bank shall be
entitled to its Pro Rata Share of all interest and fees thereafter accruing
under this Credit Agreement (including, without limitation, interest on the New
Bank's Pro Rata Share of the Outstanding Loans). All Loans made after the New
Commitment Effective Date shall be made by the Banks pursuant to the Pro Rata
Shares set forth in Schedule 2.01 attached hereto.
(c) The New Bank hereby (i) warrants and represents that it is authorized
to become a party to the Credit Agreement; (ii) appoints and authorizes the
Agent to take such
4
action, exercise such powers, and perform such duties under the Credit
Agreement as are specifically delegated to or required of the Agent by the terms
of the Credit Agreement, together with such other powers as are reasonably
incidental thereto; and (iii) agrees that it will abide and be bound by all of
the terms, covenants and agreements, and perform all of the obligations, which
by the terms of the Credit Agreement are required to be abided and performed by
it as a Bank and shall be entitled to all of the rights, benefits and privileges
available or accruing to Banks under the Loan Documents.
3. Representations and Warranties. The Company represents and warrants to
the Agent and the Banks that, on and as of the date hereof, and after giving
effect to this Second Amendment:
3.1 Authorization. The execution, delivery and performance by the Company
of this Second Amendment has been duly authorized by all necessary corporate
action, and this Second Amendment has been duly executed and delivered by the
Company.
3.2 Binding Obligation. This Second Amendment constitutes the legal, valid
and binding obligation of the Company, enforceable against it in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability.
3.3 No Legal Obstacle to Amendment. The execution, delivery and performance
of this Second Amendment will not (a) contravene the Organization Documents of
the Company; (b) constitute a breach or default under any contractual
restriction or violate or contravene any law or governmental regulation or court
decree or order binding on or affecting the Company which individually or in the
aggregate does or could reasonably be expected to have a Material Adverse
Effect; or (c) result in, or require the creation or imposition of, any Lien on
any of the Company's properties. No approval or authorization of any
governmental authority is required to permit the execution, delivery or
performance by the Company of this Second Amendment, or the transactions
contemplated hereby.
3.4 Incorporation of Certain Representations. After giving effect to the
terms of this Second Amendment, the representations and warranties of the
Company set forth in Article VI of the Credit Agreement are true and correct in
all respects on and as of the date hereof as though made on and as of the date
hereof, except to the extent such representations relate solely to an earlier
specified date.
3.5 Default. No Default or Event of Default under the Credit Agreement has
occurred and is continuing.
4. Conditions, Effectiveness. The effectiveness of this Second Amendment
shall be subject to the compliance by the Company with its agreements herein
contained, and to the
5
delivery of the following to Agent in form and substance satisfactory to
Agent of the following on or before January 31, 1999:
4.1 Execution of Second Amendment. The Company, the Agent and the Majority
Banks shall have signed a copy hereof and the same shall have been delivered to
the Agent.
4.2 Pledge Agreement Affirmations. The Agent shall have received
affirmation letters in respect of the Pledge Agreement, substantially in the
form of Exhibit A, from each Pledgor Subsidiary.
4.3 Notes. The Agent shall have received for each of BofA, First Union and
the New Bank, a duly executed Note in the amount of such Bank's Commitment.
4.4 Other Evidence. Such other evidence with respect to the Company or any
other person as the Agent, the New Bank or any Bank may reasonably request to
establish the consummation of the transactions contemplated hereby, the taking
of all corporate action in connection with this Second Amendment and the Credit
Agreement and the compliance with the conditions set forth herein.
5. Miscellaneous.
5.1 Effectiveness of the Credit Agreement and the Notes. Except as hereby
expressly amended, the Credit Agreement and the Notes shall each remain in full
force and effect, and are hereby ratified and confirmed in all respects on and
as of the date hereof.
5.2 Waivers. This Second Amendment is limited solely to the matters
expressly set forth herein and is specific in time and in intent and does not
constitute, nor should it be construed as, a waiver or amendment of any other
term or condition, right, power or privilege under the Credit Agreement or under
any agreement, contract, indenture, document or instrument mentioned therein;
nor does it preclude or prejudice any rights of the Agent or the Banks
thereunder, or any exercise thereof or the exercise of any other right, power or
privilege, nor shall it require the Majority Banks to agree to an amendment,
waiver or consent for a similar transaction or on a future occasion, nor shall
any future waiver of any right, power, privilege or default hereunder, or under
any agreement, contract, indenture, document or instrument mentioned in the
Credit Agreement, constitute a waiver of any other right, power, privilege or
default of the same or of any other term or provision.
5.3 Counterparts. This Second Amendment may be executed in any number of
counterparts, and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
5.4 Governing Law. This Second Amendment shall be governed by and construed
in accordance with the laws of the State of California.
6
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed and delivered as of the date first written above.
SIERRA HEALTH SERVICES, INC.
By:
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Administrative
Agent
By:
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Bank
By:
Name:
Title:
FIRST UNION NATIONAL BANK, as a Bank
By:
Name:
Title:
7
CREDIT LYONNAIS NEW YORK BRANCH, as
a Bank
By:
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
as a Bank
By:
Name:
Title:
NORWEST BANK NEVADA N.A., as a BANK
By: ___________________________________
Name:
Title:
UNION BANK OF CALIFORNIA, N.A., as a
Bank
By:
Name:
Title:
8
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES, as a New
Bank
By:
Name: _________________________
Title:
By:
Name:
Title:
9
SCHEDULE 2.01
COMMITMENTS AND PRO RATA SHARES
<TABLE>
<CAPTION>
Bank Commitment Pro Rata Share
Bank of America National
Trust and Savings
<S> <C> <C>
Association $ 50,000,000 25%
First Union National Bank $ 40,000,000 20%
Deutsche Bank AG, New York $ 30,000,000 15%
and/or Cayman Island Branches
Credit Lyonnais
New York Branch $ 20,000,000 10%
The First National Bank
of Chicago $ 20,000,000 10%
Norwest Bank Nevada N.A. $ 20,000,000 10%
Union Bank of California, N.A. $ 20,000,000 10%
TOTAL $200,000,000 100%
</TABLE>
SCHEDULE 11.02
OFFSHORE AND DOMESTIC LENDING OFFICES,
ADDRESSES FOR NOTICES
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Administrative Agent
Notices (other than Borrowing Notices and Notices of Conversion/Continuation):
Bank of America National Trust
and Savings Association
Agency Management Services #20529
555 South Flower Street, 11th Floor
Los Angeles, CA 90071
Attention: Ms. Gina Meador
Vice President
Telephone: 213/228-5245
Facsimile: 213/228-2299
AGENT'S PAYMENT OFFICE:
Notices for Extensions of Credit and Conversion/Continuation:
Bank of America National Trust
and Savings Association
Agency Administrative Services #5596
1850 Gateway Boulevard, Fifth Floor
Concord, CA 94520
Attention: Kathy Eddy
Telephone: 925/675-8458
Facsimile: 925/675-8500
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as a Bank
Domestic and Offshore Lending Office:
GPO-Domestic Account Administration #5583
The Harnor Building, 19th Floor
333 S. Beaudry Ave.
Los Angeles, CA 90017-1486
Attention: Sandra Ibarra
Telephone: 213/345-6536
Facsimile: 213/345-6550
Notices (other than Borrowing notices and Notices of Conversion/Continuation):
Bank of America National Trust
and Savings Association
Health Care Finance #9173
555 South Flower Street, 11th Floor
Los Angeles, CA 90071
Attention: J. Gregory Seibly
Vice President
Telephone: 213/228-2953
Facsimile: 213/228-2756
FIRST UNION NATIONAL BANK
Domestic and Offshore Lending Office:
One First Union Center
Charlotte, North Carolina 28288
Attention: Sue Patterson
Telephone: 704/374-7121
Facsimile: 704/374-6537
with a copy of all Notices (other
than Borrowing Notices or Notices
of Conversion/Continuation):
First Union National Bank
One First Union Center
Charlotte, North Carolina 28288
Attention: Valerie Cline
Telephone: 704/383-6237
Facsimile: 704/383-9144
DEUTSCHE BANK AG,
New York and/or Cayman Islands Branches
Domestic Lending Office:
Operations:
Richard Agnolet
Deutsche Bank AG
New York Branch
31 W. 52nd Street
New York, NY 10019
Tel: 212-469-4113
Fax: 212-469-4138
Business/Credit Matters
Sue Pearson
Deutsche Bank AG
31 W. 52nd Street
New York, NY 10019
Tel: 212-469-7140
Fax: 212-469-8701
Offshore Lending Office:
Deutsche Bank AG
Cayman Islands Branch
c/o New York Branch
Operations:
Richard Agnolet
Deutsche Bank AG
New York Branch
31 W. 52nd Street
New York, NY 10019
Tel: 212-469-4113
Fax: 212-469-4138
Business/Credit Matters
Sue Pearson
Deutsche Bank AG
31 W. 52nd Street
New York, NY 10019
Tel: 212-469-7140
Fax: 212-469-8701
CREDIT LYONNAIS NEW YORK BRANCH
Domestic and Offshore Lending Office:
1301 Avenue of the Americas
New York, New York 10019
Attention: Kenia A. Perez
Telephone: 212/261-7788
Facsimile: 212/261-3440
THE FIRST NATIONAL BANK OF CHICAGO
Domestic and Offshore Lending Office:
One First National Plaza
Chicago, Illinois 60670
Attention: Ken Fecko
Telephone: 312/732-4616
Facsimile: 312-732-4303
NORWEST BANK NEVADA N.A.
Domestic and Offshore Lending Office:
3300 West Sahara Avenue
Las Vegas, Nevada 89102
Attention: Sue Norton
Telephone: 702/765-3180
Facsimile: 702/765-3888
UNION BANK OF CALIFORNIA, N.A.
Domestic and Offshore Lending Office:
Commercial Customer Service Unit
1980 Saturn Street
Monterey Park, CA 91755
Attention: Gohar Karapetyan
Telephone: 323/720-2679
Facsimile: 323/724-6198
EXHIBIT A to
Second Amendment
to Credit Agreement
January 15, 1999
Sierra Health Services, Inc.
Sierra Medical Management, Inc.
Prime Holdings, Inc.
c/o Sierra Health Services, Inc.
2724 North Tenaya Way
Las Vegas, Nevada 89128
Re: Sierra Health Services, Inc.
Gentlemen:
Please refer to (1) the Credit Agreement, dated as of October 30, 1998, as
amended by that certain First Amendment dated as of November 23, 1998 (the
"Credit Agreement"), by and among Sierra Health Services, Inc., as the Borrower,
the commercial lending institutions party thereto (collectively, the "Lenders")
and Bank of America National Trust and Savings Association, as agent (herein, in
such capacity, called the "Agent") and (2) the Pledge Agreements dated
October 30, 1998 from each of the addressees in favor of the Lenders and the
Agent (the "Pledge Agreements"). Pursuant to an amendment dated of even date
herewith, a copy of which is attached hereto, certain terms of the Credit
Agreement were amended. We hereby request that you (i) acknowledge and reaffirm
all of your obligations and undertakings under your Pledge Agreement and (ii)
acknowledge and agree that your Pledge Agreement is and shall remain in full
force and effect in accordance with the terms thereof.
Please indicate your agreement to the foregoing by signing in the space
provided below, and returning the executed copy to the undersigned.
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Agent
By:______________________________
Title:
Acknowledged and Agreed to
as of January 15, 1999
SIERRA HEALTH SERVICES, INC.
SIERRA MEDICAL MANAGEMENT, INC.
By:____________________________
Its:___________________________
PRIME HOLDINGS, INC.
By:____________________________
Its:___________________________
EXHIBIT A
OUTSTANDING BORROWINGS OF
LIBOR RATE LOANS
(as of January 15, 1999)
LENGTH OF INTEREST
BORROWING PERIOD FOR DETERMINING
AMOUNT MATURITY PAYMENTS TO NEW BANK
$101,000,000 February 5, 1999 One Month
$ 18,000,000 February 9, 1999 One Month
8,000,000 February 10, 1999 One Month
$ 12,000,000 March 3, 1999 Three Months
EXHIBIT 10.7(10)
EMPLOYMENT AGREEMENT
This Agreement is made this day of November 20, 1998, by and between SIERRA
HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter
referred to as "Employer"), and Paul H. Palmer , (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,
Treasurer and 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 CEO of
Employer
1
<PAGE>
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 3 year period starting November 20, 1998 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, 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.
2
<PAGE>
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 Employer 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.
3
<PAGE>
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 Interest form by February 15 of each
4
<PAGE>
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.
5
<PAGE>
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
6
<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.
7
<PAGE>
(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
8
<PAGE>
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
9
<PAGE>
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 Paragraphs 6 and 7 of this Article,
Employee shall be entitled to nine (9) 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, as 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 be made in a lump sum within five (5)
10
<PAGE>
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 Employer'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 six (6)
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)
11
<PAGE>
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
12
<PAGE>
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 Employer 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
Employer 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 Employer'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, Employer 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
13
<PAGE>
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 and 7 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
14
<PAGE>
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.
15
<PAGE>
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.
16
<PAGE>
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
AMENDMENT
No amendment or modification of this Agreement shall be deemed effective,
unless or until, it is executed in writing by the parties hereto.
17
<PAGE>
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.
18
<PAGE>
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.
19
<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:______________________________
Paul H. Palmer
1484 Flintrock
Henderson, NV 89014
20
<PAGE>
ATTACHMENT A
COMPENSATION - Paul H. Palmer
1998 Subject to all the terms of this Agreement, the compensation for
- ----
Employee shall be paid $________ per month ($____________ per annum).
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE STATEMENTS OF CONSOLIDATED OPERATIONS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 83,910,000
<SECURITIES> 110,008,000
<RECEIVABLES> 124,192,000
<ALLOWANCES> 10,540,000
<INVENTORY> 0
<CURRENT-ASSETS> 393,931,000
<PP&E> 295,124,000
<DEPRECIATION> 65,960,000
<TOTAL-ASSETS> 1,045,120,000
<CURRENT-LIABILITIES> 346,168,000
<BONDS> 242,398,000
0
0
<COMMON> 141,000
<OTHER-SE> 303,573,000
<TOTAL-LIABILITY-AND-EQUITY> 1,045,120,000
<SALES> 0
<TOTAL-REVENUES> 1,037,203,000
<CGS> 0
<TOTAL-COSTS> 962,779,000
<OTHER-EXPENSES> 13,851,000<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,181,000
<INCOME-PRETAX> 53,392,000
<INCOME-TAX> 13,796,000
<INCOME-CONTINUING> 39,596,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,596,000
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.43
<FN>
<F1>Identifiable integration, settlement, and other costs
</FN>
</TABLE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-42222, 33-41542, 33-41543, 33-59187, 33-60901, 33-60591, 33-82474, and
333-68399 of Sierra Health Services, Inc. on Forms S-8 of our report dated
February 8, 1999 appearing in this Annual Report on Form 10-K of Sierra Health
Services, Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 15, 1999
<PAGE>
EXHIBIT 10.13
AMENDMENT NO. 2
TO THE ASSET SALE AND PURCHASE AGREEMENT
THIS AMENDMENT ("Amendment") is entered into as of October 31, 1998, by and
between Kaiser Foundation Health Plan of Texas, a Texas non-profit corporation
("Seller"), and Texas Health Choice, L.C., f/k/a HMO Texas, L.C., a Texas
limited liability company ("Buyer").
RECITAL
The undersigned parties have entered into that certain Asset Sale and
Purchase Agreement, dated June 5, 1998, as amended on August 7, 1998 ("Purchase
Agreement"), and the parties desire to further amend the Purchase Agreement as
set forth herein.
NOW, THEREFORE, for and in consideration of the above recitals and the
representations, warranties, mutual covenants, and agreements herein expressed,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby expressly acknowledged, the parties hereby agree as follows:
1. Identity of Buyer. The parties hereby agree to amend (i) the initial
paragraph of the Purchase Agreement, (ii) Section 15.1 regarding notices, (iii)
the signature blocks of Buyer, and (iv) any other place in the Purchase
Agreement which references HMO Texas, L.C. as Buyer, to change the identity of
the Buyer from HMO Texas, L.C., a Texas limited liability company, to Texas
Health Choice, L.C., a Texas limited liability company.
2. Confidentiality Agreements. The parties hereby acknowledge that the
references to the Confidentiality Agreements dated March 28, 1998 and March 30,
1998 in paragraph E of the Recitals in the Purchase Agreement are erroneous, and
hereby agree to amend such paragraph to change such references to the
Confidentiality Agreements dated March 24, 1998 and March 27, 1998. Copies of
the Confidentiality Agreements dated March 24, 1998 and March 27, 1998 are
attached as Exhibits A and B to this Amendment.
3. Texas Group 3000 Issues. The parties hereby acknowledge that Section
1.4.4 of the Purchase Agreement shall be interpreted to mean that the Texas
Group 3000 Members shall not be counted in the Membership Base under the
Earn-Out Accounts for the purpose of calculating any additional purchase price
paid by Buyer to Seller thereunder. In addition, other members employed by the
Group 3000 Members' employers (such employers to be determined as of the Closing
Date) shall not be counted unless (i) such member is listed on Schedule 1.4.4 as
a National Account or (ii) Seller brings new members to areas other than
Dallas/Fort Worth in accordance with the provisions of Section 1.4.4. As an
example of subsection (i), if XYZ Co. is listed as a National Account in
Schedule 1.4.4 and an employee of XYZ Co. is listed as a Group 3000 Member but
is not included in the membership count in Schedule 1.4.4, the
employee shall never count in the Membership Base for purposes of
calculating the Earn-Out Accounts; however, increases in the number of members
employed by XYZ Co. and who are not a Group 3000 Member at Closing shall be
counted in the Membership Base for purposes of calculating the Earn-out
Accounts.
4. Old National Accounts. In addition to updating Schedule 1.4.4 to make it
accurate as of the Closing, the parties agree (i) to delete intentionally
Columbia Healthcare members from the Membership Base for purposes of Section
1.4.4, notwithstanding that Columbia Healthcare is an Old National Account, and
(ii) to not count Columbia Healthcare members in the New Accounts or Earn-Out
Accounts. This shall affect Section 1.4.4 of the Purchase Agreement only.
5. Closing. The parties hereby agree that Section 1.5 of the Purchase
Agreement shall be amended to change the reference regarding the time of Closing
from 12:01:01 a.m. to 11:59:59 p.m. on the Closing Date.
6. Columbia Hospital Contract. In order to simplify the process described
in Section 1.6.3(b) of the Purchase Agreement relating to the Columbia Hospital
Contract, the parties agree to delete the text of Section 1.6.3(b) of the
Purchase Agreement in its entirety, and replace such text with the following:
Buyer has arranged to amend and assume that certain contract between Seller
and Columbia North Texas Division, Inc. ("Columbia"), dated January 1, 1995
("Columbia Hospital Contract") pursuant to a letter dated September 17, 1998,
from Larry S. Howard to Thomas O. Corley, which sets forth the agreement between
Buyer and Columbia and the consent of Columbia to the assignment and assumption
of the Columbia Hospital Contract. The following chart sets forth the change in
Equivalent Per Diem rates resulting from the assignment of the Columbia Hospital
Contract to Buyer:
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
Time Period 11/1/98 to 1/1/99 to 3/1/99 to
12/31/98 2/28/99 12/31/99
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Existing Columbia $1,059 $1,109 $1,109
Contract Equivalent
Per Diem
- -----------------------------------------------------------------------------------------------
Amended Columbia $1,143 $1,143 $1,170
Contract Assigned
to Buyer Equivalent
Per Diem
- -----------------------------------------------------------------------------------------------
Difference in $84 $34 $61
Equivalent Per Diem
- -----------------------------------------------------------------------------------------------
</TABLE>
- 2 -
For each Time Period set forth above, Seller shall reimburse Buyer 70% of
the applicable Difference in Equivalent Per Diem multiplied by the number of
Inpatient Hospital Days incurred under the Columbia Hospital Contract during
that Time Period. In addition, Seller shall reimburse Buyer the amount by which
30% of the applicable Difference in Equivalent Per Diem multiplied by the number
of Inpatient Hospital Days incurred under the Columbia Hospital Contract for all
Time Periods cumulatively exceeds $350,000.
Seller shall pay amounts due under this Section 1.6.3(b) on a monthly basis
promptly upon receipt of an invoice from Buyer and shall be subject to later
verification by Seller through a quarterly audit of Buyer's books and records
necessary or reasonable to verify the number of Inpatient Hospital Days at
Columbia facilities utilized under the Columbia Hospital Contract. This payment
shall be the sole and exclusive payment by Seller to Buyer relating to the cost
increases imposed by Columbia's condition to consent to the assignment of the
Columbia Hospital Contract from Seller to Buyer.
The parties agree that the language set forth above supersedes all
discussions and agreements regarding the Columbia Hospital Contract among the
parties since June 5, 1998, through the date hereof, including, but not limited
to, that certain amendment among the parties dated August 7, 1998, and that the
language as set forth above constitutes the sole, full and complete agreement
among the parties relating to the Columbia Hospital Contract.
7. Adjustment to Purchase Price. Section 1.4.1 of the Purchase Agreement is
amended to state as follows:
The consideration for the transfer of the Assets from Seller and Seller's
Affiliates to Buyer shall be One Hundred Twenty-Two Million, Nine Thousand,
Three Hundred and Nine Dollars ($122,009,309.00), as adjusted as provided in
this Section 1.4 (the "Purchase Price"). Ninety-Two Million, Nine Thousand,
Three Hundred and Nine Dollars ($92,009,309.00) of the Purchase Price shall be
paid by Buyer to Seller by Federal Reserve Bank wire transfer of good funds at
Closing, as adjusted as provided in this Section 1.4. The remaining Thirty
Million Dollars ($30,000,000.00) of the Purchase Price shall be paid in
accordance with the earn-outs set forth in Sections 1.4.4 and 1.4.5. The parties
acknowledge that the amount of Two Hundred Seventy Five Six Hundred Ninety-One
($ 275,691.00) is the purchase price associated with the Insurance Assumption
Reinsurance Agreement and that such amount is not included in the term Purchase
Price for purposes of this Agreement.
In addition, Section 1.4.6 of the Purchase Agreement shall be deleted in
its entirety, it being the intent of the parties that the sole adjustment to the
Purchase Price as a result of any decrease in
- 3 -
Member Accounts as required by Section 1.4.6 is reflected in the Purchase
Price set forth in the amended Section 1.4.1 set forth above.
8. Amendment to Section 10.8. Both Sections 10.8(a) and 10.8(b) of the
Purchase Agreement shall each be amended to add the following:
The parties shall meet within 30 days of the Closing Date to come to an
agreement on the actuarially sufficient commercial rate to be charged for 1999.
If the parties are unable to come to an agreement prior to January 1, 1999, each
shall charge the other an amount equal to 4 % (2 % for Medicare) above the rate
being charged for 1998 (the 1998 commercial and Medicare rates being described
in the consolidated and amended Exhibits 10.8(a) & (b)) until they have reached
an agreement as to the actuarially sufficient commercial rates for 1999, at
which time, the amount previously provided for 1999 shall be adjusted
accordingly with the final actuarially sufficient commercial rates.
9. Section Deleted. Section 10.9 is deleted in its entirety.
10. Amendments Relating to Personal Property.
a. Section 11.3.1 of the Purchase Agreement is amended to add the
following:
This Section 11.3.1 shall not apply to the extent that the aggregate net
book value of the personal property delivered to Buyer hereunder is less than
$22,478,636.
b. Section 11.3.2 of the Purchase Agreement is amended to add the
following:
This Section 11.3.2 shall not apply to the extent that the aggregate net
book value of the personal property delivered to Buyer hereunder is less than
$22,478,636.
11. Exhibits/Documents Amended. The parties agree to amend certain exhibits
which were attached to the Purchase Agreement on June 5, 1998, and to replace
such exhibits in their entirety with new versions of such exhibits, which shall
be approved by the parties and signed at Closing, the signatures of the duly
authorized officer(s) of each party to such exhibits to conclusively evidence
the parties' approval thereof, including, without limitation, the following
exhibits:
Bill of Sale Exhibit 1.6.1(b)
Transition Agreement Exhibit 1.6.1(m)
Medical Services Agreement Exhibit 1.6.1(n)
Opinion Letter of Seller's Counsel Exhibit 5.1
Opinion Letter of Buyer's Counsel Exhibit 6.1
12. Schedules Amended. The parties agree to amend certain schedules which
were attached to the Purchase Agreement on June 5, 1998, and to replace such
schedules in their entirety with restated versions of such schedules, as
follows:
- 4 -
Schedule 1. l(b) Provider Agreements
Schedule 1.1(c) Contracts
Schedule 1.l(d) Tangible Personal Property
Schedule 1.1(i) Assets of Seller's Affiliates
Schedule 1.1(j) Software, Hardware and Related Data of Seller
or Seller's Affiliates
Schedule 1.2(m) Other Assets to be Excluded
Schedule 1.4.4 Membership Base
Schedule 2.1.6 Litigation
Schedules 10.8(a)&(b) Seller's Group 3000 Rates & Seller's
Affiliates Standard Group 3000 Rates
(amended and combined)
13. HCFA and OPM. Notwithstanding the terms of the HCFA and OPM Novation
Agreements, as such terms may come to be, Buyer and Seller agree that as between
themselves, the relationship between Seller and Buyer shall be governed by
Sections 10.2 and 10.3 of the Purchase Agreement and the following addition to
Sections 11.1 and 11.2 of the Purchase Agreement:
There shall be a new Section 11.1(f) that shall state: Any claim,
obligation, or other liability arising from the current OPM or HCFA contracts
(including, but not limited to, any legal obligations regarding the accuracy of
the encounter data) with respect to any period prior to the Closing Date other
than as described in Sections 10.2 or 10.3.
There shall be a new Section 11.2(f) that shall state: Any claim,
obligation, or other liability arising from the current OPM or HCFA contracts
(including, but not limited to, any legal obligations regarding the accuracy of
the encounter data) with respect to any period on or after the Closing Date
other than as described in Sections 10.2 or 10.3.
14. Directors. The last sentence of Section 10.4.4 shall be deleted and
replaced with the following: Buyer shall pay for the premiums of all such
directors for the calendar year 1999.
15. National Accounts. Buyer and Seller agree that the fixtures, furniture
and equipment used by Seller's Affiliates in connection with its National
Accounts Program and which are located in Northpoint I, 9229 LBJ Freeway, Suite
202, Dallas, Texas 75243 are not Assets.
16. Other Provisions. All other provisions of the Purchase Agreement not
explicitly amended by this Amendment shall remain in full force and effect.
*************
[signature pages to follow]
- 5 -
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
October 31, 1998.
BUYER:
TEXAS HEALTH CHOICE, L.C. (F/K/A HMO TEXAS, L.C.)
By:
Name:
Title:
SELLER:
KAISER FOUNDATION HEALTH PLAN OF TEXAS
By:
Name:
Title:
Sierra Health Services, Inc. and Kaiser Foundation Hospitals have executed
this Amendment solely with respect to their respective guarantee obligations set
forth in Section 14 of the Purchase Agreement.
SIERRA HEALTH SERVICES, INC.
By:
Name:
Title:
[signature page 1 of 2 - Amendment No. 2 to Asset Sale and Purchase Agreement]
- 6 -
KAISER FOUNDATION HOSPITALS
By:
Name:
Title:
Attachments:
Exhibit A Confidentiality Agreement dated March 24, 1998
Exhibit B Confidentiality Agreement dated March 27, 1998
Restated Schedule 1.1(b) Provider Agreements
Restated Schedule 1.1(c) Contracts
Restated Schedule 1.1(d) Tangible Personal Property
Restated Schedule 1.1(i) Assets of Seller's Affiliates
Restated Schedule 1.1(j) Software, Hardware and Related Data of
Seller or Seller's Affiliates
Restated Schedule 1.2(m) Other Assets to be Excluded
Restated Schedule 1.4.4 Membership Base
Restated Schedule 2.1.6 Litigation
Restated Schedules 10.8 (a)&(b) Seller's Group 3000 Rates and Seller's
Affiliates Standard Group 3000 Rates
[signature page 2 of 2 - Amendment No. 2 to Asset Sale and Purchase Agreement]
- 7 -
