-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TaaeSVSl4JUW5Dw0jwAi6VfXgiAdHCXo4AfnZgjxFtCorF4dpsUDrDhD9XfiAdAA cmcc0aK3DnRwhqsMTDXrLw== 0000754009-98-000004.txt : 19980330 0000754009-98-000004.hdr.sgml : 19980330 ACCESSION NUMBER: 0000754009-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRA HEALTH SERVICES INC CENTRAL INDEX KEY: 0000754009 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 880200415 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08865 FILM NUMBER: 98575406 BUSINESS ADDRESS: STREET 1: 2724 N TENAYA WAY CITY: LAS VEGAS STATE: NV ZIP: 89128 BUSINESS PHONE: 7022427000 MAIL ADDRESS: STREET 2: 2724 NORTH TENAYA WAY CITY: LAS VEGAS STATE: NV ZIP: 89128 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number: 1-8865 SIERRA HEALTH SERVICES, INC. (Exact name of Registrant as specified in its charter) NEVADA (State or other jurisdiction of incorporation or organization) 88-0200415 (I.R.S. Employer Identification Number) 2724 NORTH TENAYA WAY LAS VEGAS, NEVADA 89128 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (702) 242-7000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.005 New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant on February 27, 1998 was $585,195,000. The number of shares of the registrant's common stock outstanding on February 27, 1998 was 18,275,000. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT WHERE INCORPORATED Registrant's Current Report on Form 8-K dated Part I March 19, 1998. Part II, Item 7 Portions of the registrant's definitive proxy Part III statement for its 1998 annual meeting to be filed with the SEC not later than 120 days after the end of the fiscal year. SIERRA HEALTH SERVICES, INC. 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page PART I Item 1. Business ............................................. 1 Item 2. Properties............................................ 14 Item 3. Legal Proceedings..................................... 15 Item 4. Submission of Matters to a Vote of Security Holders.................................. 15 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........................ 16 Item 6. Selected Financial Data............................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 18 Item 7a. Quantitative and Qualitative Disclosures about Market Rate ................................ 28 Item 8. Financial Statements and Supplementary Data........... 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 59 PART III Item 10. Directors and Executive Officers of the Registrant................................. 59 Item 11. Executive Compensation................................ 59 Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 59 Item 13. Certain Relationships and Related Transactions........ 59 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 60 i PART I ITEM 1. BUSINESS GENERAL Sierra Health Services, Inc. ("Sierra") and its subsidiaries (collectively referred to as the "Company"), is a managed health care organization that provides and administers the delivery of comprehensive health care and workers' compensation programs with an emphasis on quality care and cost management. The Company's strategy has been to develop and offer a portfolio of managed health care and workers' compensation products to employer groups and individuals. The Company's broad range of managed health care services is provided through its federally qualified and non-qualified health maintenance organizations ("HMOs"), insurance companies, managed indemnity plans, a third-party administrative services programs for employer-funded health benefit plans and workers' compensation medical management programs. Ancillary products and services that complement the Company's managed health care and workers' compensation product lines are also offered. During the third quarter of 1997, Sierra Military Health Services, Inc. ("SMHS"), a wholly owned subsidiary of the Company, was notified it had been awarded a multi-year triple-option health benefits ("TRICARE") managed care support contract by the Department of Defense to serve TRICARE eligible beneficiaries in Region 1. This region includes more than 600,000 beneficiaries in 13 northeastern states and the District of Columbia. SMHS is currently in the implementation period of the contract with actual health care delivery to commence on June 1, 1998. SMHS subcontracts for health care delivery, including some of the risk, for parts of the TRICARE contract. SMHS was notified on February 13, 1998 that the United States General Accounting Office ("GAO") sustained a competitor's protest of the contract award for TRICARE managed care support for Region 1 and recommended that the contract be re-bid. The TRICARE Management Activity ("TMA"), along with the Company, has filed a motion requesting that the GAO reconsider its recommendation. If the GAO does not change its recommendation and the TMA follows the recommendation, there are several possible outcomes, including litigation. The Company currently anticipates providing health care delivery for one year of the contract in the event a re-bid occurs. (See "Management's Discussion and Analysis Overview") In June 1996, the Department of Defense awarded a five-year TRICARE contract to TriWest Healthcare Alliance ("TriWest"), a consortium consisting of Sierra and 13 other health care companies, to provide health services to Regions 7 and 8, which includes a total of 16 states. In April 1997, TriWest began providing health care to approximately 700,000 individuals, of which Sierra is responsible for providing care to approximately 93,000 beneficiaries in Nevada and Missouri. In August 1997, the Company acquired the assets and operations of Total Home Care, Inc. ("THC") for approximately $3.1 million, net of cash acquired. THC provides home infusion, oxygen, and durable medical equipment services in Nevada and Arizona. The Company sold the Arizona operations in the first quarter of 1998 for approximately $1.5 million. Also, in the first quarter of 1998, the Company purchased three medical clinics in southern Nevada for approximately $7.3 million. Effective December 31, 1996, the Company purchased Prime Holdings, Inc. ("Prime") for approximately $31.2 million in cash. At December 31, 1996, Prime operated Med One Health Plan, Inc., a 12,800 member HMO, and also served 215,000 people through preferred provider organizations ("PPOs"), workers' compensation programs and administrative services products for self-insured employers and union welfare funds primarily in the state of Nevada. 1 The principal executive offices of the Company are located at 2724 North Tenaya Way, Las Vegas, Nevada 89128, and its telephone number is (702) 242-7000. Managed Care Products and Services The Company's primary types of health care coverage are HMO plans, HMO Point of Service ("POS") plans, and managed indemnity plans, which include a PPO option. As of December 31, 1997, the Company provided HMO products to approximately 192,000 members. Of these HMO members, approximately 90% reside in Nevada. The POS products allow members to choose one of the various coverage options when medical services are required instead of one plan for the entire year. The Company also provides managed indemnity products to approximately 64,000 members, Medicare supplement products to approximately 25,000 members, and administrative services to approximately 328,000 members. Medical premiums account for approximately 71% of total revenues, 79% of such medical premiums are derived from southern Nevada. Health Maintenance Organizations. The Company operates mixed group network model HMOs in Nevada, and a network model HMO in Texas. Most of its managed health care services in Nevada are provided through its independently contracted network of over 2000 providers and 18 hospitals. These networks include the Company's multi-specialty medical group, which provides medical services to approximately 72% of the Company's Nevada HMO members and employs over 145 primary care and other providers in various medical specialties. The Company directly provides home health care, hospice care and behavioral health care services. In addition, the Company operates two 24-hour urgent care centers, a radiology department, a vision department, an occupational medicine department and two free-standing, state-licensed and Medicare-approved ambulatory surgery centers. The Company believes that this vertical integration of its health care delivery system provides a competitive advantage as it has helped it to manage health care costs effectively while delivering quality care. As of December 31, 1997, the Texas HMO members were served by approximately 1500 independent contracted providers and 32 hospitals. Contracted primary care physicians and specialists for the HMOs are compensated on a capitation or modified fee-for-service basis. Contracts with their primary hospitals are on a capitation or discounted per diem basis. Members receive a wide range of coverage after paying a nominal co-payment and are eligible for preventive care coverage. The HMOs do not require deductibles, co-insurance or claim forms. In addition to its commercial HMO plans, which involve traditional HMO benefits and Point of Service benefits, the Company offers prepaid health care programs for Medicare-eligible beneficiaries called Senior Dimensions in Nevada and parts of Arizona and Golden Choice in Texas. Senior Dimensions is marketed directly to Medicare-eligible beneficiaries in the Company's Nevada service area as well as certain parts of Arizona. Federal legislation has been enacted which allows delivery of health care to Medicare beneficiaries through HMOs. Such legislation provides that the federal government will reimburse HMOs for health care services to Medicare beneficiaries in an amount equal to 95% of the Medicare payments to fee-for-service providers in a defined service area. As of December 31, 1997, approximately 33,000, or 19%, of the Company's total Nevada HMO members were enrolled in Senior Dimensions. The Senior Dimensions plan enables Medicare beneficiaries to reduce their out-of-pocket expenses and receive additional benefits not covered by Medicare. During 1996 the Company's Texas HMO received approval to offer a Medicare risk product and at December 31, 1997 approximately 3,000, or 18%, of the Company's total Texas members were enrolled in Golden Choice. Social Health Maintenance Organization. Effective November 1, 1996, the Company entered into a multi-year Social HMO contract pursuant to which a large portion of the Company's Medicare risk enrollees will receive certain expanded benefits. Sierra was one of six HMOs nationally to be awarded this contract, and is currently the only company to have implemented the program as of December 31, 1997. The Company receives additional revenues for providing these expanded benefits. The additional revenues are determined based on health risk assessments that have been, and will continue to be, performed on the 2 Company's eligible Medicare risk members. The additional benefits include, among other things, assisting the eligible Medicare risk members with typical daily living functions such as bathing, dressing and walking. These members, as identified in the health risk assessments, are ones who currently have difficulty performing such daily living functions because of a health or physical problem. The additional reimbursement will be subject to adjustment based on the number of beneficiaries who need assistance with the social problems noted above and their individual health risk assessments. The ultimate payment received from the Health Care Financing Administration ("HCFA") will be based on these and other factors. At this time, however, there can be no assurance as to what the final per member reimbursement will be. Preferred Provider Organizations. The Company also offers health insurance through its PPO. The Company's managed indemnity plans generally offer insureds the option of receiving their medical care from either non-contracted or contracted providers. Insureds pay higher deductibles and co-insurance or co-payments when they receive care from non-contracted providers. Out-of-pocket costs are lowered by utilizing contracted providers who are part of the Company's Nevada PPO network, consisting of approximately 2700 providers and 36 hospitals. As of December 31, 1997, approximately 64,000 members were enrolled in Sierra's managed indemnity plans. The Company currently provides managed indemnity and Medicare supplement services to individuals in Nevada, Arizona, Colorado, Texas, California, New Mexico, Missouri, Iowa and South Carolina. The Company is also exploring further expansion in certain other states. As of December 31, 1997 the PPO is licensed in a total of 37 states and the District of Columbia. During 1996 the Company adopted a plan to restructure certain insurance operations to allow the Company to focus on more favorable operating markets. This plan significantly reduced the Company's presence in Arizona and Colorado for certain managed indemnity products. Workers' Compensation Subsidiary. On October 31, 1995, the Company acquired CII Financial, Inc. ("CII"), for approximately $76.3 million of common stock in a transaction accounted for as a pooling of interests. CII writes workers' compensation insurance in the states of California, Colorado, Kansas, Missouri, Nebraska, New Mexico, Texas and Utah. CII has licenses in 29 states and the District of Columbia. California and Colorado represent approximately 83% and 9%, respectively, of CII's fully insured workers' compensation insurance premiums in 1997. Workers' compensation insurance premiums account for approximately 18% of the Company's total revenue. In conjunction with the acquisition, a supplemental indenture was filed modifying CII's 7 1/2% convertible subordinated debentures (the "Debentures"). As a result each $1,000 in principal is now convertible into 16.921 shares of Sierra's common stock at a conversion price of $59.097 per share. Administrative Services. The Company's administrative services products provide, among other things, utilization review and PPO services to large employer groups that are usually self-insured. As of December 31, 1997, approximately 328,000 members were enrolled in the Company's administrative services plans. Effective September 30, 1997, the Company terminated its workers' compensation administrative services contract with the state of Nevada. The contract served approximately 200,000 enrollees and provided approximately $3.2 million in revenues for the year ended December 31, 1997. The contract was terminated to allow the Company to participate in the Nevada workers' compensation insurance market when the state allows private insurance companies to begin offering products, which is anticipated for 1999. 3 Ancillary Medical Services. Among the ancillary medical services offered by the Company are outpatient surgical care, diagnostic tests, medical and surgical procedures, inpatient and outpatient laboratory tests, x-ray, CAT scans and nuclear medicine services. The Company also provides home health care services, a hospice program and mental health and substance abuse services. These services are provided to members of the Company's HMOs, managed indemnity and administrative services plans. The mental health and substance abuse services are also provided to approximately 99,000 participants from non-affiliated employer groups and an insurance company. Marketing The Company's marketing efforts for its commercial managed care products involve a two-step process. The Company first makes presentations to employers and then provides information directly to employees once the employer has decided to offer the Company's products. Once a relationship with a group is established and a group agreement is negotiated and signed, the Company's marketing efforts focus on individual employees. During a designated "open enrollment" period each year, usually the month preceding the annual renewal of the agreement with the group, employees choose whether to remain with, join or terminate their membership with a specific health plan offered by the employer. New employees decide whether to join one of the employers' health insurance options at the time of their employment. Although contracts with employers are generally terminable on 60 days notice, changes in membership occur primarily during open enrollment periods. Medicare risk products are primarily marketed by the HMOs' sales employees. Retention of employer groups and membership growth is accomplished through print advertising directed to employers and through consumer media campaigns. Media communications convey the Company's emphasis on preventive care, ready access to health care providers and quality service. Other communications to customers include employer and member newsletters, member education brochures, prenatal information packets, employer/broker seminars and direct mail advertising to clients. Members' satisfaction with Company benefits and services is monitored by customer surveys. Results from these surveys and other primary and secondary research guide the sales and advertising efforts throughout the year. The Company's workers' compensation insurance policies are sold primarily through independent insurance agents and brokers, who may also represent other insurance companies. The Company believes that independent insurance agents and brokers choose to market the Company's insurance policies primarily because of the price the Company charges. Additional considerations include the quality of service that the Company provides and the commissions the Company pays. The Company employs full-time employees as marketing representatives to make personal contacts with agents and brokers, to maintain regular communication with them, to advise them of the Company's services and products, and to recruit additional agents and brokers. As of December 31, 1997, the Company had relationships with approximately 600 agents and 20 brokers and paid its agents and brokers commissions based on a percentage of the gross written premium produced by such agents and brokers. The Company also utilizes a number of promotional media, including advertising in publications and at trade fairs, to support the efforts of its independent agents. 4 Membership Period End Membership:
Years Ended December 31, ----------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------ HMO: Commercial.............................. 156,000 147,000 116,000 107,000 89,000 Medicare................................ 36,000 30,000 25,000 20,000 15,000 Managed Indemnity........................... 64,000 46,000 31,000 24,000 30,000 Medicare Supplement......................... 25,000 23,000 15,000 9,000 4,000 Administrative Services (1) ................ 328,000 338,000 117,000 65,000 59,000 ------- ------- ------- ------- ------- Total Membership........................ 609,000 584,000 304,000 225,000 197,000 ======= ======= ======= ======= =======
(1) For comparability purposes, enrollment information has been restated to reflect the September 30, 1997 termination of the Company's workers' compensation administrative services contract with the state of Nevada. Enrollment in the terminated plan was 163,000, 94,000 and 79,000 members at December 31, 1996, 1995 and 1994, respectively. For the years ended December 31, 1997 and 1996, the Company received approximately 23.7% and 24.2%, respectively, of its total revenues from its contract with HCFA to provide health care services to Medicare enrollees. The Company's contract with HCFA is subject to annual renewal at the election of HCFA and requires the Company to comply with federal HMO and Medicare laws and regulations and may be terminated if the Company fails to so comply. The termination of the Company's contract with HCFA would have a material adverse effect on the Company's business. In addition, there have been, and the Company expects that there will continue to be, a number of legislative proposals to limit Medicare reimbursements and to require additional benefits. Future levels of funding of the Medicare program by the federal government cannot be predicted with certainty. The Company's ability to obtain and maintain favorable group benefit agreements with employer groups affects the Company's profitability. The agreements are generally renewable on an annual basis but are subject to termination on 60 days prior notice. For the fiscal year ended December 31, 1997, the Company's ten largest HMO employer groups were, in the aggregate, responsible for approximately 10% of the Company's total revenues. Although none of such employer groups accounted for more than 2% of total revenues during that period, the loss of one or more of the larger employer groups would, if not replaced with similar membership, have a material adverse effect upon the Company's business. The Company has generally been successful in retaining these employer groups. However, there can be no assurance that the Company will be able to renew its agreements with such employer groups in the future or that it will not experience a decline in enrollment within its employer groups. Additionally, revenues received under certain government contracts are subject to audit and retroactive adjustment. Provider Arrangements and Cost Management HMO and Managed Indemnity Products. A significant distinction between the Company's health care delivery system and that of many other managed care providers is the fact that approximately 72% of the Company's Nevada HMO members receive primary health care through the Company's own multi-specialty medical group. The Company makes health care available through providers employed by the multi-specialty medical group and an independently contracted network of physicians, hospitals and other providers. Under the Company's HMOs, the member selects a primary care physician who provides or authorizes any non-emergency medical care given to that member. These primary care physicians and some specialists are compensated to a limited extent on the basis of how well they coordinate appropriate medical care. 5 The Company has a system of incentive risk arrangements and utilization management with respect to its independently contracted primary care physicians. The Company compensates its independently contracted primary care physicians and specialists by using both capitation and modified fee-for-service payment methods. Under both the capitation and modified fee-for-service methods, an incentive risk arrangement is established for institutional services. Additional amounts may be made available to certain capitated physicians if hospital costs are less than anticipated for the Company's HMO members. For those primary care physicians receiving payments on a modified fee-for-service basis, portions of the payments otherwise due the physicians are withheld. The amounts withheld are available for payment to the physicians if, at year-end, the expenditures for both institutional and non-institutional medical services are within predetermined, contractually agreed upon ranges. It is believed that this method of incentive risk payment is advantageous to the physician, the Company and the members because all share in the benefits of managing health care costs. The Company has, however, negotiated capitation agreements with certain specialists who do not participate in the incentive risk arrangements. The Company monitors health care utilization, including evaluation of elective surgical procedures, quality of care and financial stability of its capitated providers to facilitate access to service and to ensure member satisfaction. The Company also believes that it has negotiated favorable rates with its contracted hospitals. The Company's contracts with its hospital providers typically renew automatically with both parties granted the right to terminate after a notice period ranging from between three and twelve months. Reimbursement arrangements with other health care providers, including pharmacies, generally renew automatically or are negotiated annually and are based on several different payment methods, including per diems (where the reimbursement rate varies and is based on a per day of service charge for specified types of care), capitation or modified fee-for-service arrangements. To the extent possible, when negotiating non-physician provider arrangements, the Company solicits competitive bids. The Company provides, or negotiates discounted contracts with hospitals for the provision of, inpatient and outpatient hospital care, including room and board, diagnostic tests and medical and surgical procedures. The Company believes that it currently has a favorable contract with its primary southern Nevada contracted hospital, Columbia Sunrise Hospital. Subject to certain limitations, the contract provides, among other things, guaranteed contracted per diem rate increases on an annual basis after December 31, 1997. Since a majority of the Company's southern Nevada hospital days are at Columbia Sunrise Hospital, this contract assists the Company in managing a significant portion of its medical costs. The contract expires in the year 2012. The Company has negotiated a capitation arrangement with Columbia Hospital, Inc. for hospital services provided in Houston to members of the Company's Texas HMO. The Company utilizes two reimbursement methods for health care providers rendering services under the Company's indemnity plans. For services to members utilizing a PPO plan, the Company reimburses participating physicians on a modified fee-for-service basis which incorporates a limited fee schedule and reimburses hospitals on a per diem or discounted fee-for-service basis. For services rendered under a standard indemnity plan, pursuant to which a member may select a non-plan provider, the Company reimburses non-contracted physicians and hospitals at pre-established rates, less deductibles and co-insurance amounts. The Company also manages health care costs through its large case management program, home health care agency, 24-hour urgent care centers and its hospice which helps to minimize hospital admissions and lengths of stay. In addition, the Company educates its members on how and when to use the services of its plans and how to manage chronic disease conditions, and audits hospital bills to identify inappropriate charges. Risk Management The Company maintains general and professional liability, property and fidelity insurance coverage in amounts that it believes are adequate for its operations. The Company's multi-specialty medical group maintains excess malpractice insurance for the providers presently employed by the group. The Company has, however, assumed the risk for the first $250,000 per malpractice case, not to exceed $1.5 million in 6 the aggregate per contract year up to its limits of coverage. In addition, the Company requires all of its independently contracted provider physician groups, individual practice physicians, specialists, dentists, podiatrists and other health care providers (with the exception of certain hospitals) to maintain professional liability coverage. Certain of the hospitals with which the Company contracts are self-insured. The Company also maintains stop-loss insurance that reimburses the Company between 50% and 90% of hospital charges for each individual member of its HMO or managed indemnity plans whose hospital expenses exceed $200,000 during the contract year and up to $2.0 million per member per lifetime. Workers' compensation claims are reinsured between $350,000 and $60.0 million per occurrence. Effective January 1, 1998, workers' compensation claims are reinsured between $500,000 and $100.0 million per occurrence. Effective July 1, 1997, the Company also maintains excess catastrophic coverage for one of the Company's wholly-owned HMOs, Health Plan of Nevada, Inc. ("HPN"), that reimburses the Company for amounts by which the ultimate net loss exceeds $400,000, but does not exceed the annual maximum of $19.6 million per accident and $39.2 million per contract. In the ordinary course of its business, however, the Company is subject to claims that are not insured, principally claims for punitive damages. Information System The Company has in place certain data systems which assist the Company in, among other things, pricing its services, monitoring utilization and other cost factors, providing bills on a timely basis, identifying accounts for collection and handling various accounting and reporting functions. Its imaging and workflow systems are used to process and track claims and coordinate customer service. Where it is cost efficient, the Company's system is connected to large provider groups, doctors' offices, payors and brokers to enable efficient transfer of information and communication. The Company views its information systems capability as critical to the performance of ongoing administrative functions and integral to quality assurance and to the coordination of patient care across care sites. The Company is continually modifying or improving its information systems capabilities in an effort to improve operating efficiencies. The Company is in the process of modifying or replacing its computer systems and applications to accommodate the "Year 2000". The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems will recognize the year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may cause systems to process critical financial and operational information incorrectly. The Company currently expects to complete all material replacements or modifications of its computer systems and applications sufficiently in advance of the Year 2000 to allow for adequate testing so as not to negatively impact its operations. The Company is in the process of implementing two major systems at an estimated cost of approximately $20.0 million. These systems will be Year 2000 compliant. The Company is expensing the costs to make modifications as incurred. Management currently estimates the remaining modification costs to be approximately $3.0 million to $5.0 million over the next 12 to 18 months. While this is a substantial effort, it will give the Company the benefits of new technology and functionality for many of its financial and operational computer systems and applications. The inability of the Company to timely complete its Year 2000 modifications and replacements, or the inability of companies with which the Company does business to timely complete their Year 2000 modifications, could adversely affect the Company's operations. Quality Assurance and Improvement The Company has developed programs to help ensure that the health care services provided by its HMO and managed indemnity plans meet the professional standards of care established by the medical community. The Company believes that its emphasis on quality allows it to increase and retain its members. The Company monitors and evaluates the availability and quality of the medical care rendered by the providers in its HMO and insurance plans and periodically audits selected diagnoses, problems and referrals to determine adherence to appropriate standards of medical care. In addition, the Company has medical directors who, supported by a professional medical staff, monitor the quality and appropriateness of health care by analyzing a physician's utilization of diagnostic tests, laboratory and radiology procedures, 7 specialty referrals, prescriptions and hospitals. Physicians and hospitals selected to provide services to the Company's members are subject to the Company's quality assurance programs including a formal credentialing process of all physicians. The Company also has internal quality assurance and improvement review committees that meet on a regular basis to review specialist referrals, monitor the performance of physicians and review practice patterns, complaints and other patient issues. Staff members regularly visit hospitals to review medical records, meet with patients and review treatment programs and discharge plans with attending physicians. In addition, the Company solicits information from both existing and former members as to their satisfaction with the care delivered. Complaints and grievances are responded to on both an informal and formal basis, depending on the nature of the complaint. Several independent organizations have been formed for the purpose of responding to external demands for accountability over the health care industry. The organizations utilized by the Company are the National Committee for Quality Assurance (the "NCQA"), the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") and the American Association for Ambulatory Health Care (the "AAAHC"). The NCQA performs site reviews of standards established for quality management and improvement, physician credentials, members' rights and responsibilities, preventive health services, utilization management and medical records. The JCAHO reviews rights, responsibilities and ethics, continuum of care, education and communication, leadership, management of information and human resources and network performance. The AAAHC reviews rights of patients, governance, administration, quality of care provided, quality management and improvement, clinical records, professional improvement and facilities and environment. In June 1997 HPN and its Medicare risk plan, Senior Dimensions, received one-year accreditation from the NCQA for its operations in the metropolitan Las Vegas area and Pahrump. The Company's home health care and hospice subsidiaries are JCAHO accredited. The Company's Nevada multi-specialty clinic has received a full three-year accreditation from the AAAHC -- the highest accreditation issued to ambulatory care facilities. The clinic is the only multi-specialty site in Nevada to be awarded this accreditation. There can be no assurance, however, that the Company will maintain NCQA or other accreditations in the future and there is no basis to predict what effect, if any, the lack of NCQA or other accreditations could have on HPN's competitive position in southern Nevada. Underwriting HMO. The Company structures premium rates for its various health plans primarily through community rating and community rating by class method. Under the community rating method, all costs of basic benefit plans for the Company's entire membership population are aggregated. These aggregated costs are calculated on a "per member per month" basis and converted to premium rates for coverage types, such as single or family coverage. The community rating by class method is based on the same principles as community rating, except that actuarial adjustments to premium rates are made for various employer groups based on the average age and sex of their employees. All employees of an employer group are charged the same premium rate if the same coverage is selected. In addition to those premium charges paid by the employers with whom the Company's HMOs contract, members also pay co-payments at the time certain services are provided. The Company believes that such co-payments encourage appropriate utilization of health care services while allowing the Company to offer competitive premium rates. The Company also believes that the capitation method of provider compensation encourages physicians to provide only medically necessary and appropriate care. Managed Indemnity. Premium charges for the Company's managed indemnity products are set in a manner similar to the community rating by class method described above. This rate calculation utilizes age, sex and industry factors to develop group-specific adjustments from a given base rate by plan. Actual health claims experience is used to develop premium rates for larger insurance member groups. This process includes the use of utilization experience, adjustments for incurred but not reported claims, inflationary factors, credibility and specific reinsurance pooling levels for large claims. 8 Workers' Compensation. Prior to insuring a particular risk, the Company reviews, among other factors, the employer's prior loss experience and premium payment history. Additionally, the Company determines whether the employer's employment classifications are among the classifications that the Company has elected to insure generally and if the amounts of the premiums for the classifications are within the Company's guidelines. The Company reviews these classifications periodically to evaluate whether they are profitable. A member of the Company's loss control department may conduct an on-site safety inspection before the Company insures the employer. The Company generally initiates this inspection for enterprises with manufacturing or construction classifications. The Company may also initiate inspections if the enterprise previously has had a high loss ratio or frequent losses. If the on-site inspection reveals hazards that can be corrected, and an agreement can be reached with the employer that these hazards will be corrected in a time frame established by the Company's underwriting department, the Company may issue a policy subject to correction of those hazards. In the event the Company has issued a policy where no previous inspection has been conducted, and subsequently learns through an inspection the employer has hazards that must be corrected, the Company will request that the employer correct the hazards within a specified period of time. If these hazards are not corrected, the Company may cancel the policy for non-compliance of the hazard correction. With regard to new business, the agent or broker will usually submit the claims history on the prospective account. In those situations where the claims history is not supplied by the agent or broker, other sources (such as the prior insurer) are used to obtain the appropriate claims history if possible. In California, under open rating as it became effective for policyholders in 1995, the Company has subdivided many of the standard classifications. These subclassifications have been determined on the Company's perception of differences in risk exposure. As a result, different rates have been filed for each of these subclassifications. The use of these subclassifications requires more detailed information than was required prior to open rating. The Company ascertains characteristics of various employers through the use of questionnaires and telephone inquiries by underwriters to determine the proper subclassification. Subclassifications are subject to verification by loss control and premium audits. Competition HMO and Managed Indemnity. Managed care companies and HMOs operate in a highly competitive environment. The Company's major competition is from self-funded employer plans, PPO networks, other HMOs, such as Humana Care Plus and Pacificare, Inc., and traditional indemnity carriers, such as Blue Cross/Blue Shield. Many of the Company's competitors have substantially larger total enrollments, have greater financial resources and offer a broader range of products than the Company. Additional competitors with greater financial resources than the Company may enter the Company's market in the future. The Company believes that the most important competitive factors are the delivery of reasonably priced, quality medical benefits to members and the adequacy and availability of health care delivery services and facilities. The Company depends on a large PPO network and flexible benefit plans to attract new members. Competitive pressures are expected to limit the Company's ability to increase premium rates and, to a lesser extent, to result in declining premium rates. Accordingly, the profitability of the Company will, to a large extent, depend on the Company's ability to manage the costs of providing health care benefits to its members. The inability of the Company to manage these costs would have an adverse impact on the Company's future results of operations by reducing margins. In addition, competitive pressures may also result in reduced membership levels. Any such reductions could materially affect the Company's results of operations. Workers' Compensation. The Company's workers' compensation business is concentrated in California, a state where the workers' compensation insurance industry is extremely competitive. The Company believes that there are more than 200 insurance companies writing workers' compensation insurance in California. Many of the Company's competitors have been in business longer, have a larger volume of business, offer a more diversified line of insurance coverage, have greater financial resources and have 9 greater distribution capability than the Company. The largest writer of workers' compensation insurance in California is the State Compensation Insurance Fund. Prior to 1995, the Company concentrated on insuring workers' compensation accounts in the small- to medium-size range. Under the current open rating environment, the Company is actively pursuing accounts of all sizes. In all states in which the Company is currently writing business, competition for workers' compensation insurance is primarily driven by price and secondarily by services provided to insureds and agents. In states other than California the National Council on Compensation Insurance ("NCCI") is usually the designated rating organization. The NCCI accumulates statistical information and recommends pure loss costs to the state's Department of Insurance. As in California under the open rating environment, the Company then adds loss cost multipliers or expense loads to derive premium rates. Rating plans in those states are more "standardized" and are usually based on plans developed by the NCCI. Unlike California, where the Company has developed subclasses, the Company will use standard classes in the other states. Losses and Loss Adjustment Expenses Often, in workers' compensation insurance, several years may elapse between the occurrence of a loss and the final settlement of the loss. To recognize liabilities for unpaid losses, the Company establishes reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses for insured events, including reserves for events that have occurred but have not yet been reported to the Company ("IBNR"). When a claim is reported, the Company's claims personnel initially establish reserves on a case-by-case basis for the estimated amount of the ultimate payment. These estimates reflect the judgment of the claims personnel based on their experience and knowledge of the nature and value of the specific type of claim and the available facts at the time of reporting as to severity of injury and initial medical prognosis. Included in these reserves are estimates of the expenses of settling claims, including legal and other fees, and the general expenses of administering the claims adjustment process. Claims personnel adjust the amount of the case reserves as the claim develops and as the facts warrant. IBNR reserves are established for unreported claims and loss development relating to current and prior accident years. In the event that a claim that occurred during a prior accident year was not reported until the current accident year, the case reserve for such claim typically will be established out of previously established IBNR reserves for that prior accident year. The Company reviews the adequacy of its reserves on a monthly basis and considers external forces such as changes in the rate of inflation, the regulatory environment, the judicial administration of claims, medical costs and other factors that could cause actual losses and loss adjustment expenses ("LAE") to change. Reserves are reviewed with the Company's independent actuary at least annually. The actuarial projections include a range of estimates reflecting the uncertainty of projections. Management evaluates the reserves in the aggregate, based upon the actuarial indications and makes adjustments where appropriate. The consolidated financial statements of the Company provide for reserves based on the anticipated ultimate cost of losses. Once an employer is insured by the Company, the Company's loss control department may assist the insured in developing and maintaining safety programs and procedures to minimize on-the-job injuries and industrial health hazards. The safety programs and procedures vary from insured to insured. The Company's loss control department may recommend to the employer that a safety committee consisting of members of the employer's management staff and its general labor force be established. The Company's loss control department may then assist the committee members in isolating safety hazards, advising the committee on how to correct the hazards and assisting the employer in establishing procedures to enforce the corrections. The Company's loss control department may also revisit the 10 employer to determine whether the recommended corrections and procedures have been implemented. Depending upon the size, classifications, and loss experience of the employer, the Company's loss control department will periodically inspect the employer's places of business and may recommend changes that could prevent industrial accidents. In addition, severe or recurring injuries may also warrant on-site inspections. In certain instances, members of the Company's loss control department may conduct special educational training sessions for insured employees to assist in the prevention of on-the-job injuries. For example, employers engaged in manufacturing may be offered a training session on how to prevent back injuries or employers engaged in contracting may be offered a training session on general first aid and prevention of injuries that may result from specific work exposures. Government Regulation and Recent Legislation HMOs and Managed Indemnity. Federal and state governments have enacted statutes extensively regulating the activities of HMOs. In addition, growing government concerns over increasing health care costs and quality could result in new or additional state or federal legislation that could affect health care providers, including HMOs, PPOs and other health insurers. Among the areas regulated by federal and state law are the scope of benefits available to members, premium structure, procedures for review of quality assurance, enrollment requirements, the relationship between an HMO and its health care providers, licensing and financial condition. Government regulation of health care coverage products and services is a changing area of law that varies from jurisdiction to jurisdiction. Changes in applicable laws and regulations are continually being considered and interpretation of existing laws and rules also may change from time to time. Regulatory agencies generally have broad discretion in promulgating regulations and in interpreting and enforcing laws and regulations. While the Company is unable to predict what regulatory changes may occur or the impact on the Company of any particular change, the Company's operations and financial results could be negatively affected by regulatory revisions. For example, any proposals affecting underwriting practices, limiting rate increases, requiring new or additional benefits or affecting contracting arrangements (including proposals to require HMOs and PPOs to accept any health care providers willing to abide by an HMO's or PPO's contract terms) may have a material adverse effect on the Company's business. The continued consideration and enactment of "anti-managed care" laws and regulations by federal and state bodies may make it more difficult for the Company to control medical costs and may adversely affect financial results. In addition to changes in applicable laws and regulations, the Company is subject to various audits, investigations and enforcement actions. These include possible government actions relating to the federal Employee Retirement Income Security Act, which regulates insured and self-insured health coverage plans offered by employers, the Federal Employees Health Benefit Plan, federal and state fraud and abuse laws, and laws relating to utilization management and the delivery of health care and payment or reimbursement therefor. Any such government action could result in assessment of damages, civil or criminal fines or penalties, or other sanctions, including exclusion from participation in government programs. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect the Company's reputation in various markets and make it more difficult for the Company to sell its products and services. The Company has HMO licenses in Nevada, Texas and Arizona. The Company's HMO operations are subject to regulation by the Nevada Division of Insurance, the Nevada Division of Health, the Texas Department of Insurance and the Arizona Department of Insurance. The Company's health insurance subsidiary is domiciled and incorporated in California and is licensed in 37 states and the District of Columbia, with current operations primarily in Nevada, Arizona, Colorado, Texas, California, New Mexico, Missouri, Iowa and South Carolina. It is subject to licensing by and other regulations of the California Department of Insurance as well as the insurance departments of other states in which it operates or holds 11 licenses. The Company's premium rate increases are subject to various state insurance department approvals. The Company's HMO and insurance subsidiaries are also required by state regulatory agencies to maintain certain deposits and must also meet certain net worth and reserve requirements. The Company also has certain other deposit requirements. The Company has restricted assets on deposit in various states ranging from $20,000 to $2.0 million and totalling $16.5 million at December 31, 1997. The Company's HMO and insurance subsidiaries meet requirements to maintain minimum stockholder's equity ranging from $1.1 million to $5.2 million. The Company's Nevada HMO and health insurance subsidiaries currently maintain home offices and a regional home office, respectively, in Las Vegas and, accordingly, are eligible for certain premium tax credits in Nevada. The Company's HMO subsidiaries are also restricted by state law as to the amount of dividends that can be declared and paid. Moreover, insurance companies and HMOs domiciled in Texas, Nevada and California generally may not pay extraordinary dividends without providing the state insurance commissioner with 30 days prior notice, during which period the commissioner may disapprove the payment. An "extraordinary dividend" is generally defined as a dividend whose fair market value together with that of other dividends or distributions made within the preceding 12 months exceeds the greater of (i) ten percent of the insurer's surplus as of the preceding December 31 or (ii) the net gain from operations of such insurer for the 12-month period ending on the preceding December 31. The Company is not in a position to assess the likelihood of obtaining future approval for the payment of "extraordinary dividends" or dividends other than those specifically allowed by law in each of its subsidiaries' states of domicile. No prediction can be made as to whether any legislative proposals relating to dividend rules in the domiciliary states of the Company's subsidiaries will be made or adopted in the future, whether the insurance departments of such states will impose either additional restrictions in the future or a prohibition on the ability of the Company's regulated subsidiaries to declare and pay dividends or as to the effect of any such proposals or restrictions on the Company's regulated subsidiaries. The Company is subject to the Federal HMO Act and the regulations promulgated thereunder. Of the Company's three subsidiary HMOs, only Med One Health Plan, acquired at the end of 1996, is not federally-qualified under this Act. In order to obtain federal qualification, an HMO must, among other things, provide its members certain services on a fixed, prepaid fee basis and set its premium rates in accordance with certain rating principles established by federal law and regulation. The HMO must also have quality assurance programs in place with respect to its health care providers. Furthermore, an HMO may not refuse to enroll an employee, in most circumstances, because of such person's health, and may not expel or refuse to re-enroll individual members because of their health or their need for health services. Under the "corporate practice of medicine" doctrine, in most states, business organizations, other than those authorized to do so, are prohibited from providing, or holding themselves out as providers of, medical care. Some states, including Nevada, exempt HMOs from this doctrine. The laws relating to this doctrine are subject to numerous conflicting interpretations. Although the Company seeks to structure its operations to comply with corporate practice of medicine laws in all states in which it operates, there can be no assurance that, given the varying and uncertain interpretations of those laws, the Company would be found to be in compliance with those laws in all states. A determination that the Company is not in compliance with applicable corporate practice of medicine laws in any state in which it operates could have a material adverse effect on the Company if it were unable to restructure its operations to comply with the laws of that state. Medicare and Medicaid antifraud and abuse provisions are codified at 42 U.S.C. Sections 1320a-7(b) (the "Anti-kickback Statute") and 1395nn (the "Stark Amendments"). Many states have similar anti-kickback and anti-referral laws. These statutes prohibit certain business practices and relationships involving the referral of patients for the provision of health care items or services under certain circumstances. Sanctions for violations of the Anti-kickback Statute and the Stark Amendments include criminal penalties and civil sanctions, including fines and possible exclusion from the Medicare and Medicaid programs. Similar 12 penalties are provided for violation of state anti-kickback and anti-referral laws. The Department of Health and Human Services ("HHS") has issued regulations establishing "safe harbors" with respect to the Anti- kickback Statute. The Office of the Inspector General recently proposed new rules to clarify those safe harbors. HHS has also recently proposed to establish certain safe harbors under the Stark Amendments. The Company believes that its business arrangements and operations are in compliance with the Antikickback Statute and the Stark Amendments and the exceptions set forth therein, regardless of the availability of regulatory safe harbor protection with respect to those statutes. There can, however, be no assurance that (i) government officials charged with responsibility for enforcing the prohibitions of the Anti- kickback Statute and the Stark Amendments will not assert that the Company or certain transactions in which it is involved are in violation of those statutes and (ii) such statutes will ultimately be interpreted by the courts in a manner consistent with the Company's interpretation. The Health Insurance Portability and Accountability Act of 1996 (the "Accountability Act") was passed by Congress and signed into law by President Clinton on August 21, 1996 and effective beginning July 1, 1997. While the Accountability Act contains provisions regarding health insurance or health plans, such as portability and limitations on pre-existing condition exclusions, guaranteed availability and renewability, it also contains several anti-fraud measures that significantly change health care fraud and abuse provisions. Some of the provisions include (i) creation of an anti-fraud and abuse trust fund and coordination of fraud and abuse efforts by federal, state and local authorities, (ii) extension of the criminal anti-kickback statues to all federal health programs, (iii) expansion of and increase in the amount of civil monetary penalties and establishment of a knowledge standard for individuals or entities potentially subject to civil monetary penalties, and (iv) revisions to current sanctions for fraud and abuse, including mandatory and permissive exclusion from participation in the Medicare or Medicaid programs. Workers' Compensation. The Company is subject to extensive governmental regulation and supervision in each state in which it conducts workers' compensation business. The primary purpose of such regulation and supervision is to provide safeguards for policyholders and injured workers rather than protect the interests of shareholders. The extent and form of the regulation may vary, but generally has its source in statutes that establish regulatory agencies and delegate to the regulatory agencies broad regulatory, supervisory and administrative authority. Typically, state regulations extend to such matters as licensing companies; restricting the types or quality of investments; requiring triennial financial examinations and market conduct surveys of insurance companies; licensing agents; regulating aspects of a company's relationship with its agents; restricting use of some underwriting criteria; regulating rates, forms and advertising; limiting the grounds for cancellation or nonrenewal of policies, solicitation and replacement practices; and specifying what might constitute unfair practices. Moreover, the payment of dividends and the making of other distributions to the Company by its workers' compensation insurance company subsidiaries are contingent upon the earnings of those subsidiaries and are subject to various business considerations, applicable state corporate laws and regulations, the terms of agreements to which they may become a party and government regulations, which restrict in certain circumstances the payment of dividends and distributions and the transfer of assets to the Company. In the normal course of business, the Company and the various state agencies that regulate the activities of the Company may disagree on interpretations of laws and regulations, policy wording and disclosures or other related issues. These disagreements, if left unresolved, could result in administrative hearings and/or litigation. The Company attempts to resolve all issues with the regulatory agencies, but is willing to litigate issues where it believes it has a strong position. The ultimate outcome of these disagreements could result in sanctions and/or penalties and fines assessed against the Company. Currently, there are no litigation matters pending with any department of insurance. Typically, states mandate participation in insurance guaranty associations, which assess solvent insurance companies in order to fund claims of policyholders of insolvent insurance companies. Under this arrangement, insurers can be assessed up to 1% (or 2% in certain states) of premiums written for workers' 13 compensation insurance in that state each year to pay losses and LAE on covered claims of insolvent insurers. In California and certain other states, insurance companies are allowed to recoup such assessments from policyholders while several states allow an offset against premium taxes. Potential assessment expenses, net of recoupment, if any, for insolvencies are not accrued until after an insolvency has occurred since the likelihood and the amount of the assessment expense cannot be reasonably determined or estimated. In California, there have been no new assessments for insolvent workers' compensation insurance companies since 1990. California's Insurance Holding Company Act regulates the payment of shareholder dividends by insurance companies. To date, the workers' compensation insurance subsidiaries have not paid dividends to the Company. General. Besides state insurance laws, the Company is subject to general business and corporation laws, federal and state securities laws, consumer protection laws, fair credit reporting acts and other laws regulating the conduct and operation of its subsidiaries. Employees The Company had approximately 2,800 employees on December 31, 1997. None of these employees are covered by a collective bargaining agreement. The Company believes that its relations with its employees are good. ITEM 2. PROPERTIES The Company owns several administrative facilities in southern Nevada totalling approximately 218,000 square feet. Such facilities include an approximate 134,000 square foot six-story home office building and an approximate 43,000 square foot two-story corporate administrative headquarters. These buildings are subject to liens securing a $5.8 million loan balance from Bank of America. Also, the Company recently constructed an additional approximately 180,000 square foot six-story administrative headquarters building which should be fully occupied by the end of the first quarter. This building was financed in January 1998 and subject to a $15.0 million loan balance. The Company also owns several clinical facilities in the southern Nevada area totalling approximately 370,000 square feet and consisting primarily of seven medical clinics and two surgery centers including a newly constructed 59,000 square foot medical building completed in the fourth quarter of 1997. Certain clinical space is subject to a $3.1 million mortgage in favor of GE Capital Asset Management Corporation. The Company leases additional office and clinical space in Nevada totalling approximately 122,000 and 70,000 square feet, respectively. The Company owns real estate and a building in Park City, Utah purchased in 1996 to provide entertainment and a meeting environment for significant current and prospective clients, brokers and others who assist in the Company's marketing efforts. In connection with its workers' compensation insurance subsidiary, the Company leases approximately 67,000 square feet of office space in California. The Company also leases approximately 180,000 square feet of office space in various states as needed for other regional operations, including the Texas HMO and TRICARE service centers. The Company believes that current and planned clinical space will be adequate for its present needs. Additional clinical space may be required, however, if membership continues to expand in southern Nevada. 14 ITEM 3. LEGAL PROCEEDINGS On March 18, 1997, the Company announced it had terminated its merger agreement with Physician Corporation of America ("PCA"). The original agreement had been entered into in November 1996. On March 18, 1997, prior to termination of the merger agreement, PCA filed a lawsuit against the Company in the United States District Court for the Southern District of Florida (the "District Court"), seeking, among other things, specific performance of the merger agreement and monetary damages in excess of $20 million. The lawsuit has been dismissed (without prejudice to PCA's claims) for failure to join an indispensable party. On March 27, 1997 the Company commenced a lawsuit against PCA in the Court of Chancery of the State of Delaware alleging, among other things, breach of the merger agreement and equitable fraud, and seeking a declaratory judgment, monetary damages and other remedies. No answer to the Company's complaint or counterclaims (if any) have been filed. The Company intends to vigorously pursue all remedies available to it, however, there can be no assurance that the Company will prevail in such litigation. The Company is subject to various claims and other litigation in the ordinary course of business. Such litigation includes claims of medical malpractice, claims for coverage or payment for medical services rendered to HMO members and claims by providers for payment for medical services rendered to HMO members. Also included in such litigation are claims for workers' compensation and claims by providers for payment for medical services rendered to injured workers. In the opinion of the Company's management, the ultimate resolution of pending legal proceedings should not have a material adverse effect on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Information The Company's common stock, par value $.005 per share (the "Common Stock"), has been listed on the New York Stock Exchange under the symbol SIE since April 26, 1994 and, prior to that, was listed on the American Stock Exchange since the Company's initial public offering on April 11, 1985. The following table sets forth the high and low sales prices for the Common Stock for each quarter of 1997 and 1996.
Period High Low 1997 First Quarter........................................ $27 3/4 $24 5/8 Second Quarter....................................... 32 1/8 24 1/8 Third Quarter........................................ 37 3/8 31 3/16 Fourth Quarter....................................... 40 31 3/16 1996 First Quarter........................................ $36 $29 7/8 Second Quarter....................................... 35 7/8 29 Third Quarter........................................ 34 7/8 25 1/4 Fourth Quarter....................................... 34 3/8 22 3/8
On February 27, 1998, the closing sale price of the common stock was $36 5/8 per share. Holders The number of record holders of Common Stock at February 27, 1998 was 276. Based upon information available to it, the Company believes there are several thousand beneficial holders of the Common Stock. Dividends No cash dividends have been paid on the Common Stock since the Company's inception. The Company currently intends to retain its earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. As a holding company, the Company's ability to declare and to pay dividends is dependent upon cash distributions from its operating subsidiaries. The ability of the Company's HMO and insurance subsidiaries to declare and to pay dividends is limited by state regulations applicable to the maintenance of minimum deposits, reserves and net worth. (See Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.) The declaration of any future dividends will be at the discretion of the Company's Board of Directors and will depend on, among other things, future earnings, debt covenants, operations, capital requirements and the financial condition of the Company and upon general business conditions. 16 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data of Sierra Health Services, Inc., and subsidiaries (the "Company"), for each of the fiscal years in the five-year period ended December 31, 1997 should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information which appears elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data below has been derived from the audited Consolidated Financial Statements of the Company.
Years Ended December 31, 1997 1996 1995 1994 1993 ---------- ---------- ---------- ----------- -------- (Amounts in thousands, except per share data) Statement of Operations Data (1): OPERATING REVENUES: Medical Premiums........................................... $513,857 $386,968 $319,475 $269,382 $240,691 Specialty Product Revenues ................................ 146,211 133,324 102,807 101,287 113,714 Professional Fees.......................................... 31,238 28,836 19,417 12,331 11,254 Military Contract Revenues ................................ 4,346 Investment and Other Revenues.............................. 26,072 26,283 25,310 19,081 17,771 -------- -------- -------- ---------- ---------- Total.................................................... 721,724 575,411 467,009 402,081 383,430 -------- ------- ------- ---------- --------- OPERATING EXPENSES:........................................... Medical Expenses........................................... 419,272 315,915 245,135 200,229 178,526 Specialty Product Expenses................................. 143,082 130,758 102,859 96,600 118,868 General, Administrative and Marketing Expenses............. 93,919 72,237 63,562 53,671 50,715 Military Contract Expenses ............................... 4,193 Merger, Restructuring, and Start-up Expenses (2) .......... 29,350 12,064 11,614 ------ -------- -------- Total.................................................... 689,816 530,974 423,170 350,500 348,109 ------- -------- ------- --------- --------- OPERATING INCOME ............................................. 31,908 44,437 43,839 51,581 35,321 INTEREST EXPENSE AND OTHER, NET............................... (4,433) (2,823) (3,737) (6,401) (4,437) -------- -------- -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ..................................... 27,475 41,614 40,102 45,180 30,884 PROVISION FOR INCOME TAXES.................................... 3,234 10,471 12,198 8,236 8,435 -------- -------- ------ -------- -------- INCOME FROM CONTINUING OPERATIONS............................. 24,241 31,143 27,904 36,944 22,449 LOSS FROM DISCONTINUED OPERATIONS ............................ (6,600) (2,501) (404) CUMULATIVE EFFECT OF ADOPTING FAS 109......................... 5,250 ----------- ----------- ----------- ------------ --------- NET INCOME ................................................... $ 24,241 $ 31,143 $ 21,304 $ 34,443 $ 27,295 ========= ======== ======== ========= ========= EARNINGS PER COMMON SHARE: Income from Continuing Operations Per Share ............... $1.35 $1.76 $1.60 $2.36 $1.50 Loss Per Share from Discontinued Operations ............... (.38) (.16) (.02) Cumulative Effect of Adopting FAS 109. .................... .35 -------- -------- -------- -------- ------- Net Income Per Share ...................................... $1.35 $1.76 $1.22 $2.20 $1.83 ===== ===== ===== ===== ===== Weighted Average Number of Common Shares Outstanding ...................................... 18,008 17,726 17,414 15,678 14,939 ====== ========= ========= ========= ========= EARNINGS PER COMMON SHARE ASSUMING DILUTION: Income from Continuing Operations Per Share ............... $1.33 $1.72 $1.57 $2.31 $1.47 Loss Per Share from Discontinued Operations ............... (.37) (.16) (.02) Cumulative Effect of Adopting FAS 109. .................... .34 -------- -------- -------- -------- ------- Net Income Per Share ...................................... $1.33 $1.72 $1.20 $2.15 $1.79 ===== ===== ===== ===== ===== Weighted Average Number of Common Shares Outstanding Assuming Dilution .................... 18,284 18,127 17,734 15,999 15,256 ====== ========= ========= ========= =========
17
Years Ended December 31, 1997 1996 1995 1994 1993 ---------- ---------- ---------- ----------- -------- (Amounts in thousands) Balance Sheet Data: Working Capital ........................................... $ 88,377 $ 76,530 $ 18,157 $ 71,337 $ 21,323 Total Assets............................................... 723,936 629,462 575,146 535,487 445,510 Long-term Debt (Net of Current Maturities)................. 90,841 66,189 71,257 75,209 72,802 Cash Dividends Per Common Share............................ NONE NONE NONE NONE NONE Stockholders' Equity....................................... 265,682 234,482 207,715 168,157 84,708
(1) The Company's consolidated financial statements have been restated to reflect the results of acquisitions accounted for in accordance with pooling of interests method of accounting. See Note 1 of Notes to the Consolidated Financial Statements. (2) In connection with certain acquisitions and restructurings, the Company recorded certain non-recurring incremental costs. See Note 14 of Notes to the Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant for an assessment and understanding of the Company's consolidated financial condition and results of operations. The discussion should be read in conjunction with the Consolidated Financial Statements and Related Notes thereto. Any forward-looking information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and any other sections of this 1997 Annual Report on Form 10-K should be considered in connection with certain cautionary statements contained in the Company's Current Report on Form 8-K filing dated March 19, 1998 incorporated herein by reference. Such cautionary statements are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and identify important risk factors that could cause the Company's actual results to differ from those expressed in any projected, estimated or forward-looking statements relating to the Company. Acquisitions Effective December 31, 1996, the Company purchased Prime Holdings, Inc. ("Prime") for approximately $32.2 million in cash. At December 31, 1996, Prime operated Med One Health Plan, Inc., a 12,800 member HMO, and also served 215,000 people through preferred provider organizations, workers' compensation programs, and administrative services products for self-insured employers and union welfare funds, primarily in the state of Nevada. The acquisition of Prime has been accounted for as a purchase and, therefore, none of Prime's prior operations have been included in the information contained in this discussion and analysis; however, all of the acquired assets and liabilities have been reflected in the Company's ending consolidated balance sheet, as of December 31, 1996, along with the associated goodwill. In November 1996, the Company acquired the remaining ownership interests of HMO Texas for $5.0 million. The Company had previously held a 50 percent interest in the Houston-based health plan. On October 31, 1995, the Company acquired CII Financial, Inc., ("CII") a workers' compensation insurance holding company, for approximately $76.3 million of common stock, in a transaction accounted for as a pooling of interests. The information contained in this Annual Report on Form 10-K includes the results of CII for all periods presented. 18 Overview The Company derives revenues from its health maintenance organizations, managed indemnity and workers' compensation insurance subsidiaries. To a lesser extent, the Company also derives additional specialty product revenues from non-HMO and insurance products (consisting of fees for workers' compensation administration, utilization management services and ancillary products), professional fees (consisting primarily of fees for providing health care services to non-members and co-payment fees received from members), and investment and other revenue. Medical premium revenues accounted for approximately 71.2%, 67.3% and 68.4% of the Company's total revenues for 1997, 1996 and 1995, respectively. Continued medical premium revenue growth is principally dependent upon continued enrollment in the Company's products and upon competitive and regulatory factors. Effective September 30, 1997, the Company terminated its workers' compensation administrative contract with the state of Nevada. The contract was terminated to allow the Company to participate in the Nevada workers' compensation insurance market when the state allows private insurance companies to begin offering products, which is anticipated for 1999. The Company's principal expenses consist of medical expenses, specialty product expenses, and general, administrative and marketing expenses. Medical expenses represent the aggregate expenses of operating the Company's multi-specialty medical group and other provider subsidiaries as well as capitation fees and other fee-for-service payments paid to independently contracted physicians, hospitals and other health care providers. As a provider of managed care services, the Company seeks to manage medical expenses by employing or contracting with physicians, hospitals and other health care providers at negotiated price levels, by adopting quality assurance programs, by monitoring and managing utilization of physicians and hospital services and by providing incentives to use cost-effective providers. Specialty product expenses primarily consist of losses and loss adjustment expenses, and underwriting expenses associated with the Company's workers' compensation insurance subsidiaries. General, administrative and marketing expenses generally represent operational costs other than those associated with the delivery of health care services and specialty product services. During the third quarter of 1997, Sierra Military Health Services, Inc. ("SMHS"), a wholly owned subsidiary of the Company, was notified it had been awarded a multi-year triple-option health benefits ("TRICARE") managed care contract by the Department of Defense to serve TRICARE eligible beneficiaries in Region 1. This region includes more than 600,000 beneficiaries in 13 northeastern states and the District of Columbia. SMHS is currently in the implementation period of the contract with actual health care delivery to commence on June 1, 1998. SMHS subcontracts for the health care delivery, including some of the risk, for parts of the TRICARE contract. The Company believes the TRICARE contract will add approximately $240 million of annualized revenues when health care delivery begins in 1998. Revenues and expenses resulting from this contract are recorded separately on the financial statements. There can be no assurance that the Company will be successful in managing the implementation and delivery of health care services under the multi-year TRICARE contract or that such contract will provide the Company with an adequate level of profitability. SMHS was notified on February 13, 1998 that the United States General Accounting Office ("GAO") sustained a competitor's protest of the contract award for TRICARE Managed Care Support Region 1 and recommended that the contract be re-bid. The TRICARE Management Activity ("TMA"), along with the Company, has filed a motion requesting that the GAO reconsider its recommendation. If the GAO does not change its recommendation and the TMA follows the recommendation, there are several possible outcomes, including litigation. The Company currently anticipates providing health care delivery for one year of the contract should a re-bid occur. 19 Merger, restructuring and start-up expenses represent the non-recurring incremental costs the Company has incurred in connection with various mergers, acquisitions and planned dispositions as well as expenses associated with the Company's proposal to serve TRICARE beneficiaries in Region 1. Such start-up expenses were charged to operations upon notification of award. Results of Operations The following table sets forth selected operating data as a percentage of revenues for the periods indicated:
Years Ended December 31, 1997 1996 1995 ---------- ---------- ------- OPERATING REVENUES: Medical Premiums........................................ 71.2% 67.3% 68.4% Specialty Product Revenues ............................. 20.3 23.2 22.0 Professional Fees....................................... 4.3 5.0 4.2 Military Contract Revenues ............................. .6 Investment and Other Revenues .......................... 3.6 4.5 5.4 ------ ------ ------ Total................................................ 100.0 100.0 100.0 ----- ----- ----- OPERATING EXPENSES: Medical Expenses........................................ 58.1 54.9 52.5 Specialty Product Expenses.............................. 19.8 22.7 22.0 General, Administrative and Marketing Expenses.......... 13.0 12.6 13.6 Military Contract Expenses ............................. .6 Merger, Restructuring and Start-up Expenses ............ 4.1 2.1 2.5 ------ ----- ----- Total................................................ 95.6 92.3 90.6 ---- ----- ----- OPERATING INCOME ............................................ 4.4 7.7 9.4 INTEREST EXPENSE AND OTHER, NET.............................. (.6) (.5) (.8) ---- ---- ---- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .................................... 3.8 7.2 8.6 PROVISION FOR INCOME TAXES................................... .4 1.8 2.6 ----- ----- ----- INCOME FROM CONTINUING OPERATIONS ........................... 3.4 5.4 6.0 NET OPERATING LOSS ON DISCONTINUED OPERATIONS .............................................. (.4) NET LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS .................................. (1.0) NET INCOME................................................... 3.4% 5.4% 4.6% ===== ===== =====
20 1997 Compared to 1996 Revenues. The Company's total operating revenues for 1997 increased 25.4% to $721.7 million from $575.4 million for 1996. The increase was primarily due to medical premium revenue increases of approximately $126.9 million, or 32.8%, from the Company's HMO and managed indemnity insurance subsidiaries. Such premium growth resulted principally from an approximate 30.3% increase in member months (the number of months of each year that an individual is enrolled in a plan). The Company's HMO and insurance subsidiaries' premium rates increased approximately 2.5%, primarily due to an increase in its capitation rate for its Medicare members as established by the Health Care Financing Administration ("HCFA"). The increase was due in part to the Company's participation in HCFA's social HMO program. The Company realized 1% to 3% rate increases for its existing HMO subsidiaries' commercial groups and the managed indemnity subsidiary. However, these increases were offset in part by lower premium rates at Med One Health Plan, an HMO acquired on December 31, 1996. The Company's specialty product revenue increased $12.9 million, or 9.7%, to $146.2 million in 1997 from $133.3 million in 1996. The increase was due to specialty product revenue growth in the workers' compensation insurance market of approximately $8.3 million and an increase in administrative services and other of $4.6 million due primarily to the acquisition of Prime Health, Inc., at the end of 1996. Some of this increase will be offset in the future by the loss of a portion of the state of Nevada's self-insured medical business. Also, effective September 30, 1997, the Company terminated its workers' compensation administrative services contract with the state of Nevada. The contract served approximately 200,000 enrollees and provided approximately $3.2 million in revenues for the year ended December 31, 1997. The contract was terminated to allow the Company to participate in the Nevada workers' compensation insurance market when the state allows private insurance companies to begin offering products, which is anticipated for 1999. Professional fees increased $2.4 million, or 8.3%, over 1996 to $31.2 million. This increase is due in part to the acquisition of the assets and operations of Total Home Care, Inc. ("THC") during the third quarter. THC provides home infusion, oxygen and durable medical equipment services in Nevada and Arizona. During the fourth quarter of 1997, SMHS began the implementation period of its TRICARE contract. The military contract revenue of $4.3 million is a result of this contract. The Company expects these revenues to increase substantially in 1998, subject to the results of the bid protest discussed previously. Investment and other revenue was consistent with the prior year. Medical and Specialty Product Expenses. Total medical expenses increased by $103.4 million in 1997 compared to 1996. This 32.7% increase resulted from the consolidated member month growth discussed previously. Medical expenses as a percentage of medical premiums and professional fees ("Medical Loss Ratio") increased from 76.0% to 76.9% due primarily to member growth and expansion in areas with higher medical expenses, such as northern Nevada and Texas. In addition, Med One Health Plan has a higher Medical Loss Ratio, which further contributed to the increase in the Company's overall Medical Loss Ratio. Specialty product expenses increased $12.3 million, or 9.4%, over 1996. This increase is due primarily to the increase in workers' compensation premiums noted above. Specialty product revenue and expense is primarily related to the workers' compensation insurance business. The combined ratio for the workers' compensation insurance business was 101.9% compared to 103.2% for the comparable prior year period. The reduction was due to a 40 basis point decrease in the loss ratio along with a 90 basis point decrease in the expense ratio. Compared to the prior year period, incurred losses for the current accident year were reduced as a result of the Company's ability to overlay and implement managed care techniques to the workers' compensation claims. In addition, the Company had net favorable loss development totaling $9.0 million compared to net favorable loss development of $15.3 million for the comparable prior year period. The favorable development is largely due to actual paid losses below projected losses and the majority of the favorable loss development occurred on the 1992 through 1995 accident years. There can be no assurances that favorable development, or the magnitude thereof, will continue in the future. The losses and loss adjustment expense ratio for the year ended December 31, 1997 reflects the Company's current projection of the ultimate costs of claims occurring in the current as 21 well as prior accident years. Such projections are subject to change and any change would be reflected in the income statement. Workers' compensation claims are paid over several years. Until payment is made, the Company invests the monies, earning a yield on the invested balance. General, Administrative and Marketing Expenses. General, administrative and marketing ("G&A") costs increased $21.7 million, or 30.0%, for the twelve months ended December 31, 1997 compared to the twelve months ended December 31, 1996. As a percentage of revenues, G&A costs for the twelve months ended December 31, 1997 increased to 13.0% from 12.6% during the comparable period in 1996. Of the $21.7 million increase in G&A, $8.6 million is in compensation costs primarily resulting from additional employees supporting expanded services and increased incentive amounts for management. Broker, third-party administration, and premium tax expenses increased approximately $8.5 million due to increased membership. Amortization and depreciation costs increased approximately $1.9 million primarily due to the amortization of goodwill resulting from the Prime acquisition. The remaining G&A increase is due to additional expenses in several areas including data processing maintenance. Military Contract Expense. During the fourth quarter of 1997, SMHS began the implementation period of its TRICARE contract. The military contract expense is a result of this contract. Merger, Restructuring and Start-up Expenses. During 1997, the Company recorded and paid expenses of approximately $11.0 million, $8.4 million after tax, for merger-related costs. On March 18, 1997, the Company announced it had terminated its merger agreement with Physician Corporation of America, Inc. ("PCA"). The original agreement had been entered into in November 1996. On March 18, 1997, prior to termination of the merger agreement, PCA filed a lawsuit against the Company in the United States District Court for the Southern District of Florida (the "District Court"), seeking, among other things, specific performance of the merger agreement and monetary damages. The lawsuit has been dismissed for failure to join a necessary party. The Company has also initiated a lawsuit in the Court of Chancery of the State of Delaware seeking a declaratory judgment as well as other remedies. The Company intends to vigorously pursue all remedies available to it; however, there can be no assurance that the Company will prevail in such litigation. During the third quarter of 1997, SMHS, a wholly owned subsidiary of the Company, was awarded a contract to serve TRICARE eligible beneficiaries in Region 1. This region includes more than 600,000 TRICARE beneficiaries in 13 northeastern states and the District of Columbia. Development expenses of $18.4 million, $10.6 million net of taxes, were recorded in the third quarter primarily for expenses associated with the Company's proposal to serve eligible beneficiaries in Region 1. Such expenses were charged to operations upon notification of award. SMHS is currently in the implementation period of the contract with actual health care delivery to commence on June 1, 1998. SMHS subcontracts for health care delivery, including some of the risk, for parts of the TRICARE contract. The Company believes the TRICARE contract will add approximately $240 million of annualized revenues when health care delivery begins in 1998. SMHS was notified on February 13, 1998 that the GAO sustained a competitor's protest of the contract award for TRICARE Managed Care Support Region 1 and recommended that the contract be re-bid. The TMA, along with the Company, has filed a motion requesting that the GAO reconsider its recommendation. If the GAO does not change its recommendation and the TMA follows the recommendation, there are several possible outcomes, including litigation. The Company currently anticipates providing health care delivery for one year of the contract should a re-bid occur. Interest Expense and Other. Interest expense and other increased approximately $1.6 million over the prior year primarily due to the $2.1 million benefit for minority interests recorded in 1996, offset in part by an increase in capitalized interest related to various construction projects in 1997. In November 1996, the Company acquired complete ownership of a Texas HMO in which it had previously held a 50% interest. 22 That HMO began business in March 1995 and experienced losses in both years. In the prior year, a portion of these losses resulted in a benefit from minority interests. Income Taxes. The Company's effective tax rate for the year ended December 31, 1997 was 11.8%, compared to 25.2% in 1996. The difference between the Company's effective tax rate and the current federal tax rate is due primarily to a $4.7 million tax benefit recorded as a result of a reduction of the deferred tax valuation allowance and the Company's portfolio of tax preferred investments. These benefits are more significant as a result of the non-recurring charges related to the PCA acquisition and start-up costs associated with the TRICARE contract. Excluding these non-recurring costs, the effective tax rate for 1997 is 23.9%. See Note 9 of Notes to Consolidated Financial Statements. Net Income. Excluding non-recurring items and the related tax effects, income from ongoing operations for 1997 increased $3.1 million, or 7.6%. Net income for 1997, including all non-recurring items, decreased $6.9 million, or 22.2%, from 1996. This decrease was impacted in part by non-recurring items including the merger-related and start-up costs in 1997 and the restructurings and disposal costs in 1996. 1996 Compared to 1995 Revenues. The Company's total operating revenues for 1996 increased 23.2% to $575.4 million from $467.0 million for 1995. The increase was primarily due to medical premium revenue increases of approximately $67.5 million, or 21.1%, from the Company's HMO and managed indemnity insurance subsidiaries. Such premium growth resulted principally from a 19.6% increase in member months. The Company experienced an overall rate increase for its Medicare members due to an approximate 2.9% increase in its capitation rate established by HCFA. Additionally, the Company realized minimal rate changes for the HMO subsidiary's commercial groups and managed indemnity insurance subsidiary. The Company's specialty product revenue increased $30.5 million, or 29.7%, to $133.3 million in 1996 from $102.8 million in 1995. Such increases were primarily from workers' compensation premiums in California. Professional fees increased $9.4 million, or 48.5%, over 1995 to $28.8 million. This increase is due primarily to the acquisition of a medical facility in the fourth quarter of 1995 as well as expanded services at the Company's existing medical facilities. Investment and other revenue increased $1.0 million, or 3.8%, over the prior year due to changes in the investment balances and market yield fluctuations. Medical and Specialty Product Expenses. Total medical expenses increased by $70.8 million in 1996 compared to 1995. This 28.9% increase resulted from the consolidated member month growth discussed above, as well as the clinical expansions and increases associated with professional fee growth. These factors, as well as an increase in Medicare members as a percentage of total members, increased the Company's medical loss ratio to 76.0% for the twelve months ended December 31, 1996, from 72.3% for the comparable twelve months in 1995. The cost of providing medical care to Medicare members generally requires a greater percentage of the premium revenue received. Specialty product expenses increased $27.9 million, or 27.1%, over 1995. This increase is due primarily to the increase in workers' compensation premiums noted above, offset in part by the Company's ability to overlay managed care techniques on the management and payment of certain workers' compensation claims. In addition, specialty product expenses for 1996 and 1995 were impacted by the loss development on prior accident years. During the year, the Company had net favorable loss development on prior accident years of $15.3 million, compared to net favorable loss development of $20.1 million for the comparable prior year period. The majority of the favorable loss development occurred on the 1992 through 1994 accident years. The favorable development on the 1992 year appears to be primarily due to the Company's aggressive actions to resolve claims. The favorable development on the 1993 and 1994 accident years appears to have been aided by the workers' compensation reforms that were enacted in July 1993 to combat the abuses in California's workers' compensation system. There can be no assurances that favorable development, or the magnitude of the development, will continue in the future. See Note 7 of Notes to Consolidated Financial Statements. 23 General, Administrative and Marketing Expenses. G&A costs increased $8.7 million, or 13.6%, for the twelve months ended December 31, 1996 compared to the twelve months ended December 31, 1995. As a percentage of revenues, however, G&A costs for the twelve months ended December 31, 1996 decreased to 12.6% from 13.6% during the comparable period in 1995. Of the $8.7 million increase in G&A, $3.3 million is in compensation costs primarily resulting from additional employees supporting expanded services, $3.8 million is from percent of premium costs such as broker commissions and premium taxes, and the remaining $1.6 million is made up of various changes which individually are insignificant. Merger, Restructuring and Start-up Expenses. During 1995, as part of the Company's clinical expansion and growth efforts, the Company acquired a medical facility in Mohave County, Arizona, across the border from Laughlin, Nevada. This medical facility included a small 12-bed hospital. During 1996 the Company implemented a plan to exit the hospital business and actively pursued buyers for this business. As a result of this plan, the Company took a charge of $3.8 million ($2.8 million after tax) in the fourth quarter of 1996, primarily to recognize the estimated costs to dispose of the hospital. As of December 31, 1997, the Company has been unable to reach an agreement to sell the hospital. As a result of higher than expected claim and administrative costs relative to premium rates that can be obtained in certain regional insurance operations and the Company's inability to negotiate adequate provider contracts due to its limited presence in some of these markets, the Company adopted a plan to restructure certain insurance operations during the third quarter of 1996 and recorded a charge of $8.3 million. The plan included the sale or closure of certain regional operations in California, Arizona and Colorado. The plan will allow the Company to focus on more favorable operating markets and improve operating efficiencies. The Company believes that this restructuring, over time, will result in improved cash flow and operating cost savings in excess of the amount of the charge. As a result of these restructurings, the Company recorded expenses of $12.1 million. These costs included cancellation of certain contractual obligations of $6.0 million, lease termination costs of $1.5 million, and $4.6 million of other costs including the estimated costs to dispose of the hospital. Income Taxes. The Company's effective tax rate for the year ended December 31, 1996 was 25.2%, compared to 30.4% in 1995, or 25.4% after taking into account the non-deductible merger costs incurred in 1995. The difference between the Company's effective tax rate and the current federal tax rate is due primarily to a $2.7 million tax benefit recorded as a result of a reduction of the deferred tax valuation allowance and the Company's significant portfolio of tax preferred investments. See Note 9 of Notes to Consolidated Financial Statements. Net Income. Net income for 1996 increased $9.8 million, or 46.2%, over 1995. This increase was impacted in part by several non-recurring items including the restructurings in 1996 and discontinued operations and merger costs in 1995. Excluding non-recurring items and the related tax effects, income from ongoing operations for 1996 increased $2.6 million, or 6.9%. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased by approximately $6.8 million to $96.8 million at December 31, 1997, from $103.6 million at December 31, 1996. At December 31, 1997, the Company had working capital of $88.4 million. The primary source of cash received during the year ended December 31, 1997, was operations. The Company's cash flow from operating activities resulted in $52.8 million of cash flow for the twelve months ended December 31, 1997. This cash flow was primarily generated from net income of $24.2 million, $13.5 million in depreciation and amortization and $4.3 million in provision for doubtful accounts, 24 as well as a net change in operating assets and liabilities, excluding cash and cash equivalents, of approximately $10.8 million. The increase in cash from fluctuations in such operating assets and liabilities is principally due to increases in the reserve for losses and loss adjustment expense, other current liabilities and medical claims payable. These increases in cash were offset by decreases in cash due to increases in accounts receivable and other current assets. In 1997 the Company spent $3.1 million, net of cash received, to acquire the operations and assets of a company that provides home infusion, oxygen and durable medical equipment services in Nevada and Arizona. In the first quarter of 1998 the Arizona business was sold for $1.5 million. Capital expenditures were primarily for new facilities as well as the expansion of existing medical facilities and include $33.9 million for the construction of both a 59,000 square foot medical facility in Las Vegas completed in the fourth quarter of 1997, and an additional administrative headquarters building of approximately 180,000 square feet which should be fully occupied by the end of the first quarter of 1998. Other capital expenditures were primarily for furniture and equipment associated with the Company's new military health services subsidiary, remodeling of certain existing medical space, as well as business expansion of the HMO and insurance operations, along with general corporate expansion. Such amounts include $6.1 million in computer hardware and software. Additionally, the Company used $5.5 million to purchase treasury stock on the open market, $2.4 million for the reduction of debt, and there was a $28.9 million net change in marketable securities. These cash outflows were offset by $10.3 million received in connection with the purchase of stock through the Company's employee stock plans. In the second quarter of 1997, the Company amended and increased to $100.0 million its unsecured line of credit from Bank of America National Trust & Savings Association ("BofA") for a term of five years at an interest rate based on the London InterBank Offering Rate ("LIBOR"). In March 1997 and December 1997, the Company borrowed $17.0 million and $8.0 million, respectively, for general corporate purposes. The remaining line of credit may be used for additional working capital, if necessary. Also in the second quarter of 1997, the Company's Board of Directors authorized a $3.0 million line of credit from the Company to the Company's Chief Executive Officer ("CEO"). The CEO borrowed a total of $2.0 million in 1997, at an interest rate equal to the London InterBank Offering Rate plus 53 basis points. The line of credit is collateralized by certain amounts of the CEO's Sierra stock options and is due and payable no later than June 30, 1998. In September 1991, CII issued convertible subordinated debentures (the "Debentures") due September 15, 2001. The Debentures bear interest at 7 1/2% which is due semi-annually on March 15 and September 15. Each $1,000 in principal is convertible into 16.921 shares of the Company's common stock at a conversion price of $59.097 per share. Unamortized issuance costs of $800,000 are included in other assets on the balance sheet and are being amortized over the life of the Debentures. The Debentures are general unsecured obligations of CII only and are not guaranteed by Sierra Health Services, Inc. ("Sierra"). During the twelve months ended December 31, 1997, the Company purchased $30,000 of the Debentures on the open market. At December 31, 1997, CII had total assets of $343.0 million, consisting primarily of investments, and total liabilities of $285.4 million, consisting primarily of reserves for losses and loss adjustment expense and the debentures. For the year ended December 31, 1997, CII had net premiums earned of $129.2 million, investment and other revenue of $17.4 million, and total operating expenses of $135.8 million. On September 30, 1997, the Company was awarded a TRICARE contract to provide managed health care coverage to eligible beneficiaries in Region 1. This region includes more than 600,000 individuals in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Washington, D.C. The contract will result in approximately $1.2 billion in estimated revenues over the five-year term of the contract. The expenses incurred in connection with obtaining this contract were expensed in the third quarter as previously discussed. The Company will fund approximately $25.0 million to SMHS during the seven-month 25 implementation period of the TRICARE Region 1 contract. These monies will be reimbursed by the Department of Defense in accordance with the provisions of the contract. SMHS was notified on February 13, 1998 that the GAO sustained a competitor's protest of the contract award for TRICARE Managed Care Support Region 1 and recommended that the contract be re-bid. The TMA, along with the Company, has filed a motion requesting that the GAO reconsider its recommendation. If the GAO does not change its recommendation and the TMA follows the recommendation, there are several possible outcomes, including litigation. The Company currently anticipates providing health care delivery for one year of the contract should a re-bid occur. The Company is in the process of modifying or replacing its computer systems and applications to accommodate the "Year 2000". The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems will recognize the year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may cause systems to process critical financial and operational information incorrectly. The Company currently expects to complete all material replacements or modifications of its computer systems and applications sufficiently in advance of the Year 2000 to allow for adequate testing so as not to negatively impact its operations. The Company is in the process of implementing two major systems at an estimated cost of $20.0 million. These systems will be Year 2000 compliant. The Company is expensing the costs to make modifications as incurred. Management currently estimates the remaining modification costs to be approximately $3.0 million to $5.0 million over the next 12 to 18 months. While this is a substantial effort, it will give the Company the benefits of new technology and functionality for many of its financial and operational computer systems and applications. The inability of the Company to timely complete its Year 2000 modifications and replacements, or the inability of companies with which the Company does business to timely complete their Year 2000 modifications, could have a material effect on the Company's operations. The Company has a 1998 capital budget of approximately $50.0 million, primarily for computer hardware and software, medical buildings, furniture and equipment for the newly constructed 180,000 square foot, six-story corporate headquarters building, and other requirements due to the Company's projected growth and expansion. The Company financed a portion of the newly constructed administrative building in January 1998, and received $15.0 million. On January 12, 1998, $7.3 million of the projected capital expenditure budget was used by the Company to purchase all of the assets and operations of three clinics in southern Nevada. The Company's liquidity needs over the next 12 months will primarily be for the capital items noted above to support growing membership in Nevada, implementation of the Region 1 TRICARE contract, the Company's stock repurchase program, as well as debt service and expansion of the Company's operations, including potential acquisitions. The Company believes that existing working capital, operating cash flow and, if necessary, mortgage financing and equipment leasing, and amounts available under its credit facility will be sufficient to fund its capital expenditures, debt service and any expansion activities during the next 12 months. Additionally, subject to unanticipated cash requirements, the Company believes that its existing working capital and operating cash flow and, if necessary, its access to new credit facilities, will enable it to meet its liquidity needs on a longer term basis. The holding company may receive dividends from its HMO and insurance subsidiaries which generally must be approved by certain state insurance departments. The Company's HMO and insurance subsidiaries are required by state regulatory agencies to maintain certain deposits and must also meet certain net worth and reserve requirements. The HMO and insurance subsidiaries had restricted assets on deposit in various states totaling $16.5 million and $13.6 million, as of December 31, 1997 and December 31, 1996, respectively. The HMO and insurance subsidiaries also meet requirements to maintain minimum stockholder's equity ranging from $1.1 million to $5.2 million. Of the cash and cash equivalents held at December 31, 1997, $82.2 million is designated for use only by the regulated subsidiaries. Such amounts are available for transfer to the holding company from the HMO and insurance subsidiaries only to the extent that they can be remitted in accordance with terms of existing management agreements and by 26 dividends. Remaining amounts are available on an unrestricted basis. The holding company will not receive dividends from its HMO or insurance subsidiaries that would cause violation of statutory net worth and reserve requirements. Inflation Health care costs generally continue to rise at a faster rate than the Consumer Price Index. The Company uses various strategies to mitigate the negative effects of health care cost inflation, including setting commercial premiums based on its anticipated health care costs, risk-sharing arrangements with the Company's various health care providers, and other health care cost containment measures. There can be no assurance, however, that, in the future, the Company's ability to manage medical costs will not be negatively impacted by items such as technological advances, competitive pressures, applicable regulations, pharmacy costs, utilization changes and catastrophic items, which could, in turn, result in medical cost increases equaling or exceeding premium increases. Government Regulation The Company's business, offering health care coverage, health care management services, workers' compensation programs and, to a lesser extent, the delivery of medical services, is heavily regulated at both the federal and state levels. Government regulation of health care coverage products and services is a changing area of law that varies from jurisdiction to jurisdiction. Changes in applicable laws and regulations are continually being considered and interpretation of existing laws and rules also may change from time to time. Regulatory agencies generally have broad discretion in promulgating regulations and in interpreting and enforcing laws and regulations. While the Company is unable to predict what regulatory changes may occur or the impact on the Company of any particular change, the Company's operations and financial results could be negatively affected by regulatory revisions. For example, any proposals affecting underwriting practices, limiting rate increases, requiring new or additional benefits or affecting contracting arrangements (including proposals to require HMOs and PPOs to accept any health care providers willing to abide by an HMO's or PPO's contract terms) may have a material adverse effect on the Company's business. The continued consideration and enactment of "anti-managed care" laws and regulations by federal and state bodies may make it more difficult for the Company to control medical costs and may adversely affect financial results. In addition to changes in applicable laws and regulations, the Company is subject to various audits, investigations and enforcement actions. These include possible government actions relating to the federal Employee Retirement Income Security Act, which regulates insured and self-insured health coverage plans offered by employers, the Federal Employees Health Benefit Plan, federal and state fraud and abuse laws, and laws relating to utilization management and the delivery of health care. Any such government action could result in assessment of damages, civil or criminal fines or penalties, or other sanctions, including exclusion from participation in government programs. In addition, disclosure of any adverse investigation1 or audit results or sanctions could negatively affect the Company's reputation in various markets and make it more difficult for the Company to sell its products and services. Recently Issued Accounting Standards Statement of Financial Accounting No. 130, "Reporting Comprehensive Income" is effective for periods beginning after December 15, 1997 and requires companies to classify items of other comprehensive income by their nature in a financial statement. Management does not believe this statement will have a material impact on the Company's financial statements. Statement of Financial Accounting No. 131, 27 "Disclosures about Segments of an Enterprise and Related Information" is also effective for periods beginning after December 15, 1997 and establishes additional standards for segment disclosures in the financial statements. Management has not determined the effect of this statement on its financial statement disclosure. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pursuant to the General Instructions to Rule 305 of Regulation S-K, the quantitative and qualitative disclosures called for by this Item and by Rule 305 of Regulation S-K are inapplicable to the Company at this time. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page Management Report on Consolidated Financial Statements.................... 30 Independent Auditors' Report.............................................. 31 Consolidated Balance Sheets at December 31, 1997 and 1996................. 32 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996, and 1995...................................... 33 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995................... 34 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995...................................... 35 Notes to Consolidated Financial Statements................................ 36 29 MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS The management of Sierra Health Services, Inc., is responsible for the integrity and objectivity of the accompanying Consolidated Financial Statements. The statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and are not misstated due to fraud or material error. The statements include some amounts that are based upon the Company's best estimates and judgment. The accounting systems and controls of the Company are designed to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the financial records are reliable for preparing financial statements and maintaining accountability for assets, and that assets are safeguarded against losses from unauthorized use or disposition. Management believes that for the year ended December 31, 1997, such systems and controls were adequate to meet the objectives discussed herein. The accompanying Consolidated Financial Statements have been audited by independent certified public accountants, whose audits thereof were made in accordance with generally accepted auditing standards and included a review of internal accounting controls to the extent necessary to design audit procedures aimed at gathering sufficient evidence to provide a reasonable basis for their opinion on the fairness of presentation of the Consolidated Financial Statements taken as a whole. The Audit Committee of the Board of Directors, comprised solely of directors from outside the Company, meets regularly with management and the independent auditors to review the work procedures of each. The independent auditors have free access to the Audit Committee, without management being present, to discuss the results of their opinions on the adequacy of the Company's accounting controls and the quality of the Company's financial reporting. The Board of Directors, upon the recommendation of the Audit Committee, appoints the independent auditors, subject to stockholder ratification. Anthony M. Marlon, M.D. Chairman and Chief Executive Officer James L. Starr Senior Vice President, Chief Financial Officer, and Treasurer 30 INDEPENDENT AUDITORS' REPORT Board of Directors Sierra Health Services, Inc.: We have audited the accompanying consolidated balance sheets of Sierra Health Services, Inc., and its subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the index at Item 14 (a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sierra Health Services, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Las Vegas, Nevada February 16, 1998 31 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 ASSETS
1997 1996 --------------- ---------- CURRENT ASSETS: Cash and Cash Equivalents.............................................. $ 96,841,000 $103,587,000 Short-term Investments................................................. 115,498,000 83,688,000 Accounts Receivable (Less: Allowance for Doubtful Accounts 1997 - $7,916,000; 1996 - $7,324,000)..................... 42,041,000 31,849,000 Current Portion of Deferred Tax Asset ................................. 15,496,000 13,713,000 Prepaid Expenses and Other Current Assets.............................. 30,730,000 20,098,000 ------------ ------------ Total Current Assets............................................... 300,606,000 252,935,000 PROPERTY AND EQUIPMENT, NET................................................ 148,831,000 99,804,000 LONG-TERM INVESTMENTS...................................................... 155,153,000 160,482,000 RESTRICTED CASH AND INVESTMENTS............................................ 16,540,000 13,648,000 REINSURANCE RECOVERABLE, Net of Current Portion............................ 20,245,000 14,721,000 GOODWILL .................................................................. 42,803,000 44,602,000 OTHER ASSETS............................................................... 39,758,000 43,270,000 ------------ ------------ TOTAL ASSETS............................................................... $723,936,000 $629,462,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accrued Liabilities....................................................... $ 43,601,000 $ 37,650,000 Accrued Payroll and Taxes................................................. 14,838,000 12,503,000 Medical Claims Payable.................................................... 55,943,000 46,969,000 Current Portion of Reserve for Losses and Loss Adjustment Expense .................................. 63,358,000 52,878,000 Unearned Premium Revenue.................................................. 29,763,000 24,210,000 Current Portion of Long-term Debt......................................... 4,726,000 2,195,000 ------------- ------------- Total Current Liabilities............................................ 212,229,000 176,405,000 RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSE (Less Current Portion) ........................... 139,341,000 134,898,000 LONG-TERM DEBT (Less Current Portion) ........................................ 90,841,000 66,189,000 OTHER LIABILITIES ............................................................ 15,843,000 17,488,000 ------------- ------------- TOTAL LIABILITIES............................................................. 458,254,000 394,980,000 ------------ ------------ STOCKHOLDERS' EQUITY: Preferred Stock, $.01 Par Value, 1,000,000 Shares Authorized; None Issued or Outstanding Common Stock, $.005 Par Value, 40,000,000 Shares Authorized; Shares Issued: 1997 -- 18,473,000; 1996-- 17,910,000........................................ 92,000 89,000 Additional Paid-in Capital................................................ 164,294,000 152,035,000 Treasury Stock; 1997-- 284,500; 1996-- 100,200 Common Shares........................................................ (5,601,000) (130,000) Unrealized Holding Gain on Available-for-Sale Investment.................. 655,000 487,000 Retained Earnings......................................................... 106,242,000 82,001,000 ------------ ------------ Total Stockholders' Equity........................................... 265,682,000 234,482,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $723,936,000 $629,462,000 ============ ============
See the accompanying notes to consolidated financial statements. 32 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ----------------- ----------------- ----------- OPERATING REVENUES: Medical Premiums............................................. $513,857,000 $386,968,000 $319,475,000 Specialty Product Revenues .................................. 146,211,000 133,324,000 102,807,000 Professional Fees............................................ 31,238,000 28,836,000 19,417,000 Military Contract Revenues .................................. 4,346,000 Investment and Other Revenues ............................... 26,072,000 26,283,000 25,310,000 ------------ ------------- -------------- Total..................................................... 721,724,000 575,411,000 467,009,000 ------------- ------------ ------------- OPERATING EXPENSES: Medical Expenses............................................. 419,272,000 315,915,000 245,135,000 Specialty Product Expenses................................... 143,082,000 130,758,000 102,859,000 General, Administrative and Marketing Expenses............... 93,919,000 72,237,000 63,562,000 Military Contract Expenses .................................. 4,193,000 Merger, Restructuring and Start-up Expenses................. 29,350,000 12,064,000 11,614,000 ------------ ------------ ------------- Total..................................................... 689,816,000 530,974,000 423,170,000 ----------- ------------ ------------- OPERATING INCOME.................................................. 31,908,000 44,437,000 43,839,000 INTEREST EXPENSE AND OTHER, NET................................... (4,433,000) (2,823,000) (3,737,000) ---------- ------------ ------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ......................................... 27,475,000 41,614,000 40,102,000 PROVISION FOR INCOME TAXES........................................ 3,234,000 10,471,000 12,198,000 ------------ ----------- ------------- INCOME FROM CONTINUING OPERATIONS................................. 24,241,000 31,143,000 27,904,000 NET OPERATING LOSS ON DISCONTINUED OPERATIONS ..................................... (2,010,000) NET LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS ..................................... (4,590,000) ----------------- ----------------- ------------- NET INCOME ....................................................... $ 24,241,000 $ 31,143,000 $ 21,304,000 ============ ============ ============ EARNINGS PER COMMON SHARE: Income from Continuing Operations ........................... $1.35 $1.76 $1.60 Net Operating Loss on Discontinued Operations ............... (.12) Net Loss on Disposal of Discontinued Operations ............. (.26) -------- -------- ------ Net Income Per Share .................................... $1.35 $1.76 $1.22 ===== ===== ===== EARNINGS PER COMMON SHARE ASSUMING DILUTION: Income from Continuing Operations ........................... $1.33 $1.72 $1.57 Net Operating Loss on Discontinued Operations ............... (.11) Net Loss on Disposal of Discontinued Operations ............. (.26) -------- -------- ------ Net Income Per Share .................................... $1.33 $1.72 $1.20 ===== ===== =====
See the accompanying notes to consolidated financial statements. 33 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, 1997, 1996 and 1995
Unrealized (Loss) Gain on Additional Available- Total Common Stock Paid- In Treasury for-Sale Retained Stockholders Shares Amount Capital Stock Investments Earnings Equity -------- -------- ------------- ----------- ------------- ------------- ---------- BALANCE, JANUARY 1, 1995.......... 17,336,000 $87,000 $141,398,000 $(130,000) $(2,752,000) $29,554,000 $168,157,000 Issuance of Common Stock in Connection with Stock Plans.... 304,000 1,000 4,297,000 4,298,000 Issuance of Stock in Connection with Acquisition .............. 37,000 87,000 87,000 Income Tax Benefit Realized Upon Exercise of Stock Options...... 1,458,000 1,458,000 Change in Unrealized Holding Gains (Losses), Net of Taxes......... 12,411,000 12,411,000 Net Income........................ 21,304,000 21,304,000 ------------ ----------- ----------- --------- --------- ----------- --------- BALANCE, DECEMBER 31, 1995........ 17,677,000 88,000 147,240,000 (130,000) 9,659,000 50,858,000 207,715,000 Issuance of Common Stock in Connection with Stock Plans.... 233,000 1,000 3,637,000 3,638,000 Income Tax Benefit Realized Upon Exercise of Stock Options...... 1,158,000 1,158,000 Change in Unrealized Holding Gains (Losses), Net of Taxes ........ (9,172,000) (9,172,000) Net Income........................ 31,143,000 31,143,000 ---------- ---------- ------------ --------- ----------- ----------- BALANCE, DECEMBER 31, 1996 ....... 17,910,000 89,000 152,035,000 (130,000) 487,000 82,001,000 234,482,000 Issuance of Common Stock in Connection with Stock Plans.... 563,000 3,000 10,255,000 10,258,000 Purchase of Treasury Stock ....... (5,471,000) (5,471,000) Income Tax Benefit Realized Upon Exercise of Stock Options...... 2,004,000 2,004,000 Change in Unrealized Holding Gains (Losses), Net of Taxes ........ 168,000 168,000 Net Income........................ 24,241,000 24,241,000 ---------- ----------- ------------ ----------- --------- ------------ ----------- BALANCE, DECEMBER 31, 1997 ....... 18,473,000 $92,000 $164,294,000 $(5,601,000) $655,000 $106,242,000 $265,682,000 ========== ======= ============ =========== ======== ============ ============
See the accompanying notes to consolidated financial statements. 34 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------- -------------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income ........................................................ $24,241,000 $ 31,143,000 $ 21,304,000 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Loss on Discontinued Operations ............................... 6,600,000 Depreciation and Amortization.................................. 13,510,000 10,499,000 9,505,000 Provision for Doubtful Accounts................................ 4,283,000 3,057,000 1,694,000 Change in Assets and Liabilities, Net of Effects from Acquisitions: Other Assets................................................... (5,851,000) (16,301,000) (7,542,000) Reinsurance Recoverable ....................................... (5,635,000) 10,164,000 3,464,000 Reserve for Losses and Loss Adjustment Expense ................ 14,923,000 5,458,000 (8,645,000) Other Liabilities ............................................. 6,838,000 6,985,000 1,665,000 Minority Interests............................................. (12,000) (1,746,000) (2,606,000) Accounts Receivable............................................ (12,290,000) (12,469,000) (923,000) Other Current Assets........................................... (11,853,000) (4,671,000) (2,549,000) Medical Claims Payable......................................... 8,974,000 4,973,000 6,341,000 Other Current Liabilities...................................... 15,692,000 15,354,000 8,873,000 ------------ ------------ ----------- Net Cash Provided by Continuing Operations ....................... 52,820,000 52,446,000 37,181,000 Net Cash Used by Discontinued Operations .......................... (2,651,000) ----------------- ----------------- ------------ Net Cash Provided by Operating Activities ..................... 52,820,000 52,446,000 34,530,000 ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures............................................... (55,642,000) (17,927,000) (20,522,000) Property and Equipment Dispositions, Net........................... 772,000 172,000 725,000 Purchase of Available-for-Sale Investments......................... (1,078,396,000) (712,503,000) (368,875,000) Proceeds from Sales/Maturities of Available-for-Sale Investments................................. 1,046,523,000 752,279,000 365,539,000 Purchase of Held-to-Maturity Investments........................... (7,523,000) (25,835,000) (11,735,000) Proceeds from Maturities of Held-to-Maturity Investments........... 10,449,000 39,184,000 20,183,000 Change in Financed Premium Receivable ............................. 15,676,000 Acquisitions, Net of Cash Acquired................................. (3,145,000) (36,310,000) (11,023,000) ------------ ------------ ----------- Net Cash Used for Investing Activities......................... (86,962,000) (940,000) (10,032,000) ------------ ------------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Long-term Borrowing.................................. 25,000,000 1,000,000 2,625,000 Payments on Debt and Capital Leases................................ (2,391,000) (9,601,000) (11,931,000) Purchase of Treasury Stock ........................................ (5,471,000) Exercise of Stock in Connection with Stock Plans................... 10,258,000 3,638,000 3,807,000 ------------ ----------- ---------- Net Cash Provided by (Used for) Financing Activities........... 27,396,000 (4,963,000) (5,499,000) ------------ ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................................... (6,746,000) 46,543,000 18,999,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................... 103,587,000 57,044,000 38,045,000 ------------- ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR................................. $ 96,841,000 $103,587,000 $ 57,044,000 ============ ============ ============
See the accompanying notes to consolidated financial statements. 35 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 1. BUSINESS Business. The consolidated financial statements include the accounts of Sierra Health Services, Inc. ("Sierra") and its subsidiaries (collectively referred to as the "Company"). The Company is a managed health care organization that provides and administers the delivery of comprehensive health care and workers' compensation programs with an emphasis on quality care and cost management. The Company's broad range of managed health care services is provided through its health maintenance organizations ("HMOs"), managed indemnity plans, third-party administrative services programs for employer-funded health benefit plans and workers' compensation medical management programs. Ancillary products and services that complement the Company's managed health care product lines are also offered. Acquisitions. On October 31, 1995, the Company issued approximately 2.7 million shares of its common stock in exchange for all of the outstanding common stock of CII Financial, Inc., and subsidiaries ("CII"). In addition, all outstanding CII stock options were converted into options to purchase up to approximately 540,000 shares of the Company's common stock. The merger was accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of CII for all periods prior to the merger. In November 1996, the Company acquired complete ownership of HMO Texas, LC ("HMO Texas") for $5,040,000. The Company had previously held a 50 percent interest in the Houston-based health plan. The purchase resulted in goodwill of $5,040,000. Effective December 31, 1996 the Company purchased Prime Holdings, Inc. ("Prime"), for approximately $32,219,000 in cash. At December 31, 1996 Prime operated Med One Health Plan, Inc. ("Med One"), a 12,800 member HMO. Prime also served 215,000 people through preferred provider organizations, workers' compensation programs and administrative service products for self-insured employers and union welfare trust funds, primarily in the state of Nevada. The acquisition resulted in goodwill of $31,117,000. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. All significant intercompany transactions and balances have been eliminated. Sierra's wholly owned subsidiaries include Health Plan of Nevada, Inc. ("HPN"), HMO Texas and Med One, all licensed HMOs, Sierra Health and Life Insurance Company, Inc. ("SHL"), a health and life insurance company, Southwest Medical Associates, Inc. ("SMA"), a multi-specialty medical group, CII, a holding company primarily engaged in writing workers' compensation insurance through its wholly owned subsidiaries, Sierra Military Health Services, Inc., ("SMHS"), a company that has been contracted to provide and administer managed care services to certain TRICARE eligible beneficiaries, administrative services companies, a home health care agency, a hospice and a company that provides and manages mental health and substance abuse services. Medical Premiums. Non-Medicare member enrollment is represented principally by employer groups. Medical premiums are billed to each employer group in accordance with negotiated contracts, and such premium revenue is recognized when earned. Unearned premium revenue includes payments under prepaid Medicare contracts with the Health Care Financing Administration ("HCFA") and prepaid HPN, HMO Texas and Med One commercial and SHL indemnity premiums. HPN and HMO Texas offer a prepaid health care program to Medicare recipients. Revenues associated with these Medicare recipients were approximately $186,105,000, $140,611,000, and $111,584,000 in 1997, 1996 and 1995, respectively. 36 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 Specialty Product Revenue. These revenues consist primarily of workers' compensation premiums. Premiums are calculated by formula such that the premium written is earned pro rata over the term of the policy. Also included in specialty product revenues are administrative services and certain ancillary product revenues. Such revenues are recognized in the period in which the service is performed or the period that coverage for services is provided. Premiums written in excess of premiums earned are recorded as an unearned premium revenue liability. Premiums earned include an estimate for earned but unbilled premiums. Professional Fees. Revenue for professional medical services is recorded on the accrual basis in the period in which the services are provided. Such revenue is recorded at established rates net of provisions for estimated contractual and charitable allowances. Medical Expenses. Sierra contracts with hospitals, physicians and other providers of health care under capitated or discounted fee-for-service arrangements including hospital per diems to provide medical care services to enrollees. Capitated providers are at risk for the cost of medical care services provided to the Company's enrollees in the relevant geographic areas; however, the Company is ultimately responsible for the provision of services to its enrollees should the capitated provider be unable to provide the contracted services. Health care costs are recorded in the period when services are provided to enrolled members, including estimates for provider costs which have been incurred as of the balance sheet date but not reported to the Company. Losses on specific contracts, if any, are accrued when measurable. Specialty Product Expenses. This expense consists primarily of losses and loss adjustment expense ("LAE") and policy acquisition costs associated with issued workers' compensation policies. Losses and LAE is based upon the accumulation of cost estimates for reported claims occurring during the period as well as an estimate for losses that have occurred but have not yet been reported. Policy acquisition costs consist of commissions, premium taxes and other underwriting costs, which are directly related to the production and retention of new and renewal business and are deferred and amortized as the related premiums are earned. Should it be determined that future policy revenues and earnings on invested funds relating to existing insurance contracts will not be adequate to cover related costs and expenses, deferred costs are expensed. Also included in specialty product expense are costs associated with administrative services and certain ancillary products. These costs are recorded when incurred. Cash and Cash Equivalents. The Company considers cash and cash equivalents as all highly liquid instruments with a maturity of three months or less at time of purchase. The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of these instruments. Marketable Investments. Short- and long-term investments consist principally of U.S. Government securities and municipal bonds, as well as corporate and mortgage backed securities. Short-term investments have maturities of one year or less. Long-term investments have maturities in excess of one year. Restricted Cash and Investments. Certain subsidiaries are required by state regulatory agencies to maintain certain deposits and must also meet certain net worth and reserve requirements. The Company and its subsidiaries are in compliance with the applicable minimum regulatory and capital requirements. 37 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 Property and Equipment. Property and equipment are stated at cost. Maintenance and repairs that do not improve or extend the life of the respective assets are charged to operations. Depreciation and amortization is computed using the straight-line method over the estimated service lives of the assets or terms of leases if shorter. Estimated useful lives are as follows: Buildings and Improvements 30 years Leasehold Improvements 3 - 10 years Furniture, Fixtures and Equipment 3 - 5 years Data Processing Hardware and Software 3 - 5 years Goodwill. Goodwill has been recorded primarily as a result of various business acquisitions by the Company. Amortization is provided on a straight line basis over periods not exceeding 30 years. The Company evaluates the carrying value of its intangible assets at each balance sheet date. Medical Claims Payable. Medical claims payable includes the estimated cost for unpaid claims for which health care services have been provided to enrollees and a provision of the estimated costs for claims that have occurred but have not been reported. Reserve for Losses and Loss Adjustment Expense. The reserve for losses and LAE consists of estimated costs of each unpaid claim reported to the Company prior to the close of the accounting period, as well as those incurred but not yet reported. The methods for establishing and reviewing such liabilities are continually reviewed and adjustments are reflected in current operations. Income Taxes. The Company accounts for income taxes using the liability method. Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. The Company's temporary differences arise principally from certain net operating losses, accrued expenses, reserves and depreciation. Discontinued Operations. During 1995, CII sold its interest in a subsidiary for a combination of common stock and warrants of the purchaser. This transaction was recorded as a discontinued operation. Concentration of Credit Risk. The Company's financial instruments that are exposed to credit risk consist primarily of investments and accounts receivable. The Company maintains cash and cash equivalents, and short- and long-term investments with various financial institutions. These financial institutions are located in many different geographies, and company policy is designed to limit exposure with any one institution. Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries. These customers are primarily located in the states in which the Company operates. Such operations are principally in California, Colorado, Nevada and Texas. However, the Company is licensed and does business in several other states as well. The Company also has receivables from certain reinsurers. Reinsurance contracts do not relieve the Company from its obligations to enrollees or policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. All reinsurers that the Company has reinsurance contracts with are rated A or better by the A.M. Best Company. 38 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 Recently Issued Accounting Standards. Statement of Financial Accounting No. 130, "Reporting Comprehensive Income" is effective for periods beginning after December 15, 1997 and requires companies to classify items of other comprehensive income by their nature in a financial statement. Management does not believe this statement will have a material impact on the Company's financial statements. Statement of Financial Accounting No. 131, "Disclosures about Segments of an Enterprise and Related Information" is also effective for periods beginning after December 15, 1997 and establishes additional standards for segment disclosures in the financial statements. Management has not determined the effect of this statement on its financial statement disclosure. Estimates and Assumptions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions include, but are not limited to, medical and specialty product expenses. Actual results may materially differ from estimates. Merger, Restructuring and Start-up Expenses. Merger, restructuring and start-up expenses represent the non-recurring incremental costs the Company has incurred in connection with various mergers, acquisitions and planned dispositions as well as costs associated with the Company's proposal to serve eligible TRICARE beneficiaries in Region 1. Costs recorded for restructurings satisfy the definitions and criteria set forth in Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," that are directly related to the restructurings. Reclassifications. Certain amounts in the Consolidated Financial Statements for the years ended December 31, 1996 and 1995 have been reclassified to conform with the current year presentation. 39 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 3. EARNINGS PER SHARE The following table provides a reconciliation of basic and diluted earnings per share ("EPS"):
Dilutive Basic Stock Options Diluted For the Year Ended December 31, 1997: Income from Continuing Operations.............. $24,241,000 $24,241,000 Shares......................................... 18,008,000 276,000 18,284,000 Per Share Amount............................... 1.35 1.33 For the Year Ended December 31, 1996: Income from Continuing Operations.............. 31,143,000 31,143,000 Shares......................................... 17,726,000 401,000 18,127,000 Per Share Amount............................... 1.76 1.72 For the Year Ended December 31, 1995: Income from Continuing Operations.............. 27,904,000 27,904,000 Shares......................................... 17,414,000 320,000 17,734,000 Per Share Amount............................... 1.60 1.57
CII issued convertible subordinated debentures (the "Debentures") due September 15, 2001. Each $1,000 in principal is convertible into 16.921 shares of the Company's common stock at a conversion price of $59.097 per share. The Debentures were not included in the computation of EPS because their effect would be anti-dilutive. 40 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 4. PROPERTY AND EQUIPMENT Property and equipment at December 31 consists of the following:
Classification 1997 1996 Land................................................... $14,296,000 $12,224,000 Buildings and Improvements............................. 109,307,000 63,229,000 Furniture, Fixtures and Equipment...................... 38,692,000 35,785,000 Data Processing Equipment and Software................. 31,452,000 21,034,000 Construction in Progress............................... 4,170,000 7,858,000 Less: Accumulated Depreciation ........................ ( 49,086,000) (40,326,000) ------------ ----------- Net Property and Equipment......................... $148,831,000 $99,804,000 ============ ===========
The following is an analysis of property and equipment under capital leases by classification as of December 31:
Classification 1997 1996 Data Processing Equipment and Software ................ $4,779,000 $1,682,000 Furniture, Fixtures and Equipment...................... 728,000 730,000 Building............................................... 245,000 245,000 Less: Accumulated Depreciation......................... (467,000) (1,496,000) ---------- ---------- Net Property and Equipment.......................... $5,285,000 $1,161,000 ========== ==========
The Company capitalizes interest expense as part of the cost of construction of facilities and the implementation of computer systems. Interest expense capitalized in 1997, 1996 and 1995 was $1,621,000, $245,000 and $183,000, respectively. 5. CASH AND INVESTMENTS Marketable debt investments that the Company has the intention and ability to hold to maturity are stated at amortized cost and categorized as held-to-maturity. The remaining marketable debt and equity investments have been categorized as available-for-sale and as a result are stated at their fair value. Unrealized holding gains and losses on available-for-sale securities are included as a separate component of stockholders' equity until realized. Gross realized gains and losses in 1997 were $2,878,000 and $2,373,000, respectively. Realized gains and losses are calculated using the specific identification method and are included in net income. 41 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 The following table summarizes the Company's short-term, long-term and restricted investments as of December 31, 1997:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-Sale Investments: Classified as Short-term: U.S. Government 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 ============ ========== ========= ============
42 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 The following table summarizes the Company's short-term, long-term and restricted investments as of December 31, 1996:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-Sale Investments: Classified as Short-term: U.S Government and its Agencies..................... $ 14,410,000 $ 25,000 $ 14,435,000 Municipal Obligations................... 36,363,000 164,000 $ 78,000 36,449,000 Corporate Bonds......................... 10,521,000 26,000 3,000 10,544,000 Other. . . . ............... 21,902,000 66,000 211,000 21,757,000 ------------ --------- --------- ----------- Total Short-term..................... 83,196,000 281,000 292,000 83,185,000 ------------ -------- -------- ------------ Classified as Long-term: U.S. Government and its Agencies..................... 67,108,000 131,000 791,000 66,448,000 Municipal Obligations................... 14,049,000 519,000 62,000 14,506,000 Corporate Bonds......................... 32,315,000 199,000 184,000 32,330,000 Other . . . . .......................... 158,000 29,000 129,000 -------------- ------------- ----------- -------------- Total Long-term...................... 113,630,000 849,000 1,066,000 113,413,000 ------------ --------- ---------- ------------ Classified as Restricted: U.S. Government and its Agencies..................... 6,997,000 102,000 12,000 7,087,000 Municipal Obligations................... 2,485,000 149,000 2,634,000 Corporate Bonds......................... 492,000 492,000 Other. . . . . . . . . ................. 1,797,000 1,797,000 -------------- -------------- -------------- ------------- Total Restricted .................... 11,771,000 251,000 12,000 12,010,000 ------------- ---------- ----------- ------------ Total Available-for-Sale ......... $208,597,000 $1,381,000 $1,370,000 $208,608,000 ============ ========== ========== ============ Held-to-Maturity Investments: Classified as Short-term: Municipal Obligations .................. $ 503,000 $ 6,000 $ 509,000 -------------- ------------ ------------- Classified as Long-term: U.S. Government and its Agencies..................... 20,644,000 28,000 $ 460,000 20,212,000 Municipal Obligations................... 6,359,000 456,000 6,815,000 Corporate Bonds......................... 20,066,000 398,000 194,000 20,270,000 ------------ ---------- ---------- ------------ Total Long-term...................... 47,069,000 882,000 654,000 47,297,000 ------------ ---------- ---------- ------------ Classified as Restricted: Municipal Obligations................... 575,000 38,000 613,000 Corporate Bonds......................... 1,063,000 28,000 1,091,000 ------------ ---------- ------------ Total Restricted .................... 1,638,000 66,000 1,704,000 ------------ ---------- ------------ Total Held-to-Maturity ........... $ 49,210,000 $ 954,000 $ 654,000 $ 49,510,000 ============ ========== ========== ============
43 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 The contractual maturities of available-for-sale short-term, long-term and restricted investments at December 31, 1997 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
Amortized Estimated Cost Fair Value Due in one year or less...................................... $ 61,517,000 $ 61,339,000 Due after one year through five years........................ 92,459,000 93,201,000 Due after five years through ten years....................... 66,406,000 66,961,000 Due after ten years.......................................... 21,263,000 21,357,000 ------------ ------------ Total................................................... $241,645,000 $242,858,000 ============ ============
The contractual maturities of held-to-maturity short-term, long-term and restricted investments at December 31, 1997 were as follows:
Amortized Estimated Cost Fair Value Due in one year or less...................................... $ 1,140,000 $ 1,140,000 Due after one year through five years........................ 16,111,000 16,767,000 Due after five years through ten years....................... 8,707,000 9,005,000 Due after ten years.......................................... 18,375,000 18,543,000 ----------- ----------- Total................................................... $44,333,000 $45,455,000 =========== ===========
Of the cash and cash equivalents that total $96,841,000 in the accompanying Consolidated Balance Sheet at December 31, 1997, $82,194,000 is limited for use only by the Company's regulated subsidiaries. Such amounts are available for transfer to Sierra from the regulated subsidiaries only to the extent that they can be remitted in accordance with terms of existing management agreements and by dividends which customarily must be approved by regulating state insurance departments. The remainder is available to Sierra on an unrestricted basis. 6. REINSURANCE In the normal course of business, the Company seeks to reduce potential losses that may arise from catastrophic events that cause unfavorable underwriting results by reinsuring certain levels of such risk with other reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsurance policy. The Company is covered under medical reinsurance agreements that provide coverage for 50% - 90% of hospital and other costs in excess of $200,000 per case, up to a maximum of $2,000,000 per member per lifetime for both the managed indemnity and HMO subsidiaries. In addition, certain of the Company's HMO members are covered by an excess catastrophe reinsurance contract. Reinsurance premiums of $3,156,000, $3,235,000 and $2,827,000 net of reinsurance recoveries of $1,729,000, $2,276,000 and $1,133,000 are included in medical expense for 1997, 1996 and 1995, respectively. In addition, SHL maintains reinsurance on certain other insurance products. 44 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 CII also has reinsurance treaties in effect. The reinsurers have assumed the liability on that portion of workers' compensation claims between $350,000 and $60,000,000 per occurrence for 1997 and 1996 and between $250,000 and $60,000,000 per occurrence for 1995. At December 31, 1997 and 1996, the amount of reinsurance recoverable for unpaid losses and loss adjustment expense was $21,056,000 and $15,676,000, respectively. The amount of reinsurance receivable for paid losses and loss adjustment expense was $358,000 and $103,000, respectively. Reinsurance contracts do not relieve the Company from its obligations to enrollees or policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. All reinsurers that the Company has reinsurance contracts with are rated A or better by the A.M. Best Company. The following table provides workers' compensation reinsurance information for the three years ended December 31, 1997:
Change in Recoveries Recoverable on Paid on Unpaid Premiums Losses/LAE Losses/LAE Ceded 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 ========== ============ ========== 1995: General Reinsurance Corporation................. $2,426,000 $ (3,472,000) $3,727,000 Others ......................................... 300,000 --------------- ------------------ ----------- Total .......................................... $2,426,000 $ (3,472,000) $4,027,000 ========== ============ ==========
45 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 7. LOSSES AND LOSS ADJUSTMENT EXPENSES The following table provides a reconciliation of the beginning and ending reserve balances for unpaid losses and LAE. There can be no assurances that favorable development, or the magnitude of the development, will continue in the future.
Year ended December 31, 1997 1996 1995 --------------- --------------- --------- Net Beginning Losses and LAE Reserve ..................... $172,100,000 $156,447,000 $161,620,000 Net Provision for Insured Events Incurred in: Current Year .......................................... 102,301,000 101,401,000 75,978,000 Prior Years............................................ (8,970,000) (15,284,000) (20,079,000) ------------ ------------- ------------- Total Net Provision.................................. 93,331,000 86,117,000 55,899,000 ------------ ------------- ------------- Net Payments for Losses and LAE Attributable to Insured Events Incurred in: Current Year .......................................... 26,811,000 24,733,000 16,553,000 Prior Years............................................ 56,977,000 45,731,000 44,519,000 ------------ ------------ ------------ Total Net Payments .................................. 83,788,000 70,464,000 61,072,000 ------------ ------------ ------------ Net Ending Losses and LAE Reserve ........................ 181,643,000 172,100,000 156,447,000 Reinsurance Recoverable .................................. 21,056,000 15,676,000 25,871,000 ------------ ------------ ------------ Gross Ending Losses and LAE Reserve ...................... $202,699,000 $187,776,000 $182,318,000 ============ ============ ============
46 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 8. LONG-TERM DEBT Long-term debt at December 31 consists of the following:
1997 1996 -------------- ---------- 7 1/2% Convertible Subordinated Debentures ........................ $54,467,000 $54,497,000 Revolving Loan ...................................................... 25,000,000 0 7 3/8% Mortgage Note ............................................... 5,833,000 7,833,000 Adjustable Rate Mortgage Note ....................................... 3,116,000 3,167,000 Other................................................................ 7,151,000 2,887,000 ------------ ------------ Total.............................................................. 95,567,000 68,384,000 Less Current Portion................................................. (4,726,000) (2,195,000) ----------- ----------- Long-term Debt....................................................... $90,841,000 $66,189,000 =========== ===========
7 1/2% Convertible Subordinated Debentures. In September 1991 CII issued convertible subordinated debentures (the "Debentures") due September 15, 2001. The Debentures bear interest at 7-1/2% which is due semi-annually on March 15 and September 15. Each $1,000 in principal is convertible into 16.921 shares of the Company's common stock at a conversion price of $59.097 per share. Unamortized issuance costs of $803,000 are included in other assets on the balance sheet and are being amortized over the life of the Debentures. Accrued interest on the Debentures as of December 31, 1997 and 1996 was $1,191,000 and $1,192,000, respectively. The Debentures are redeemable by CII, in whole or in part, at redemption prices ranging from 102.25% in 1998 to 100.75% in 2000, plus accrued interest. The Debentures are general unsecured obligations of CII only and were not assumed or guaranteed by Sierra. During the twelve months ended December 31, 1997 and 1996, the Company purchased $30,000 and $2,303,000, respectively, of the debentures on the open market. Revolving Loan. As of December 31, 1997, the Company has drawn $25.0 million on its $100.0 million line of credit ("LOC") for general corporate purposes at a current interest rate of 6.3%. The remaining line of credit may be used for general corporate purposes, including acquisitions, and may be available for additional working capital, if necessary. 7 3/8% Mortgage Note. In December 1993, the Company obtained a loan from Bank of America, Nevada. This loan is secured by a deed of trust, assignment of rents and leases, and a security agreement and fixture filing covering a portion of the Company's administrative headquarters complex and underlying real property. In January 1998, the Company obtained a $15,000,000 loan from Bank of America, Nevada at an interest rate of 7.11%. This loan is secured by a deed of trust, assignment of rents and leases, and a security agreement and fixture filing covering the newly constructed portion of the Company's administrative headquarters complex and underlying real property. This note is not reflected in the Company's financial statements at December 31, 1997. Adjustable Rate Mortgage Note. The Company has a mortgage which has an adjustable rate with an interest margin of 3% over the Federal Home Loan Bank Board 11th District Cost of Funds Index, a maximum interest rate of five percentage points above the initial rate of 11.85% and a minimum interest rate of 8%. The interest rate at December 31, 1997 was 8.0%. This mortgage is secured by a medical facility. 47 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 Other. The Company has obligations under capital leases with interest rates from 6.3% to 13.4%. In addition, the Company has a term loan due July 1998 including cumulative interest at 7.0%. Scheduled maturities of the Company's notes payable and future minimum payments under capital leases, together with the present value of the net minimum lease payments at December 31, 1997, are as follows:
Obligations Notes Under Capital Year ending December 31, Payable Leases 1998................................................. $ 3,846,000 $1,247,000 1999................................................. 5,058,000 1,260,000 2000................................................. 2,000,000 1,301,000 2001................................................. 54,467,000 1,137,000 2002 ................................................ 25,000,000 1,133,000 Thereafter........................................... -- 401,000 -------------- ---------- Total............................................. $90,371,000 6,479,000 =========== Less: Amounts Representing Interest................. (1,283,000) ---------- Present Value of Minimum Lease Payments.............. $5,196,000 ==========
The fair value of the Debentures at December 31, 1997 was $51,744,000 which was determined based on the quoted market price at December 31, 1997. Excluding the Debentures, the fair value of long-term debt, including the current portion, is $41,410,000 based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. 48 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 9. INCOME TAXES A summary of the provision for income taxes for the years ended December 31, 1997, 1996, and 1995 is as follows:
1997 1996 1995 ------------ ------------ -------- Provision for Income Taxes: Current..................................... $5,528,000 $11,860,000 $11,736,000 Deferred.................................... (2,294,000) (1,389,000) 462,000 ---------- ---------- ----------- $3,234,000 $10,471,000 $12,198,000 ========== =========== ===========
The following reconciles the difference between the 1997, 1996 and 1995 current and statutory provision for income taxes:
1997 1996 1995 ------------ ------------ -------- Statutory Rate .................................. 35% 35% 35% Tax Preferred Investments ....................... (5) (6) (9) Change in Valuation Allowance ................... (17) (6) (2) Non-deductible Acquisition Costs ................ 5 Other ....................................... (1) 2 1 -- --- --- Provision for Income Taxes ................. 12% 25% 30% == === ===
49 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 The tax effects of significant items comprising the Company's net deferred tax assets are as follows:
1997 1996 -------------- --------- Deferred Tax Assets: Medical and Losses and LAE Reserves ...................... $ 7,428,000 $ 5,277,000 Accruals Not Currently Deductible......................... 7,269,000 5,334,000 Compensation Accruals .................................... 2,344,000 2,960,000 Bad Debt Allowances....................................... 2,041,000 2,946,000 Loss Carryforwards and Credits............................ 11,543,000 13,389,000 Other .................................................... 872,000 803,000 ----------- ------------ 31,497,000 30,709,000 ----------- ----------- Deferred Tax Liabilities: Deferred Policy Acquisition Costs ........................ 596,000 613,000 Depreciation and Amortization ............................ 4,872,000 4,102,000 Other .................................................... 1,066,000 825,000 ----------- ------------ 6,534,000 5,540,000 ----------- ----------- Net Deferred Tax Asset Before Valuation Allowance.................................... 24,963,000 25,169,000 Valuation Allowance ...................................... (6,266,000) (10,929,000) ------------ ----------- Net Deferred Tax Asset ................................... $18,697,000 $14,240,000 =========== ===========
At December 31, 1997, the Company had approximately $27,048,000 of regular tax net operating loss carryforwards which are limited to use at the rate of approximately $7,021,000 per year during the carryforward period. The net operating loss carryforwards can be used to reduce future taxable income until they expire through the year 2011. The Company also has California net operating loss carryforwards of approximately $7,492,000 which expire through the year 2000. In addition to these net operating loss carryforwards, the Company has alternative minimum tax credits of approximately $848,000 which can be used to reduce regular tax liabilities in future years. There is no expiration date for the alternative minimum tax credits. The majority of the above items are subject to both annual and separate company limitations required by the Internal Revenue Code. Due to the above referenced limitations, a valuation allowance has been set up to reflect the Company's inability to use tax benefits from recent acquisitions currently or in the near future. As the benefits are realizable by the Company, the valuation allowance will be reduced as required by Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). For the years ended December 31, 1997 and 1996, the Company was able to realize a portion of the tax benefits for which a valuation allowance had been previously established. As a result, the Company reduced its valuation allowance by $4,663,000 and $2,685,000 for the years ended December 31, 1997 and 1996, respectively. The valuation allowance of $6,266,000 at December 31, 1997 is considered necessary under the more likely than not criteria required by FAS 109. 50 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 10. COMMITMENTS AND CONTINGENCIES Leases. The Company is the lessee under several operating leases, most of which relate to office facilities and equipment. The rentals on these leases are charged to expense over the lease term as the Company becomes obligated for payment and, where applicable, provide for rent escalations based on certain costs and price index factors. The following is a schedule, by year, of the future minimum lease payments under existing operating leases:
Year Ending December 31, 1998................................................... $6,894,000 1999................................................... 6,351,000 2000................................................... 5,745,000 2001................................................... 5,153,000 2002 .................................................. 4,832,000 Thereafter............................................. 7,089,000 ------------ Total............................................. $36,064,000 ===========
Rent expense totaled $5,827,000, $4,945,000 and $4,942,000 in 1997, 1996 and 1995, respectively. Litigation and Legal Matters. The Company is subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these legal proceedings will not materially impact the consolidated financial statements of the Company. 11. EMPLOYEE BENEFIT PLANS Defined Contribution Plan. The Company has a defined contribution pension and 401(k) plan (the "Plan") for its employees. The Plan covers all employees who meet certain age and length of service requirements. The Company contributes 2% of eligible employees' compensation and matches 50% of a participant's elective deferral up to a maximum of either 10% of an employee's compensation or the maximum allowable under current IRS statute. Expense under the plan totaled $3,929,000, $3,216,000 and $2,516,000 in 1997, 1996 and 1995, respectively. Supplemental Retirement Plan. The Company has Supplemental Retirement Plans (the "SRPs") for certain officers, directors and highly compensated employees. The SRPs are non-qualified deferred compensation plans through which participants may elect to postpone the receipt and taxation of all or a portion of their salary and bonuses received from the Company. The Company also matches 50% of those contributions that participants are restricted from deferring, if any, under the Company's pension and 401(k) plan. As contracted with the Company, the participants or their designated beneficiaries may begin to receive benefits under the SRPs upon participant death, disability, retirement, termination of employment or certain other circumstances including financial hardship. Executive Life Insurance Plan. Effective July 1, 1997 the Company and certain officers and key executives selected and approved by the Sierra Board of Directors entered into split dollar life insurance agreements whereby the Company has funded the insurance premiums. The premiums paid by the Company will be reimbursed upon the occurrence of certain events as specified in the contract. 51 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 Supplemental Executive Retirement Plan. Effective July 1, 1997, the Company adopted a defined benefit retirement plan covering certain key employees. The Company is funding the benefits through the purchase of certain life insurance policies. Benefits are based on, among other things, the employee's average earnings over the five-year period prior to retirement or termination, and length of service. Benefits attributable to service prior to the adoption of the plan are amortized over the estimated remaining service period for those employees participating in the plan. A reconciliation of ending year balances is as follows:
Change in Benefit Obligation: Projected Benefit Obligation at Inception .................... $9,008,000 Service Cost ................................................. 132,000 Interest Cost ................................................ 375,000 Benefits Paid ................................................ Benefit Obligation at December 31, 1997 ...................... 9,515,000 ---------- Change in Plan Assets: Actual Return on Plan Assets ................................. (308,000) Company Contributions ........................................ 2,180,000 Benefits Paid ................................................ Fair Value of Plan Assets at December 31, 1997 ............... 1,872,000 Funded Status of the Plan .................................... (7,643,000) Unrecognized Prior Service Credit ............................ 8,647,000 ----------- Total Recognized ............................................. $1,004,000 ========== Total Recognized Amounts in the Financial Statements Consist of: Unrecognized Net Loss ........................................ $ (394,000) Accrued Benefit Liability .................................... (2,964,000) Intangible Asset ............................................. 4,362,000 ---------- Total ........................................................ $1,004,000 ========== Assumptions as of December 31, 1997 Discount Rate ................................................ 7.0% Expected Return on Plan Assets ............................... 8.0% Rate of Compensation Increase ................................ 5.0% Benefit Cost ..................................................... $ 781,000
Other CII Plans. Prior to the acquisition of CII, CII maintained various supplemental benefit, executive benefit, and profit sharing plans. Subsequent to the merger all such plans have been, or are in the process of being, discontinued, terminated, or merged into the Company's existing plans. During the year ended December 31, 1995, CII expensed $1,574,000 under the various plans. Eligible CII employees are included in the Company's plans discussed above. 52 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 12. CAPITAL STOCK PLANS Stockholders' Rights Plan. Each share of Sierra common stock, par value $.005 per share, contains one right (a "Right"). Each Right entitles the registered holder to purchase from Sierra a unit consisting of one one-hundredth of a share of the Series A Junior Participating Preferred Shares (a "Unit"), par value $.01 per share, of Sierra, or a combination of securities and assets of equivalent value, at a purchase price of $100.00 per Unit, subject to adjustment. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire Sierra on terms not approved by Sierra's Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since Sierra may redeem the Rights at the price of $.02 per Right prior to the time that a person or group has acquired beneficial ownership of 20% or more of Sierra common stock. Stock Option Plans. During 1995 the shareholders of the Company approved the 1995 Long-Term Incentive Plan ("LTIP"). The LTIP provides for the granting of Options, Stock, and other stock-based awards. Under the LTIP 1.2 million shares were reserved along with remaining shares reserved from certain previous stock option and capital accumulation plans which have not been and will not be issued under those plans. Awards are granted by a committee appointed by the Board of Directors. Options become exercisable at such times and in such installments as set by the committee. Under this plan, the exercise price of each option equals the market price of the Company's stock on the date of grant. Options currently granted under the LTIP vest for the employees at a rate of 20% - 25% per year. Options expire one year after the end of the vesting period. In addition, in 1995 the shareholders of the Company approved the 1995 Non-Employee Directors' Stock Plan ("Directors' Plan"). Under the Directors' Plan non-employee directors are granted an option to purchase 3,000 shares of common stock. Options are granted annually on January 20 at the current fair market value and become exercisable over a five-year period. The Company reserved 60,000 shares under the Directors' Plan. 53 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 The following table reflects the activity of the stock option plans:
Number of Option Weighted Shares Price Average Price Outstanding January 1, 1995................. 1,272,000 $ 2.44 - $28.63 $16.29 Granted.................................. 882,000 14.86 - 31.75 26.30 Exercised................................ (241,000) 2.44 - 21.00 12.14 Canceled................................. (53,000) 3.38 - 28.63 17.49 ---------- Outstanding December 31, 1995............... 1,860,000 3.38 - 31.75 21.54 Granted.................................. 320,000 25.00 - 35.00 26.15 Exercised................................ (166,000) 3.38 - 28.63 12.57 Canceled................................. (15,000) 10.69 - 31.75 21.70 ---------- Outstanding December 31, 1996 .............. 1,999,000 7.50 - 35.00 23.01 Granted.................................. 306,000 24.38 - 36.75 34.73 Exercised................................ (470,000) 7.50 - 31.75 17.71 Canceled................................. ( 65,000) 9.46 - 35.00 26.00 --------- Outstanding December 31, 1997 .............. 1,770,000 9.46 - 36.75 26.30 ========= Exercisable at December 31, 1997 ........... 696,000 $ 9.46 - $36.75 $23.79 ========= Available for Grant at December 31, 1997 ....................... 402,000 =======
The following table summarizes information about stock options outstanding at December 31, 1997:
Weighted-Average Weighted-Average Range of Exercise Remaining Options Exercise Price Prices Contractual Life Outstanding Exercisable Outstanding Exercisable $ 9.46 - $10.69 156 days 29,000 29,000 $ 9.76 $ 9.76 14.86 - 21.00 598 days 244,000 154,000 17.15 17.47 24.38 - 31.75 1,385 days 1,230,000 508,000 26.35 26.39 34.50 - 36.75 1,762 days 267,000 5,000 36.60 34.98
Employee Stock Purchase Plan. The Company has an employee stock purchase plan (the "Purchase Plan") whereby employees may purchase newly issued shares of stock through payroll deductions at 85% of the fair market value of such shares on specified dates as defined in the Purchase Plan. As of December 31, 1997, the Company had 331,000 shares reserved for purchase under the Purchase Plan. During 1997, a total of 92,000 shares were purchased at a price of $20.93 per share. During January 1998, 48,000 shares were issued to employees at $26.62 per share in connection with the Purchase Plan. 54 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 Accounting for Stock-Based Compensation. At December 31, 1997, the Company had three stock-based compensation plans, which are described above. The Company uses the intrinsic value method in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans nor the Purchase Plan. Had compensation cost for the Company's three stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
For the Years Ended 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Net Income As reported $24,241,000 $31,143,000 $21,304,000 Pro forma 22,177,000 29,703,000 20,203,000 Net Income Per Share As reported $1.35 $1.76 $1.22 Pro forma 1.23 1.68 1.16 Net Income Per Share Assuming Dilution As reported $1.33 $1.72 $1.20 Pro forma 1.21 1.64 1.14
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield of 0% for all years; expected volatility of 35%, 29% and 34%; risk-free interest rates of 5.89%, 5.92%, and 6.12%; and expected lives of four years for all years. The weighted fair value of options granted in 1997, 1996 and 1995 was $12.40, $8.47 and $9.49, respectively. The fair value of the look-back option implicit in each offering of the Purchase Plan is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield of 0% for all years; expected volatility of 35%, 29% and 34%; risk-free interest rates of 5.32%, 5.29% and 6.07%; and expected lives of six months for all years. Due to the fact that the Company's stock option programs vest over many years and additional awards are made each year, the above pro forma numbers are not indicative of the financial impact had the disclosure provisions of FAS 123 been applicable to all years of previous option grants. The above numbers do not include the effect of options granted prior to 1995. 55 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 13. STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION Supplemental statements of cash flows information for the years ended December 31, is presented below:
1997 1996 1995 ------------ ------------ -------- Cash Paid During the Year for Interest (Net of Amount Capitalized)............................... $4,463,000 $5,275,000 $ 6,430,000 Cash Paid During the Year for Income Taxes.................... 7,943,000 7,966,000 10,509,000 Noncash Investing and Financing Activities: Liabilities Assumed in Connection with Corporate Acquisitions................................. 195,000 7,890,000 3,113,000 Reductions to Funds Withheld by Ceding Insurance Company and Future Policy Benefits........................................ 8,471,000 773,000 990,000 Stock Issued for Exercise of Options and Related Tax Benefits............................... 2,004,000 1,158,000 1,949,000 Assumption of Liability in Connection with Land Purchase ......................................... -- -- 1,956,000 Additions to Capital Leases............................... 4,574,000 -- 278,000 Stock and Warrants Received on Sale of Discontinued Operations ............................ -- -- 1,000,000
14. MERGER, RESTRUCTURING AND START-UP EXPENSES During 1997, the Company recorded and paid expenses of approximately $11,000,000, $8,360,000 after tax, for merger-related costs. On March 18, 1997, the Company announced it had terminated its merger agreement with PCA. The original agreement had been entered into in November 1996. On March 18, 1997, prior to termination of the merger agreement, PCA filed a lawsuit against the Company in the United States District Court for the Southern District of Florida (the "District Court"), seeking, among other things, specific performance of the merger agreement and monetary damages. The lawsuit has been dismissed for failure to join a necessary party. The Company has also initiated a lawsuit in the Court of Chancery of the State of Delaware seeking a declaratory judgment as well as other remedies. The Company intends to vigorously pursue all remedies available to it; however, there can be no assurance that the Company will prevail in such litigation. During the third quarter of 1997, SMHS was notified it had been awarded a multi-year triple-option health benefits ("TRICARE") managed care contract by the Department of Defense to serve eligible beneficiaries in Region 1. This region includes more than 600,000 beneficiaries in 13 northeastern states and the District of Columbia. Development expenses of $18,350,000, $10,600,000 net of taxes, were recorded in the third quarter, primarily for expenses associated with the Company's proposal to serve TRICARE beneficiaries in Region 1. Such expenses had been deferred until award notification. SMHS is currently in the implementation period of the contract with actual health care delivery to commence on June 1, 1998. SMHS subcontracts for health care delivery, including some of the risk, for parts of the TRICARE contract. 56 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 SMHS was notified on February 13, 1998 that the United States General Accounting Office ("GAO") sustained a competitor's protest of the contract award for TRICARE Managed Care Support Region 1 and recommended that the contract be re-bid. The TRICARE Management Activity ("TMA"), along with the Company, has filed a motion requesting that the GAO reconsider its recommendation. If the GAO does not change its recommendation and the TMA follows the recommendation, there are several possible outcomes, including litigation. The Company currently anticipates providing health care delivery for one year of the contract should a re-bid occur. During 1995, as part of the Company's clinical expansion and growth efforts, the Company acquired a medical facility in Mohave County, Arizona, across the border from Laughlin, Nevada. This medical facility included a 12-bed hospital. During 1996 the Company implemented a plan to exit the hospital business and has actively pursued buyers for this business. As a result of this plan, the Company recorded a charge of $3,814,000 ($2,860,000 after tax) in the fourth quarter of 1996, primarily to recognize the estimated costs to dispose of the hospital. As of December 31, 1997, the Company has been unable to reach an agreement to sell the hospital. As a result of higher than expected claim and administrative costs relative to premium rates that can be obtained in certain regional insurance operations and the Company's inability to negotiate adequate provider contracts due to its limited presence in some of these markets, the Company adopted a plan to restructure certain insurance operations during the third quarter of 1996 and recorded a charge of $8,250,000 ($6,187,000 after tax). The plan will allow the Company to focus on more favorable operating markets and improve operating efficiencies. The Company believes that this restructuring, over time, will result in improved cash flow and operating cost savings. These restructuring costs included cancellation of certain contractual obligations of $6,000,000, lease termination costs of $1,500,000 and approximately $750,000 of other costs. In connection with the merger and integration of CII, $11,614,000 of costs and expenses ($9,677,000 after tax) were incurred and charged to expense in the fourth quarter of 1995. These costs include $6,400,000 in professional fees, $1,700,000 for the write-off of certain redundant hardware and software, $1,300,000 for the cancellation of certain contractual obligations and other settlement costs, $900,000 related to transition and severance-related payments and approximately $1,314,000 for other integration costs. 57 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 15. UNAUDITED QUARTERLY INFORMATION (Amounts in thousands, except per share data)
March June September December 31 30 30 31 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 .................................. .08 .59 .03 .65 Earnings Per Share Assuming Dilution ................ .08 .58 .03 .64 Year Ended December 31, 1996: Operating Revenues................................... $136,012 $141,362 $146,245 $151,792 Operating Income..................................... 14,375 14,520 6,137 9,405 Income From Continuing Operations Before Income Taxes .............................. 13,566 13,688 5,422 8,938 Net Income........................................... 10,164 10,211 4,067 6,701 Earnings Per Share .................................. .58 .58 .23 .38 Earnings Per Share Assuming Dilution ................ .56 .56 .22 .37
58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "Election of Directors" in Sierra's Proxy Statement for its 1998 Annual Meeting of Stockholders, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Compensation of Executive Officers" in Sierra's Proxy Statement for its 1998 Annual Meeting of Stockholders, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in Sierra's Proxy Statement for its 1998 Annual Meeting of Stockholders, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Relationships and Related Transactions" in Sierra's Proxy Statement for its 1998 Annual Meeting of Stockholders, is incorporated herein by reference. 59 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements are included in Part II, Item 8 of this Report: Page Independent Auditors' Report................................... 31 Consolidated Balance Sheets at December 31, 1997 and 1996...... 32 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995............................ 33 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995........ 34 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995............................ 35 Notes to Consolidated Financial Statements..................... 36 (a)(2) Financial Statement Schedules: Schedule I - Condensed Financial Information of Registrant..... S-1 Schedule V - Supplemental Information Concerning Property-Casualty Insurance ...................... S-4 Section 403.04 b - Reconciliation of Beginning and Ending Loss and Loss Adjustment Expense Reserves and Exhibit of Redundancies (Deficiencies) .. S-5 All other schedules are omitted because they are not applicable, not required, or because the required information is in the consolidated financial statements or notes thereto. (a)(3) and (c) The following exhibits are filed as part of, or incorporated by reference into, this Report as required by Item 601 of Regulation S-K: (3.1) Articles of Incorporation, together with amendments thereto to date, incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. (3.2) Certificate of Division of Shares into Smaller Denominations of the Registrant, incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (3.3) Amended and Restated Bylaws of the Registrant, as amended through December 12, 1997. (4.1) Rights Agreement, dated as of June 14, 1994, between the Registrant and Continental Stock Transfer & Trust Company, incorporated by reference to Exhibit 3.4 to the Registrant's Registration Statement on Form S-3 effective October 11, 1994 (Reg. No. 33- 83664). 60 (4.2) Specimen Common Stock Certificate, incorporated by reference to Exhibit 4(e) to the Registrant's Registration Statement on Form S-8 as filed and effective on August 5, 1994 (Reg. No. 33-82474). (4.3) Form of Indenture, of 7 1/2% convertible subordinated debentures due 2001 from CII Financial, Inc. to Manufacturers Hanover Trust Company as Trustee dated September 15, 1991, incorporated by reference to Exhibit 4.2 of Post-Effective Amendment No. 1 on Form S-3 to Registration Statement on Form S-4 dated October 6, 1995 (Reg. No. 33-60591). (4.4) First Supplemental Indenture between CII Financial, Inc., Sierra Health Services, Inc. and Chemical Bank as Trustee, dated as of October 31, 1995, to Indenture dated September 15, 1991, incorporated by reference to Exhibit 4.3 of Post-Effective Amendment No. 2 on Form S-3 to Registration Statement on Form S-4 dated October 31, 1995 (Reg. No. 33- 60591). (10.1) Administrative Services agreement between Health Plan of Nevada, Inc. and the Registrant dated December 1, 1987, incorporated by reference to Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (10.2) Administrative Services agreement between Sierra Health and Life Insurance Company, Inc. and the Registrant dated April 1, 1989, incorporated by reference to Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (10.3) Agreement between Health Plan of Nevada, Inc. and the United States Health Care Financing Administration dated July 24, 1992, incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1992. (10.4) Credit Agreement dated as of April 11, 1996 among Sierra Health Services, Inc., as Borrower, Bank of America National Trust and Savings Association, as Agent and Issuing Bank, and the Other Financial Institutions Party thereto for a $50.0 million Line of Credit, incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996. (10.5) First Amendment, dated as of May 31, 1997, to Credit Agreement and Waiver among Sierra Health Services, Inc., as Borrower, Bank of America National Trust and Savings Association, as Agent and Issuing Bank and the Other Financial Institutions Party Hereto, originally dated as of April 11, 1996 and filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the three-month period ended March 31, 1996, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997. (10.6) Compensatory Plans, Contracts and Arrangements. (1) Employment Agreement with Jonathon W. Bunker dated November 15, 1997. (2) Employment Agreement with Frank E. Collins dated November 15, 1997. (3) Employment Agreement with William R. Godfrey dated November 15, 1997. (4) Employment Agreement with Laurence S. Howard dated November 15, 1997. 61 (5) Employment Agreement with Anthony M. Marlon, M.D. dated November 15, 1997. (6) Employment Agreement with Erin E. MacDonald dated November 15, 1997. (7) Employment Agreement with Michael A. Montalvo dated November 15, 1997. (8) Employment Agreement with Marie H. Soldo dated November 15, 1997. (9) Employment Agreement with James L. Starr dated November 15, 1997. (10) Draft of Split Dollar Life Insurance Agreement effective as of July 1, 1997, by and between Sierra Health Services, Inc., and Jonathon W. Bunker, Ria Marie Carlson, Frank E. Collins, William R. Godfrey, Laurence S. Howard, Erin E. MacDonald, Anthony M. Marlon, M.D., Kathleen M. Marlon, Michael A. Montalvo, John A. Nanson, M.D., Marie H. Soldo, and James L. Starr, incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997. (11) Sierra Health Services, Inc. Deferred Compensation Plan Effective May 1, 1996 as Amended and Restated Effective July 1, 1997, dated as of July 1, 1997, incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997. (12) Sierra Health Services, Inc. Supplemental Executive Retirement Plan Effective as of July 1, 1997, dated as of July 7, 1997, incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997. (13) The Registrant's Second Amended and Restated 1986 Stock Option Plan as amended to date, incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (14) The Registrant's Second Restated Capital Accumulation Plan, as amended to date, incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (15) Protocols for cash bonus awards, incorporated by reference to Exhibit 10.17 (5) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (16) The Company's Long-Term Incentive Plan incorporated by reference to Form S-8 filed July 7, 1995. (10.7) Agreement and Plan of Merger dated as of June 12, 1995 among the Registrant, Health Acquisition Corp., and CII Financial, Inc., incorporated by reference to the Report on Form 8-K dated June 13, 1995, as amended. (10.8) Agreement between the Registrant and First Option Health Plan to develop and implement a Medicare risk product in New Jersey dated January 6, 1995, incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 62 (10.9) Loan Agreement dated August 11, 1997 between the Company and Anthony M. Marlon for a revolving credit facility in the maximum aggregate amount of $3,000,000, incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. (21) Subsidiaries of the Registrant (listed herein): There is no parent of the Registrant. The following is a listing of the active subsidiaries of the Registrant: Jurisdiction of Incorporation Sierra Health and Life Insurance Company, Inc. California Health Plan of Nevada, Inc. Nevada Sierra Healthcare Options, Inc. and Subsidiary Nevada Behavioral Healthcare Options, Inc. Nevada Family Health Care Services Nevada Family Home Hospice, Inc. Nevada Southwest Medical Associates, Inc. Nevada Sierra Medical Management, Inc. and Subsidiaries Nevada Southwest Realty, Inc. Nevada Sierra Health Holdings, Inc. (HMO Texas, L.C.) Texas Sierra Texas Systems, Inc. Texas CII Financial, Inc., and Subsidiaries California Northern Nevada Health Network, Inc. Nevada Intermed, Inc. Arizona Prime Holdings, Inc. and Subsidiaries Nevada Sierra Military Health Services, Inc. Nevada Sierra Home Medical Products, Inc. Nevada (23.1) Consent of Deloitte & Touche LLP (27.1) Financial Data Schedule -- 1997 (27.2) Financial Data Schedule -- 1996, 1995 (99) Registrant's current report on Form 8-K dated March 19, 1998, incorporated herein. All other Exhibits are omitted because they are not applicable. (b) Reports on Form 8-K None (d) Financial Statement Schedules The Exhibits set forth in Item 14 (a)(2) are filed herewith. 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereto duly authorized. SIERRA HEALTH SERVICES, INC. By: /S/ ANTHONY M. MARLON Anthony M. Marlon, M.D. Date: March 25, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date /S/ ANTHONY M. MARLON, M.D. Chief Executive Officer March 25, 1998 - --------------------------------- Anthony M. Marlon, M.D. and Chairman of the Board (Chief Executive Officer) /S/ JAMES L. STARR Senior Vice President of Finance, March 25, 1998 - --------------------------------------- James L. Starr Chief Financial Officer, and Treasurer (Chief Accounting Officer) /S/ ERIN E. MACDONALD _ President and March 25, 1998 - --------------------------------------- Erin E. MacDonald Chief Operating Officer Director /S/ PAUL H. PALMER Assistant Vice President March 25, 1998 - --------------------------------------- Paul H. Palmer and Corporate Controller /S/ CHARLES L. RUTHE Director March 25, 1998 - --------------------------------------- Charles L. Ruthe /S/ WILLIAM J. RAGGIO Director March 25, 1998 - --------------------------------------- William J. Raggio /S/ THOMAS Y. HARTLEY Director March 25, 1998 - --------------------------------------- Thomas Y. Hartley
64 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS - Parent Company Only
December 31, 1997 1996 --------------- ---------- CURRENT ASSETS: Cash and Cash Equivalents .......................................... $ 15,115,000 $ 17,761,000 Short-term Investments.............................................. 2,090,000 12,055,000 Prepaid Expenses and Other Current Assets........................... 10,415,000 8,103,000 ------------ ------------ Total Current Assets.......................................... 27,620,000 37,919,000 PROPERTY AND EQUIPMENT - NET ............................................ 55,251,000 32,596,000 EQUITY IN NET ASSETS OF SUBSIDIARIES .................................... 204,204,000 145,939,000 NOTES RECEIVABLE FROM SUBSIDIARIES ...................................... 9,744,000 9,804,000 LONG-TERM INVESTMENTS ................................................... 86,000 6,021,000 GOODWILL AND OTHER INTANGIBLE ASSETS .................................... 2,362,000 14,896,000 OTHER ................................................................... 24,081,000 10,330,000 ------------ ------------ TOTAL ASSETS ............................................................ $323,348,000 $257,505,000 ============ ============ CURRENT LIABILITIES: Accounts Payable and Other Accrued Liabilities ..................... $ 16,757,000 $ 13,268,000 Current Portion of Long-term Debt .................................. 2,349,000 444,000 ----------- ------------ Total Current Liabilities .................................... 19,106,000 13,712,000 LONG-TERM DEBT (Less Current Portion).................................... 25,858,000 3,241,000 OTHER LIABILITIES ....................................................... 12,702,000 6,070,000 ------------ ------------- TOTAL LIABILITIES ....................................................... 57,666,000 23,023,000 ------------ ------------ STOCKHOLDERS' EQUITY: Capital Stock ...................................................... 92,000 89,000 Additional Paid-in Capital ......................................... 164,294,000 152,035,000 Treasury Stock ..................................................... (5,601,000) (130,000) Unrealized Holding Gain on Available-for-sale Investments .......... 655,000 487,000 Retained Earnings .................................................. 106,242,000 82,001,000 ------------ ------------ Total Stockholders' Equity ................................... 265,682,000 234,482,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $323,348,000 $257,505,000 ============ ============
Note: Scheduled maturities of long-term debt, including the principal portion of obligations under capital leases, are as follows:
Year Ending December 31, 1998........................................................... $2,349,000 1999........................................................... 429,000 2000........................................................... 429,000 2001........................................................... -- 2002 .......................................................... 25,000,000 Thereafter..................................................... -- ------------- Total...................................................... $28,207,000 ===========
S-1 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENT OF OPERATIONS -- Parent Company Only
Year Ended December 31, 1997 1996 1995 --------------- -------------- ---------- OPERATING REVENUES: Management Fees........................................ $47,303,000 $44,139,000 $40,115,000 Subsidiary Dividends................................... 1,700,000 3,733,000 250,000 Investment and Other Income............................ 6,688,000 5,145,000 4,087,000 ----------- ----------- ------------ Total Operating Revenues............................ 55,691,000 53,017,000 44,452,000 ----------- ----------- ----------- GENERAL AND ADMINISTRATIVE EXPENSES: Payroll and Benefits................................... 17,616,000 11,579,000 12,805,000 Depreciation........................................... 3,707,000 3,433,000 3,323,000 Rent................................................... 615,000 649,000 738,000 Repairs and Maintenance................................ 459,000 408,000 382,000 Legal.................................................. 293,000 1,874,000 226,000 Consulting............................................. 769,000 827,000 583,000 Other.................................................. 7,047,000 5,145,000 4,252,000 Acquisition, Restructuring and Other Expenses ......... 29,350,000 12,064,000 11,614,000 ----------- ----------- ----------- Total General and Administrative.................... 59,856,000 35,979,000 33,923,000 INTEREST EXPENSE AND OTHER, NET............................ (676,000) (503,000) (396,000) EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES............................... 25,615,000 21,991,000 15,785,000 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES................................. 20,774,000 38,526,000 25,918,000 BENEFIT FROM (PROVISION FOR) INCOME TAXES.......................................... 3,467,000 (7,383,000) (4,614,000) ----------- ------------ ------------ NET INCOME................................................. $24,241,000 $31,143,000 $21,304,000 =========== =========== ===========
S-2 SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENTS OF CASH FLOWS -- Parent Company Only
Year Ended December 31, 1997 1996 1995 -------------- -------------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income........................................................... $24,241,000 $31,143,000 $21,304,000 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization.................................... 3,885,000 3,611,000 3,449,000 Equity in Undistributed Earnings of Subsidiaries..................... (25,615,000) (21,991,000) (15,787,000) Change in Assets and Liabilities: Other Assets..................................................... (1,177,000) (15,917,000) (5,021,000) Current Assets................................................... (2,312,000) (5,959,000) (504,000) Current Liabilities.............................................. 5,493,000 4,712,000 7,429,000 Other Long-term Liabilities ..................................... 6,634,000 6,069,000 ----------- ----------- Net Cash Provided by Operating Activities........................ 11,149,000 1,668,000 10,870,000 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures, Net ........................................... (26,453,000) (9,292,000) (8,763,000) Decrease in Short-term Securities.................................... 9,732,000 14,136,000 22,990,000 Decrease (Increase) in Other Assets.................................. 5,820,000 6,942,000 (8,963,000) Dividends from Subsidiary............................................ 1,700,000 3,733,000 250,000 Acquisitions, Net of Cash Acquired .................................. (3,145,000) (31,270,000) (Decrease) Increase in Net Assets in Subsidiaries.................... (30,816,000) 14,321,000 (1,572,000) ------------ ------------ ----------- Net Cash (Used for) Provided by Investing Activities ............ (43,162,000) (1,430,000) 3,942,000 ----------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Long-term Borrowing ................................... 25,000,000 Loans to Subsidiaries ............................................... (12,593,000) Reductions in Long-term Obligations and Payments on Capital Leases....................................... (480,000) (718,000) (789,000) Proceeds from Note Receivable to Subsidiary.......................... 60,000 2,789,000 Purchase of Treasury Stock .......................................... (5,471,000) Exercise of Stock in Connection with Stock Plans..................... 10,258,000 3,638,000 3,807,000 ----------- ----------- ----------- Net Cash Provided by (Used for) Financing Activities............. 29,367,000 5,709,000 (9,575,000) ----------- ----------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents....................... (2,646,000) 5,947,000 5,237,000 Cash and Cash Equivalents at Beginning of Year............................. 17,761,000 11,814,000 6,577,000 ----------- ------------ ------------ Cash and Cash Equivalents at End of Year................................... $15,115,000 $17,761,000 $11,814,000 ----------- =========== =========== Supplemental condensed statements of cash flows information: Cash Paid During the Year for Interest (Net of Amount Capitalized).......................................... $632,000 $ 443,000 $ 455,000 Cash Paid During the Year for Income Taxes................................. 7,916,000 6,423,000 2,746,000 Noncash Investing and Financing Activities: Additions to Capital Leases.......................................... -- -- 278,000 Assumptions of Liability in Connection with Land Purchase.................................................... -- -- 1,956,000 Stock Issued for Exercise of Options and Related Tax Benefits......................................... 2,004,000 1,158,000 1,949,000
S-3 SIERRA HEALTH SERVICES, INC. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY -- CASUALTY INSURANCE (amounts in thousands)
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: December 31, 1997........ $1,800 $202,699 -- $11,285 $134,262 $16,780 December 31, 1996........ 1,832 187,776 -- 9,885 126,121 16,422 December 31, 1995 ....... 1,928 182,318 -- 9,282 94,611 14,301
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: December 31, 1997........ $102,301 $(8,970) $26,211 $83,788 $135,580 December 31, 1996........ 101,401 (15,284) 21,968 70,464 126,497 December 31, 1995 ....... 75,978 (20,079) 22,028 67,071 94,953
S-4 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)
Year ended December 31 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 -------- -------- -------- -------- -------- -------- -------- -------- -------- ------ Losses and LAE Reserve............. $202,699 $187,776 $182,318 $190,962 $200,356 $178,460 $112,749 $ 67,593 $ 37,466 $10,277 Less Reinsurance Recoverables (1) 21,056 15,676 25,871 29,342 25,841 20,207 -------- -------- -------- -------- -------- -------- Net Loss and LAE Reserves ............. 181,643 172,100 156,447 161,620 174,515 158,253 Cumulative Net Paid as of: One Year Later 56,977 45,731 44,519 50,210 50,360 57,611 39,118 14,820 3,954 Two Years Later 70,854 68,619 79,788 84,465 89,177 65,165 28,657 6,609 Three Years Later 80,645 94,865 104,569 108,849 76,988 36,579 8,198 Four Years Later 102,395 114,293 120,539 83,822 39,345 8,938 Five Years Later 119,462 126,100 87,618 41,043 9,235 Six Years Later 129,060 89,607 41,962 9,398 Seven Years Later 90,721 42,541 9,471 Eight Years Later 42,818 9,517 Nine Years Later 9,541 Net Reserve Re-estimated as of: One Year Later 163,130 141,163 139,741 160,562 154,388 140,815 83,841 37,463 10,072 Two Years Later 132,193 125,279 141,100 147,167 142,447 96,011 39,753 9,902 Three Years Later 117,792 126,483 134,747 143,433 97,142 43,528 9,598 Four Years Later 122,517 132,193 137,143 97,942 44,404 9,330 Five Years Later 131,112 135,249 94,852 45,027 10,042 Six Years Later 135,299 93,561 44,543 10,110 Seven Years Later 93,672 43,741 10,124 Eight Years Later 43,682 9,695 Nine Years Later 9,768 Cumulative Redundancy (Deficiency) 8,970 24,254 43,828 51,998 27,141 (22,550) (26,079) (6,216) 509 Net Reserve............ 181,643 172,100 156,447 161,620 174,515 Reinsurance Recoverables 21,056 15,676 25,871 29,342 25,841 -------- -------- -------- -------- -------- Gross Reserve ......... $202,699 $187,776 $182,318 $190,962 $200,356 ======== ======== ======== ======== ======== Net Re-estimated Reserve 163,130 132,193 117,792 122,517 Re-estimated Reinsurance Recoverables 16,333 19,184 19,891 14,656 -------- -------- -------- -------- Gross Re-Estimated Reserve ............ 179,463 151,377 137,683 137,173 -------- ------- ------- ------- Gross Cumulative Redundancy.......... $ 8,313 $ 30,941 $ 53,279 $ 63,183 ======== ======== ======== ========
(1) The Company adopted Financial Accounting Standards Board Statement No. 113 ("FAS 113"), "Accounting and Reporting for Short-Duration and Long-Duration Reinsurance Contracts" for the year ended December 31, 1992. As permitted, prior financial statements have not been restated. Reinsurance recoverables on unpaid losses and LAE are shown as an asset on the balance sheets at December 31, 1997 and 1996. However, for purposes of the reconciliation and development tables, loss and LAE information will be shown net of reinsurance. See the notes to consolidated financial statements. S-5 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 96,841,000 94,065,000 59,396,000 87,077,000 287,191,000 278,719,000 297,106,000 270,760,000 49,957,000 41,976,000 40,330,000 37,180,000 7,916,000 7,539,000 7,318,000 7,518,000 0 0 0 0 300,606,000 231,394,000 217,072,000 244,148,000 197,917,000 174,447,000 162,019,000 149,189,000 49,086,000 48,116,000 45,526,000 42,907,000 723,936,000 679,345,000 660,462,000 645,359,000 212,229,000 202,585,000 191,670,000 198,309,000 90,841,000 79,539,000 79,949,000 65,641,000 0 0 0 0 0 0 0 0 92,000 92,000 90,000 89,000 265,590,000 251,489,000 248,205,000 235,240,000 723,936,000 679,345,000 660,462,000 645,359,000 0 0 0 0 721,724,000 530,758,000 346,899,000 170,578,000 0 0 0 0 660,466,000 485,828,000 317,554,000 156,336,000 29,350,000 29,350,000 11,000,000 11,000,000 0 0 0 0 4,433,000 3,549,000 2,609,000 1,402,000 27,475,000 12,031,000 15,736,000 1,840,000 3,234,000 (423,000) 3,777,000 442,000 24,241,000 12,454,000 11,959,000 1,398,000 0 0 0 0 0 0 0 0 0 0 0 0 24,241,000 12,454,000 11,959,000 1,398,000 1.35 0.70 0.67 0.08 1.33 0.69 0.66 0.08 Merger, Restructuring and Start-up Expenses
EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 9-MOS 6-MOS 3-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995 103,587,000 73,691,000 79,758,000 60,772,000 57,044,000 257,818,000 299,551,000 289,024,000 313,112,000 319,759,000 39,173,000 29,070,000 28,170,000 26,618,000 26,723,000 7,324,000 5,722,000 4,960,000 4,664,000 5,000,000 0 0 0 0 0 252,935,000 222,898,000 195,846,000 184,227,000 175,417,000 140,130,000 131,767,000 129,689,000 124,629,000 122,725,000 40,326,000 37,717,000 36,274,000 33,876,000 31,549,000 629,462,000 579,514,000 570,090,000 571,322,000 575,146,000 176,405,000 138,004,000 136,125,000 145,343,000 157,260,000 66,189,000 66,612,000 67,449,000 69,111,000 71,257,000 0 0 0 0 0 0 0 0 0 0 89,000 89,000 89,000 88,000 88,000 234,393,000 226,161,000 221,020,000 213,096,000 207,627,000 629,462,000 579,514,000 570,090,000 571,322,000 575,146,000 0 0 0 0 0 575,411,000 423,619,000 277,374,000 136,012,000 467,009,000 0 0 0 0 0 518,910,000 380,337,000 248,479,000 121,637,000 411,556,000 12,064,000 8,250,000 0 0 11,614,000 0 0 0 0 0 2,823,000 2,356,000 1,641,000 809,000 3,737,000 41,614,000 32,676,000 27,254,000 13,566,000 40,102,000 10,471,000 8,234,000 6,879,000 3,402,000 12,198,000 31,143,000 24,442,000 20,375,000 10,164,000 27,904,000 0 0 0 0 (6,600,000) 0 0 0 0 0 0 0 0 0 0 31,143,000 24,442,000 20,375,000 10,164,000 21,304,000 1.76 1.39 1.16 0.58 1.22 1.72 1.34 1.12 0.56 1.20 Merger, Restructuring and Start-up Expenses
EX-3 4 EXHIBIT 3.3 AMENDED AND RESTATED BYLAWS OF SIERRA HEALTH SERVICES, INC. (a Nevada Corporation) 47312.2 TABLE OF CONTENTS Page No. ARTICLE I
Offices and Fiscal Year SECTION 1.01. Principal Executive Office................................. 1 SECTION 1.02. Other Offices.............................................. 1 SECTION 1.03. Fiscal Year....................................... 1
ARTICLE II
Meetings of Stockholders SECTION 2.01. Place of Meeting........................................... 1 SECTION 2.02. Annual Meeting.................................... 1 SECTION 2.03. Special Meetings.................................. 2 SECTION 2.04. Notice of Meetings................................ 2 SECTION 2.05. Quorum, Manner of Acting and Adjournment.......... 2 SECTION 2.06. Organization...................................... 3 SECTION 2.07. Voting............................................ 3 SECTION 2.08. Voting Lists...................................... 5 SECTION 2.09. Ballots: Inspectors of Election.................. 5 SECTION 2.10. Determination of Stockholders of Record........... 5 SECTION 2.11. Consent of Stockholders in Lieu of Meeting........ 6 SECTION 2.12 Participation by Telephone or Similar Means................ 6
ARTICLE III Directors and Management SECTION 3.01. Powers............................................ 6 SECTION 3.02. Election, Number and Term of Office............... 6 SECTION 3.03. Organization...................................... 7 SECTION 3.04. Resignations...................................... 7 SECTION 3.05. Vacancies......................................... 7 SECTION 3.06. Removal........................................... 7 SECTION 3.07. Place of Meeting.................................. 8 SECTION 3.08. Organization Meeting.............................. 8 SECTION 3.09. Regular Meetings.................................. 8 SECTION 3.10. Special Meetings.................................. 8 SECTION 3.11. Quorum, Manner of Acting, and Adjournment......... 8 SECTION 3.12. Delegation of Board Authority to Committees....... 8 SECTION 3.13. Interested Directors or Officers; Quorum................... 9 SECTION 3.14. Fees.............................................. 10 SECTION 3.15. Participation by Telephone or Similar Means..........................10
ARTICLE IV Notice - Waivers SECTION 4.01. Notice............................................ 10 SECTION 4.02. Waivers of Notice................................. 10
47312.2 - i -
ARTICLE V Officers SECTION 5.01. Number, Qualifications and Designation............ 11 SECTION 5.02. Election and Term of Office....................... 11 SECTION 5.03. Subordinate Officers, Committees and Agents....... 11 SECTION 5.04. Resignations...................................... 11 SECTION 5.05. Removal.................................................... 11 SECTION 5.06. Vacancies.................................................. 12 SECTION 5.07. General Powers............................................. 12 SECTION 5.08. Chairman and Vice-Chairman of Board of Directors........................................................... 12 SECTION 5.09. President.................................................. 12 SECTION 5.10. Vice-Presidents............................................ 12 SECTION 5.11. Secretary.................................................. 12 SECTION 5.12. Treasurer.................................................. 13 SECTION 5.13. Officers' Bonds............................................ 13 SECTION 5.14. Salaries................................................... 13
ARTICLE VI
Certificates of Stock, Transfer, Etc SECTION 6.01. Issuance................................................... 13 SECTION 6.02. Transfer................................................... 13 SECTION 6.03. Share Certificates......................................... 14 SECTION 6.04. Record Holder of Shares.................................... 14 SECTION 6.05. Lost, Destroyed or Mutilated Certificates.................. 14
ARTICLE VII
Indemnification of Corporate Agents SECTION 7.01. Indemnification of Authorized Representatives in Third Party Proceedings............................................. 14 SECTION 7.02. Indemnification of Authorized Representatives in Corporate Proceedings............................................... 15 SECTION 7.03. Successful Defense......................................... 15 SECTION 7.04. Determination that Indemnification is Proper............... 15 SECTION 7.05. Advance Payment of Expenses................................ 15 SECTION 7.06. Preservation of Other Rights; Survival..................... 16 SECTION 7.07. Severability............................................... 16 SECTION 7.08. Subrogation................................................ 16 SECTION 7.09. No Duplication of Payments................................. 16 SECTION 7.10. Insurance and Other Financial Arrangements................. 16 SECTION 7.11. Nonapplicability to Fiduciaries of Employee Benefit Plan................................................................ 17 SECTION 7.12. Retroactive Effect......................................... 17
ARTICLE VIII Corporate Records SECTION 8.01. Access to Records of Corporation........................... 17 SECTION 8.02. Stockholders' Rights of Inspection......................... 18
47312.2 - ii -
ARTICLE IX Director's Inspection of Records SECTION 9.01. Absolute Right of Director to Inspect Records.............. 18 ARTICLE X Miscellaneous SECTION 10.01. Corporate Seal............................................. 19 SECTION 10.02. Checks..................................................... 19 SECTION 10.03. Contracts.................................................. 19 SECTION 10.04. Deposits................................................... 19 SECTION 10.05. Reports.................................................... 19 SECTION 10.06. Amendment of Bylaws........................................ 19
47312.2 - iii - AMENDED AND RESTATED BYLAWS OF SIERRA HEALTH SERVICES, INC. (a Nevada Corporation) ...ooOoo... ARTICLE I Offices and Fiscal Year SECTION 1.01. Principal Executive Office. The principal executive office of the corporation in the State of Nevada shall be at 2724 North Tenaya Way, Las Vegas, Nevada 89128, until otherwise established by a vote of a majority of the board of directors in office, and a statement of such change is filed with the Secretary of State. SECTION 1.02. Other Offices. The corporation may also have offices at such other places within or without the State of Nevada as the board of directors may from time to time appoint or the business of the corporation require. SECTION 1.03. Fiscal Year. The fiscal year of the corporation shall be established by a vote of a majority of the board of directors. ARTICLE II Meetings of Stockholders SECTION 2.01. Place of Meeting. All meetings of the stockholders of the corporation shall be held at the principal executive office of the corporation unless another place is designated by the board of directors in the notice of such meeting. SECTION 2.02. Annual Meeting. The board of directors may fix the date and time of the annual meeting of the stockholders, but if no such date and time is fixed by the board, the meeting for any calendar year shall be held on the second Tuesday of June in such year, if not a legal holiday under the laws of Nevada, and, if a legal holiday, then on the next succeeding business day, not a Saturday, at 10:00 a.m., and at said meeting the stockholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting; provided, however, that unless the notice of meeting, or waiver of notice of such meeting, sets forth the general nature of any proposal to (1) approve or ratify a contract or transaction with a director or with a corporation, firm or association in which a director has an interest; (2) amend the Articles of Incorporation of this corporation; (3) approve a reorganization or merger involving this corporation; (4) elect to wind up and dissolve this corporation; or (5) effect a plan of distribution upon liquidation otherwise than in accordance with liquidation preferences 47312.2 of outstanding shares with liquidation preferences, no such proposal may be approved at an annual meeting. SECTION 2.03. Special Meetings. Special meetings of the stockholders of the corporation for any purpose or purposes may be called at any time by the president or by the board of directors, or by stockholders entitled to cast at least 10 percent of the votes which all stockholders are entitled to cast at the particular meeting. At any time, upon written request to the chairman of the board, president, vice-president or secretary by any person (other than the board) entitled to call a special meeting of stockholders, the officer forthwith shall cause notice to be given to the stockholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the persons entitled to call the meeting may give the notice. SECTION 2.04. Notice of Meetings. Written notice of meetings of the stockholders, whether annual or special, shall be given to each stockholder of record entitled to vote at the meeting, not less than 10 days (or, if sent by third-class mail, 30 days), nor more than 60 days, prior to the day named for the meeting. Every notice of a special meeting shall state briefly the purpose or purposes thereof, and no business, other than that specified in such notice and matters germane thereto, shall be transacted at any special meeting. Every notice of an annual meeting shall state those matters (including nominees to the board of directors which management intends to present) which the board of directors intends, at the time the notice is mailed, to present to the stockholders for action, but, subject to Section 2.02 above, any proper matter may be presented to the meeting for action. SECTION 2.05. Quorum, Manner of Acting and Adjournment. The presence in person or by proxy of stockholders holding at least a majority of the voting power are necessary to constitute a quorum for the transaction of business. Treasury shares shall not be counted in determining the total number of outstanding shares for voting purposes. The stockholders present in person or by proxy at a duly organized meeting may continue to do business until adjournment, notwithstanding withdrawal of enough stockholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. If a meeting cannot be organized because a quorum has not attended, the stockholders entitled to vote and present in person or represented by proxy may adjourn the meeting to such time and place as they may determine. At any such adjourned meeting at which a quorum may be present, such business may be transacted as might have been transacted at the meeting as originally called. No notice of any adjourned meeting of the stockholders of the corporation shall be required to be given, except by announcement at the meeting, unless the adjournment is for more than 45 days or unless after the adjournment a new record date is fixed for the adjourned meeting. 47312.2 - 2 - Except as otherwise specified in the articles or these bylaws or by statute, the vote, at a duly organized meeting at which a quorum is present in person or by proxy, of the stockholders who hold at least a majority of the voting power of the issued and outstanding stock entitled to voting power, shall be the act of the stockholders. SECTION 2.06. Organization. At every meeting of the stockholders, the chairman of the board, if there be one, or in the case of vacancy in office or absence of the chairman of the board, one of the following officers present in the order stated: the vice-chairman of the board, if there be one, the president, the vice-presidents in their order of rank and seniority, or a chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall act as chairman, the secretary, or, in the absence of the secretary, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the chairman, shall act as secretary. SECTION 2.07. Voting. Every stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may designate another person or persons to act for the stockholder by proxy. Without limiting the manner in which a stockholder may authorize another person or persons to act for him as proxy, the following constitute valid means by which a stockholder may grant such authority: (a) A stockholder may execute a writing authorizing another person or persons to act for him as proxy. Execution may be accomplished by the signing of the writing by the stockholder or his authorized officer, director, employee or agent or by causing the signature of the stockholder to be affixed to the writing by any reasonable means, including, but not limited to, a facsimile signature. (b) A stockholder may authorize another person or persons to act for him as proxy by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person who will be the holder of the proxy or to a firm which solicits proxies or like agent who is authorized by the person who will be the holder of the proxy to receive the transmission. Any such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. If it is determined that the telegram, cablegram or other electronic transmission is valid, the persons appointed by the corporation to count the votes of stockholders and determine the validity of proxies and ballots or other persons making those determinations must specify the information upon which they relied. Any copy, communication by telecopier, or other reliable reproduction of the writing or transmission created pursuant to the foregoing, may be substituted for the original writing or transmission for any purpose for which the original writing or transmission could be used, if the copy, communication by telecopier, or other reproduction is a complete reproduction of the entire original writing or transmission. 47312.2 - 3 - Every proxy shall be filed with the secretary of the corporation. No proxy shall be valid after 6 months from the date of its creation, unless it is coupled with an interest, or unless the stockholder specifies in it the length for which it is to continue in force, which may not exceed 7 years from the date of its creation. Subject to the restrictions set forth herein, any proxy properly created is not revoked and continues in full force and effect until another instrument or transmission revoking it or a properly created proxy bearing a later date is filed with or transmitted to the secretary of the corporation or another person or persons appointed by the corporation to count the votes of stockholders and determine the validity of proxies and ballots, or unless the person giving the proxy attends the meeting and votes in person. A proxy which states on its face that it is irrevocable will be irrevocable for the period of time specified in the proxy, if held by a person (or nominee of a person) specified by law to have sufficient interest to make such proxy irrevocable and only so long as he shall have such interest. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of such death or incapacity is received by the corporation. Except when a record date has been fixed, every stockholder of record at the close of business on the business day next preceding the day on which notice is given shall be entitled to notice of every stockholders' meeting, or, if notice is waived, every stockholder of record at the close of business on the business day next preceding the day on which the meeting is held shall be entitled to vote at every stockholders' meeting. Each stockholder entitled to vote is entitled to one vote for each share except that at any election of directors, each stockholder possessing voting power shall be entitled to as many votes as equal the number of his shares of stock multiplied by the number of directors to be elected, and such holder may cast all such votes for a single director or may distribute them among the number to be voted for or any two or more of them, as such stockholder may see fit. The stockholders and any proxyholders for such stockholders shall be entitled to exercise the right of cumulative voting at any meeting held for the election of directors if: (1) Before the vote for election of directors, a stockholder of the corporation shall have given written notice to the president or secretary of the corporation that the stockholder desires that the voting for the election of directors be cumulative; and (2) The notice is given not less than 48 hours before the time fixed for holding the meeting, if notice of the meeting has not been given at least 10 days before the date of the meeting, and otherwise not less than 24 hours before the meeting. At the meeting, before the commencement of voting for the election of directors, an announcement of the giving of notice must be made by the chairman or the secretary of the meeting or by or on behalf of the stockholder giving the notice. Notice to stockholders of the requirement of subparagraphs (1) and (2) shall be contained in the notice calling the meeting or in the proxy material accompanying such notice. 47312.2 - 4 - Any holder of shares entitled to vote on any matter may vote part of his shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal. If a stockholder fails to specify the number of shares that he is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares which such stockholder is entitled to vote. SECTION 2.08. Voting Lists. The officer or agent of the corporation having charge of the transfer books for shares of the corporation shall make, at least 5 days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, with the address of and the number of shares held by each, which list shall be kept on file at the registered office of the corporation, and shall be subject to inspection by any stockholder at any time during usual business hours. The original share ledger or transfer book, or a duplicate thereof, kept in Nevada, shall be prima facie evidence as to who are the stockholders entitled to examine such list or share ledger or transfer book, or to vote, in person or by proxy, at any meeting of stockholders. SECTION 2.09. Ballots: Inspectors of Election. The vote upon any matter need not be by ballot, except that elections for directors shall be by ballot if a stockholder so demands at the meeting and before the voting begins. In advance of any meeting of stockholders, the board of directors may appoint inspectors of election, who need not be stockholders, to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, the chairman of any such meeting may, and upon the demand of any stockholder or the stockholder's proxy at the meeting and before voting begins shall appoint inspectors of election. The number of inspectors shall be either one or three, as determined, in the event that of inspectors appointed upon demand of a stockholder, by stockholders present entitled to cast a majority of the votes which all stockholders present are entitled to cast thereon. No person who is a candidate for office shall act as an inspector. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the board of directors in advance of the convening of the meeting, or at the meeting by the chairman of the meeting. If inspectors of election are appointed as aforesaid, they shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result, and do such acts as may be proper to conduct the election or vote with fairness to all stockholders. If there be three inspectors of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. On request of the chairman of the meeting or of any stockholder or the stockholder's proxy, the inspectors shall make a report in writing of any challenge or question or matter determined by them, and executive a certificate of any fact found by them. 47312.2 - 5 - SECTION 2.10. Determination of Stockholders of Record. The board of directors may fix a date, not more than 60 nor less than 10 days prior to the date of such meeting of stockholders, nor more than 60 days prior to the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the stockholders entitled to notice of, or to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares; and in such case, if otherwise entitled, all stockholders of record on the date so fixed, and no others, shall be entitled to notice of, or to vote at, such meeting, or to receive payment of such dividend or distribution or to receive such allotment of rights, or exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after any such record date fixed as aforesaid. In the event any meeting of stockholders is adjourned for more than 45 days, the board shall fix a new record date for purposes of giving notice of, and determining the holders of shares entitled to vote at, such adjourned meeting. SECTION 2.11. Consent of Stockholders in Lieu of Meeting. Any action, except for the election of directors, required or permitted to be taken at a meeting of the stockholders may be taken without a meeting and without prior notice if a consent or consents in writing, setting forth the action so taken, shall be signed by stockholders holding at least a majority of the voting power, except that if a different proportion of voting power is required for such an action at a meeting, then that proportion of written consents is required. SECTION 2.12 Participation by Telephone or Similar Means. Stockholders may participate in a meeting of stockholders by means of a telephone conference or similar method of communication by which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this subsection constitutes presence in person at the meeting. ARTICLE III Directors and Management SECTION 3.01. Powers. The board of directors shall have full power to conduct, manage, and direct the business and affairs of the corporation; and all powers of the corporation, except those specifically reserved or granted to the stockholders by statute or by the articles or these bylaws, are hereby granted to and vested in the board of directors. 47312.2 - 6 - SECTION 3.02. Election, Number and Term of Office. The board of directors shall be not less than 3 nor more than 7 directors; provided, however, that in cases where all the shares of the corporation are owned beneficially and of record by 1 or 2 stockholders, the number of directors may be less than 3 but not less than the number of stockholders. The number of directors may be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the directors. The number of directors is currently fixed at five (5). The directors shall be divided into two (2) classes, as nearly equal in number as possible, with the term of office of the first class (to consist currently of Messrs. Anthony M. Marlon, Robert A. Mayer, and Bruce D. Mansdorf) and the term of office of the second class (to consist currently of Messrs. William J. Raggio and Charles L. Ruthe) each to expire at the 1992 annual meeting of stockholders. At the 1992 annual meeting of stockholders, three (3) directors shall be elected to the first class, the term of which shall expire at the 1993 annual meeting of stockholders, and two directors shall be elected to the second class of directors, the term of which shall expire at the 1994 annual meeting of stockholders. At each annual meeting of stockholders following the 1992 annual meeting, directors elected to succeed those directors whose terms expire at such meeting shall be elected for a term of office to expire at the second succeeding annual meeting of stockholders after this election. Directors shall be elected to serve their respective terms and until a successor shall have been elected and qualified, except in the event of death, resignation or removal. Notwithstanding the foregoing, at least one-fourth in number of the directors of the Corporation shall be elected annually. SECTION 3.03. Organization. At every meeting of the board of directors, the chairman of the board, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the board, one of the following officers present in the order stated: vice-chairman of the board, if there be one, the president, the vice-presidents in their order of rank and seniority, or a chairman chosen by a majority of the directors present, shall preside, and the secretary, or in the absence of the secretary, an assistant secretary, or in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary. SECTION 3.04. Resignations. Any director of the corporation may resign effective upon giving written notice to the chairman of the board, the president, the secretary, or the board of directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. SECTION 3.05. Vacancies. A vacancy or vacancies in the board shall be deemed to exist in the case of death, resignation, or removal of any director, or if the authorized number of directors be increased, or if the stockholders fail, at any annual or special meeting of stockholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at the meeting. The board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. 47312.2 - 7 - Any vacancy or vacancies in the board of directors, except those resulting from removal of a director, may be filled by a vote of the majority of the remaining members of the board of directors though less than a quorum or by the sole remaining director, at any regular or special meeting; and the director or directors so elected shall continue in office until the next annual election of directors of the corporation and until their successors shall have been elected and qualified, or until their death, resignation or removal. The stockholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election requires the affirmative vote of the majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum). SECTION 3.06. Removal. All or any of the directors may be removed from office without assigning any cause, by the vote or written consent of stockholders representing at least two-thirds of the voting power of the issued and outstanding stock entitled to voting power, except that no individual director may be removed under the provisions of this Section except upon the vote of stockholders owning sufficient shares to have prevented his election to office in the first instance. A director may not be removed prior to the expiration of such director's term of office except as provided in Section 3.05 and in this Section 3.06. Any reduction of the authorized number of directors does not remove any director prior to the expiration of such director's term of office. SECTION 3.07. Place of Meeting. The board of directors may hold its meeting at such place or places within Nevada, or elsewhere as the board of directors may from time to time appoint, or as may be designated in the notice calling the meeting. SECTION 3.08. Organization Meeting. Immediately after each annual election of directors or other meeting at which the entire board of directors is elected, the newly elected board of directors shall meet for the purpose of organization, election of officers, and the transaction of other business, at the place where said election of directors was held. Notice of such meeting need not be given. Such organization meeting may be held at any other time or place which shall be specified in a notice given as hereinafter provided for special meeting of the board of directors. SECTION 3.09. Regular Meetings. Regular meetings of the board of directors shall be held at such time and place as shall be designated from time to time by resolution of the board of directors. If the date fixed for any such regular meeting be a legal holiday under the laws of the state where such meeting is to be held, then the same shall be held on the next succeeding business day, not a Saturday, or at such other time as may be determined by resolution of the board of directors. At such meetings, the directors shall transact such business as may properly be brought before the meeting. Notice of regular meetings need not be given. SECTION 3.10. Special Meetings. Special meetings of the board of directors shall be held whenever called by the president or by 2 or more of the directors. Notice of each such meeting shall be given to each director by telephone or in writing at least 24 hours (in the case of notice delivered personally by telephone or by telegram) or 4 days (in the case of notice by mail) before the time at which the meeting is to be held. Every such notice shall state the time and place of the meeting. 47312.2 - 8 - SECTION 3.11. Quorum, Manner of Acting, and Adjournment. A majority of the authorized number of directors shall be present at each meeting in order to constitute a quorum for the transaction of business. Except as otherwise specified in the articles or these bylaws or provided by statute, the act of the directors holding a majority of the voting power of the directors, present at a meeting at which a quorum is present shall be the act of the board of directors. In the absence of a quorum, a majority of the directors present may adjourn the meeting from time to time until a quorum is present, and no notice of any adjourned meeting need be given, other than by announcement at the meeting. The directors shall act only as a board and the individual directors shall have no power as such; provided, however, that any action which may be taken at a meeting of the board may be taken without a meeting if a consent or consents in writing setting forth the action so taken shall be signed by all of the directors and shall be filed with the minutes of the proceedings of the board. SECTION 3.12. Delegation of Board Authority to Committees. The board of directors may designate one or more committees, each of which must include at least one director. The appointment of members of a committee requires the vote of a majority of the whole board of directors. Except as otherwise provided in this Section, the Executive Committee, if any, shall have and exercise all of the authority of the board in the management of the business and affairs of the corporation and any other committee shall have and exercise the authority of the board to the extent provided in the resolution designating the committee. Any such committee of the board shall have the authority and powers of the board in the management of the business and affairs of the corporation, except with respect to the approval of any action which also requires stockholders' approval or approval of outstanding shares. A majority of the members designated to a committee, or alternates designated to replace them as provided in this Section, shall constitute a quorum for the transaction of business and the acts of a majority of the members designated to a committee or their replacements shall be the acts of the committee. Each committee shall keep regular minutes of its proceedings and report such proceedings periodically to the board of directors. Sections 3.09, 3.10 and 3.11 shall apply mutatis mutandis to committees of the board of directors. SECTION 3.13. Interested Directors or Officers; Quorum. 47312.2 - 9 - (1) No contract or other transaction between the corporation and one or more of its directors or officers, or between the corporation and any corporation, firm or association in which one or more of its directors or officers are directors or officers or are financially interested, shall be void or voidable solely for this reason or solely because any such director or officer shall be present at the meeting of the board of directors or a committee thereof which authorizes or approves the contract or transaction, or because the vote or votes of common or interested directors shall be counted for that purpose, if the circumstances specified in any of the following paragraphs exist: (a) The fact of the common directorship, office or financial interest is disclosed or known to the board of directors or committee and noted in the minutes, and the board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient for the purpose without counting the vote or votes of the common or interested director or directors; (b) The fact of the common directorship, office or financial interest is disclosed or known to the stockholders, and they approve or ratify the contract or transaction in good faith by a majority vote or written consent of stockholders holding a majority of the voting power. The votes of the common or interested directors or officers shall be counted in any such vote of stockholders; (c) The fact of the common directorship, office or financial interest is not disclosed or known to the director or officer at the time the transaction is brought before the board of directors of the corporation for action; or (d) The contract or transaction is fair as to the corporation at the time it is authorized or approved. (2) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or a committee thereof which authorizes, approves or ratifies a contract or transaction, and if the votes of the common or interested directors are not counted at such meeting, then a majority of the disinterested directors may authorize, approve or ratify such contract or transaction. SECTION 3.14. Fees. Each director shall be paid such reasonable fee, if any, as shall be fixed by the board of directors for each meeting of the board of directors or committee of directors which such director shall attend and may be paid such other compensation for services as a director as may be fixed by the board of directors. 47312.2 - 10 - SECTION 3.15. Participation by Telephone or Similar Means. Members of the board or of any committee designated by such board may participate in a meeting of the board, or committee of the board by means of conference telephone or similar method of communication by which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section shall constitute presence in person at such meeting. Each person participating in the meeting shall sign the minutes thereof. ARTICLE IV Notice - Waivers SECTION 4.01. Notice. Whenever written notice is required to be given to any person under the provisions of the articles, these bylaws, or the Nevada Corporations Code, it may be given to such person, either personally or by sending a copy thereof by first-class mail (or if the corporation has at least 500 stockholders of record, by third-class mail), or other means of written communication, charges prepaid, to the address of such person appearing on the books of the corporation, or supplied by such person to the corporation for the purpose of notice. If the notice is sent by mail or by telegraph, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office for transmission to such person. A notice of a meeting shall specify the place, day and hour of the meeting and in the case of a special meeting of stockholders, the general nature of the business to be transacted. SECTION 4.02. Waivers of Notice. Whenever any written notice is required to be given under the provisions of the articles, these bylaws, or the Nevada Corporations Code, a waiver thereof, in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. All waivers and consents shall be filed with the minutes of the meeting or the records of the corporation. Attendance of a person, either in person or by proxy, at any meeting, shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. ARTICLE V Officers SECTION 5.01. Number, Qualifications and Designation. The officers of the corporation shall be a chairman of the board, president, one or more vice-presidents, a secretary, a treasurer, and such other officers as may be elected in accordance with the provisions of Section 5.03 of this Article. The chairman of the board and any vice-chairman of the board shall be elected by the board of directors from among the members of the board. Any natural person may hold more than one office. Officers may but need not be directors or stockholders of the corporation. All officers of the corporation shall be natural persons of full age. 47312.2 - 11 - SECTION 5.02. Election and Term of Office. The officers of the corporation, except those elected by delegated authority pursuant to Section 5.03 of this Article, shall be elected annually by the board of directors, and each such officer shall hold office after the expiration of his term until a successor is chosen or until his resignation or removal before the expiration of his term. A failure to elect officers shall not require the corporation to be dissolved. SECTION 5.03. Subordinate Officers, Committees and Agents. The board of directors may from time to time elect such other officers and appoint such committees, employees, or other agents as the business of the corporation may require, including one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws, or as the board of directors may from time to time determine. The board of directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents, but in no event shall this delegated power include the power to expand upon the authority and duties of the vice-presidents as set forth in Section 5.10. SECTION 5.04. Resignations. Any officer or agent may resign at any time by giving written notice to the board of directors, or to the president or the secretary of the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5.05. Removal. Any officer, committee, employee or other agent of the corporation may be removed, either for or without cause, by the board of directors or other authority which elected or appointed such officer, committee, or other agent whenever in the judgment of such authority, the best interests of the corporation will be served thereby. SECTION 5.06. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause, shall be filled by the board of directors or by the officer or committee to which the power to fill such office has been delegated pursuant to Section 5.03 of this Article, as the case may be, and if the office is one for which these bylaws prescribe a term, shall be filled for the unexpired portion of the term. SECTION 5.07. General Powers. All officers of the corporation as between themselves and the corporation, shall, respectively, have such authority and perform such duties in the management of the property and affairs of the corporation as may be determined by resolution of the board of directors, or in the absence of controlling provisions in a resolution of the board of directors, as may be provided in these bylaws. SECTION 5.08. Chairman and Vice-Chairman of Board of Directors. The chairman of the board or, in the absence of the chairman, the vice-chairman of the board, shall preside at all meetings of the stockholders and of the board of directors, and shall perform such other duties as may from time to time be requested by the board of directors. 47312.2 - 12 - SECTION 5.09. President. The president shall be the chief executive officer of the corporation and shall have general supervision over the business and operations of the corporation, subject, however, to the control of the board of directors. The president shall sign, execute and acknowledge, in the name of the corporation, deeds, mortgages, bonds, contracts or other instruments, authorized by the board of directors, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors, or by these bylaws, to some other officer or agent of the corporation, and, in general, shall perform all duties incident to the office of president and such other duties as from time to time may be assigned by the board of directors. SECTION 5.10. Vice-Presidents. The board of directors may appoint one or more vice-presidents, as it shall deem proper. In the absence or disability of the president, the vice-presidents, in order of rank as fixed by the board of directors, shall perform all duties of the president, and when so acting, shall have all of the powers of and be subject to all of the restrictions upon the president. Vice-presidents shall have such powers and perform such duties as from time to time may be prescribed for them by the board of directors. SECTION 5.11. Secretary. The secretary or an assistant secretary shall attend all meetings of the stockholders and of the board of directors and shall record all the votes of the stockholders and of the directors and the minutes of the meetings of the stockholders and of the board of directors and of committees of the board in a book or books to be kept for that purpose; shall see that notices are given and records and reports properly kept and filed by the corporation as required by law; shall be the custodian of the seal of the corporation and see that it is affixed to all documents to be executed on behalf of the corporation under its seal; and, in general, shall perform all duties incident to the office of secretary, and such other duties as may from time to time be assigned by the board of directors or the president. 47312.2 - 13 - SECTION 5.12. Treasurer. The treasurer is the chief financial officer of the corporation.The treasurer or an assistant treasurer shall have or provide for the custody of the funds or other property of the corporation and shall keep a separate book account of the same to his or her credit as treasurer; shall collect and receive or provide for the collection and receipt of monies earned by or in any manner due to or received by the corporation; shall deposit all funds in his or her custody as treasurer in such banks or other places of deposit as the board of directors may from time to time designate; shall, whenever so required by the board of directors, render an account showing all transactions as treasurer, and the financial condition of the corporation; and, in general, shall discharge such other duties as may from time to time be assigned by the board of directors or the president. SECTION 5.13. Officers' Bonds. Any officer shall give a bond for the faithful discharge of the duties of the officer in such sum, if any, and with such surety or sureties as the board of directors shall require. SECTION 5.14. Salaries. The salaries of the officers elected by the board of directors shall be fixed from time to time by the board of directors or by such officer as may be designated by resolution of the board. The salaries or other compensation of any other officers, employees and other agents shall be fixed from time to time by the officer or committee to which the power to elect such officers or to retain or appoint such employees or other agents has been delegated pursuant to Section 5.03 of this Article. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that the officer is also a director of the corporation. ARTICLE VI Certificates of Stock, Transfer, Etc. SECTION 6.01. Issuance. The share certificates of the corporation shall be numbered and registered in the share ledger and transfer books of the corporation as they are issued. They shall be signed by the president or a vice-president and by the secretary or an assistant secretary or the treasurer or an assistant treasurer, and shall bear the corporate seal, which may be a facsimile, engraved or printed; provided, however, that where such certificate is countersigned or otherwise authenticated by a transfer agent or a transfer clerk and by a registrar, then a facsimile of the signatures of any corporate officers or agents, the transfer agent or transfer clerk or the registrar of the corporation may be printed or lithographed upon the certificate in lieu of the actual signatures. In the event that any officer or officers who have signed, or whose facsimile signatures have been used on any certificate or certificates for stock cease to be an officer or officers because of death, resignation or other reason, before the certificate or certificates for stock have been delivered by the corporation, the certificate or certificates may nevertheless be adopted by the corporation and be issued and delivered as though the person or persons who signed the certificate or certificates, or whose facsimile signature or signatures have been used thereon, had not ceased to be an officer or officers of the corporation. 47312.2 - 14 - SECTION 6.02. Transfer. Transfers of shares shall be made on the books of the corporation upon surrender of the certificates therefore, endorsed by the person named in the certificate or by attorney lawfully constituted in writing. No transfer shall be made inconsistent with the provisions of the Uniform Commercial Code of the State of Nevada and its amendments and supplements. SECTION 6.03. Share Certificates. Certificates for shares of the corporation shall be in such form as provided by statute and approved by the board of directors. The share record books and the blank share certificate books shall be kept by the secretary or by any agent designated by the board of directors for that purpose. Every certificate exchanged or returned to the corporation shall be marked "Canceled," with the date of cancellation. SECTION 6.04. Record Holder of Shares. The corporation shall be entitled to treat the person in whose name any share or shares of the corporation stand on the books of the corporation as the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person. SECTION 6.05. Lost, Destroyed or Mutilated Certificates. The holder of any shares of the corporation shall immediately notify the corporation of any loss, destruction or mutilation of the certificate therefore, and the board of directors may, in its discretion, cause a new certificate or certificates to be issued to such holder, in case of mutilation of the certificate, upon the surrender of the mutilated certificate, or, in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction, and, if the board of directors shall so determine, the deposit of a bond in such form and in such sum, and with such surety or sureties, as it may direct. ARTICLE VII Indemnification of Corporate Agents SECTION 7.01. Indemnification of Authorized Representatives in Third Party Proceedings. The corporation shall indemnify any person who was or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with the action, suit or proceeding if such person acted in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that such person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and that, with respect to any criminal action or proceeding, such person had reasonable cause to believe that such person's conduct was unlawful. 47312.2 - 15 - SECTION 7.02. Indemnification of Authorized Representatives in Corporate Proceedings. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by such person in connection with the defense or settlement of the action or suit if such person acted in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. SECTION 7.03. Successful Defense. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 7.01 and 7.02, or in defense of any claim, issue or matter therein, such person must be indemnified by the corporation against expenses, including attorneys' fees, actually and reasonably incurred by such person in connection with the defense. SECTION 7.04. Determination that Indemnification is Proper. Any indemnification under Sections 7.01 and 7.02, unless ordered by a court or advanced pursuant to Section 7.05, must be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made: (a) By the stockholders; (b) By the board of directors by a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding; (c) If a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion; or (d) If a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. 47312.2 - 16 - SECTION 7.05. Advance Payment of Expenses. The expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that such person is not entitled to be indemnified by the corporation. The provisions of this subsection do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contract or otherwise by law. SECTION 7.06. Preservation of Other Rights; Survival. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this Article VII: (a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the articles of incorporation or any agreement, vote of stockholders or disinterested directors or otherwise, for either an action in such person's official capacity or an action in another capacity while holding such person's office, except that indemnification, unless ordered by a court pursuant to Section 7.02 or for the advancement of expenses made pursuant to Section 7.05, may not be made to or on behalf of any director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action; and (b) Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person. SECTION 7.07. Severability. If this Article VII or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each employee or agent of the corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the corporation, to the fullest extent permitted by any applicable portion of this Article VII that shall not have been invalidated and to the fullest extent permitted by applicable law. SECTION 7.08. Subrogation. In the event of payment of indemnification to a person described in Sections 7.01 and 7.02, the corporation shall be subrogated to the extent of such payment to any right of recovery such person may have and such person, as a condition of receiving indemnification from the corporation, shall execute all documents and do all things that the corporation may deem necessary or desirable to perfect such right of recovery, including the execution of such documents necessary to enable the corporation effectively to enforce any such recovery. 47312.2 - 17 - SECTION 7.09. No Duplication of Payments. The corporation shall not be liable under this Article VII to make any payment in connection with any claim made against a person described in Sections 7.01 and 7.02 to the extent such person has otherwise received payment (under any insurance policy, bylaw or otherwise) of the amounts otherwise payable as indemnity hereunder. SECTION 7.10. Insurance and Other Financial Arrangements. The corporation may purchase and maintain insurance or make other financial arrangements on behalf of any person described in Sections 7.01 and 7.02 against any liability asserted against, and liability and expenses incurred by, such person in such person's capacity as a director, officer, employee or agent or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability and expenses. The other financial arrangements made by the corporation pursuant to this Section may include (a) the creation of a trust fund; (b) the establishment of a program of self-insurance; (c) the securing of the corporation's obligation of indemnification by granting a security interest or other lien in any assets of the corporation; (d) the establishment of a letter of credit, guaranty or surety; or (e) any other arrangement legally available to the corporation. No financial arrangement made pursuant to this Section may provide protection for a person adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable for intentional misconduct, fraud or a knowing violation of law, except with respect to the advancement of expenses or indemnification ordered by a court. Any insurance or other financial arrangement made on behalf of a person pursuant to this Section may be provided by the corporation or any other person approved by the Board of Directors, even if all or part of the other person's stock or other securities is owned by the corporation. In the absence of fraud, (a) the decision of the Board of Directors as to the propriety of the terms and conditions of any insurance or other financial arrangement made pursuant to this Section and the choice of the person to provide the insurance or other financial arrangement is conclusive; and (b) the insurance or other financial arrangement (i) is not void or voidable; and (ii) does not subject any director approving it to personal liability for his action, even if a director approving the insurance or other financial arrangement is a beneficiary of the insurance or other financial arrangement. SECTION 7.11. Nonapplicability to Fiduciaries of Employee Benefit Plan. This Article does not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may also be an authorized representative of the corporation. The corporation shall have power to indemnify such trustee, investment manager or other fiduciary to the extent permitted by the Nevada Corporations Code. SECTION 7.12. Retroactive Effect. To the extent permitted by applicable law, the rights and powers granted pursuant to this Article VII shall apply to acts, actions, suits and proceedings occurring or in progress prior to the adoption of these amended and restated bylaws. 47312.2 - 18 - ARTICLE VIII Corporate Records SECTION 8.01. Access to Records of Corporation. The accounting books and records and minutes of proceedings of the stockholders and the board and committees of the board shall be open to inspection upon the written demand on the corporation of any stockholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a stockholder or as the holder of such voting trust certificate. Such inspection by a stockholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. SECTION 8.02. Stockholders' Rights of Inspection. A stockholder or stockholders holding at least fifteen (15) percent in the aggregate of the outstanding voting shares of the corporation shall have an absolute right to do either or both of the following: (1) Inspect and copy the record of stockholders' names and addresses and shareholdings during usual business hours upon five (5) business days' prior written demand upon the corporation; or (2) Obtain from the transfer agent for the corporation upon written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the stockholder by the transfer agent upon request) a list of the names and addresses of stockholders who are entitled to vote for the election of directors, and their shareholdings as of the most recent record date for which it has been compiled or as of the date specified by the stockholder subsequent to the date of demand. The list shall be made available on or before the later of five (5) business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. The corporation shall have the responsibility to cause its transfer agent to comply with this Section. Any delay by the corporation or the transfer agent in complying with a demand under this Section beyond the time limits specified therein shall give the stockholder or the stockholders properly making the demand a right to obtain from the proper court, upon the filing of a verified complaint in the proper county and after a hearing, notice of which shall be given to such person and in such manner as the court may direct, an order postponing any stockholders' meeting previously noticed for a period equal to the period of such delay. Such right shall be in addition to any other legal or equitable remedies to which the stockholder may be entitled. The record of the stockholders shall also be open to inspection and copying by any stockholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interests as a stockholder or holder of a voting trust certificate. Any inspection and copying under this Section may be made in person or by agent or attorney. 47312.2 - 19 - ARTICLE IX Director's Inspection of Records SECTION 9.01. Absolute Right of Director to Inspect Records. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. ARTICLE X Miscellaneous SECTION 10.01. Corporate Seal. The corporation shall have a corporate seal in the form of a circle containing the name of the corporation, the year of incorporation, and the word "Nevada," but failure to affix such seal to any instrument shall not affect the validity thereof. SECTION 10.02. Checks. All checks, notes, bills of exchange or other orders in writing shall be signed by such person or persons as the board of directors may from time to time designate. SECTION 10.03. Contracts. Except as otherwise provided in these bylaws, the board of directors may authorize any officer or officers, agent or agents, to enter into any contract or to execute or deliver any instrument on behalf of the corporation and such authority may be general or confined to specific instances. SECTION 10.04. Deposits. All funds of the corporation shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the board of directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees as the board of directors shall from time to time determine. SECTION 10.05. Reports. The board of directors shall present at the annual meeting of stockholders a report of the financial condition of the corporation as of the closing date of the preceding fiscal year. Such report shall be in such form as shall be approved by the board of directors and shall be available for inspection by the stockholders at the annual meeting. The board of directors may, but shall not be required to, have such report prepared and verified by an independent certified public accountant or by a firm of practicing accountants. SECTION 10.06. Amendment of Bylaws. These bylaws may be amended or repealed, or new bylaws may be adopted, by the vote or written consent of the stockholders who hold at least a majority of the voting power of the issued and outstanding stock entitled to voting power at any duly organized annual or special meeting of stockholders; provided, however, that subject to the right of stockholders to adopt, amend or repeal bylaws, bylaws (other than a bylaw or amendment thereof changing the authorized number of directors) may be adopted, amended or repealed by the board of directors. 47312.2 - 20 - Amendment No. 1 to AMENDED AND RESTATED BYLAWS OF SIERRA HEALTH SERVICES, INC. The Amended and Restated bylaws of Sierra Health Services, Inc., a Nevada corporation (the "Corporation"), are hereby amended as follows effective August 10, 1994: 1. The fourth sentence of Section 3.02 is hereby amended by deleting the word "currently" as it appears twice therein. 2. Section 5.08 is hereby amended to read as follows: SECTION 5.08. Chairman and Vice Chairman of the Board of Directors. The chairman of the board of directors or, in the absence of the chairman, the vice-chairman of the board, shall be the chief executive officer of the corporation. Subject to the provisions of these bylaws and to the direction of the board of directors, the chairman shall have the ultimate responsibility for the management and control of the affairs and business of the corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive officer or which are delegated to him or her by the board of directors. The chairman of the board, or in the absence of the chairman, the vice-chairman of the board, shall preside at all meetings of the stockholders and of the board of directors. The chairman of the board, or in the absence of the chairman, the vice-chairman of the board, shall have power to execute and acknowledge, in the name of the corporation, all stock certificates, mortgages, bonds, contracts and other instruments of the corporation which are authorized by the board of directors, except in cases where the execution thereof shall be expressly delegated by the board of directors, or by these bylaws, to some other officer or agent of the corporation. The chairman shall have general supervision and direction of all of the other officers and agents of the corporation. 2. Section 5.09 is hereby amended to read as follows: SECTION 5.09. President. The president shall be the chief operating officer of the corporation, shall be in charge of day to day operations of the corporation and shall have such duties and powers as may from time to time be delegated to the president by the board of directors or by the chairman of the board of directors. In the absence or disability of the chairman and vice-chairman of the board of directors, or during a period of vacancy in such offices, the president shall act as the chief executive officer of the corporation and shall have the duties and powers of the chairman. Except as amended hereby, the Amended and Restated Bylaws of the Company shall remain in full force and effect. 47312.2 - 21 - Amendment No. 2 to AMENDED AND RESTATED BYLAWS OF SIERRA HEALTH SERVICES, INC. The Amended and Restated Bylaws, as amended, of Sierra Health Services, Inc., a Nevada corporation (the "Corporation"), are hereby amended as follows effective March 22, 1995: Section 2.05 is hereby amended by deleting the last paragraph thereof in its entirety. Except as amended hereby, the Amended and Restated Bylaws, as amended, of the Company shall remain in full force and effect. 47312.2 - 22 - AMENDMENT NO. 3 TO THE AMENDED AND RESTATED BYLAWS OF SIERRA HEALTH SERVICES, INC. The Amended and Restated bylaws, as amended, of Sierra Health Services, Inc., a Nevada corporation (the "Corporation"), are hereby amended as follows effective December 12, 1997: Article III, Section 3.02, of the Corporation's Bylaws be amended to read as follows: Section 3.02. Election, Number and Term of Office. The board of directors shall be not less than 3 nor more than 7 directors; provided, however, that in cases where all the shares of the corporation are owned beneficially and of record by 1 or 2 stockholders, the number of directors may be less than 3 but not less than the number of stockholders. The number of directors may be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the directors. The number of directors is currently fixed at five (5). The directors shall be divided into two (2) classes, as nearly equal in number as possible, with the term of office of the first class and the term of office of the second class each to expire in alternating years. At each annual meeting of stockholders, directors elected to succeed those directors whose terms expire at such meeting shall be elected for a term of office to expire at the second succeeding annual meeting of stockholders after this election. Directors shall be elected to serve their respective terms and until a successor shall have been elected and qualified, except in the event of death, resignation or removal. No director will be eligible to be elected to the Board after reaching the age of 75. Notwithstanding the foregoing, at least one-fourth in number of the directors of the Corporation shall be elected annually. Except as amended hereby, the Amended and Restated Bylaws, as amended of the Company shall remain in full force and effect. 47312.2 - 23 - EX-10 5 EXHIBIT 10.6 (1) EMPLOYMENT AGREEMENT This Agreement is made this 15th day of November 1997, by and between SIERRA HEALTH SERVICES,Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and Jonathon W. Bunker , (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as Vice President, HMO and Insurance Operations , and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 2. Employee shall perform such duties as are assigned by the President of Employer or his/her designee, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by Employer's President or the appropriate Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 1 year period starting November 15, 1997 and terminating December 31, 1998 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 1998 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 1998, 1 at such date as Employer has no further obligations to Employee under Article VII; provided, however, that the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of the corporation at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the future benefits available under said programs. 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any public 2 exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit Employee's right to invest his/her surplus funds in real estate. Employee shall complete a Conflict of Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. ARTICLE VI NONCOMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this 3 Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any rights or remedies, whether 4 in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Noncompetition agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee shall voluntarily terminate employment all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder without cause, except as otherwise set forth in Paragraph 7 of this Article, Employee shall be entitled to six (6) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, including those reasons set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 90 days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of 365 days, except in the event of a change in control. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments of such amounts which would otherwise be payable after a change in control, or arising as a result of a change in control, shall 5 be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment due to Employee's conduct that is materially detrimental to the Company's reputation, business relationships, or for misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than three (3) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control was not approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.0) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 9. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control is approved by a majority of the Board 6 of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.0) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, if, within two (2) years after the effective date of the change in control any one of the following occurs: (a) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities or any other action by the Company that results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose an action not taken in bad faith and that is remedied by the Company within 10 days after receipt of written notice by Employee; (b) a reduction in Employee's annual base salary or target bonus; (c) the relocation of the Company's principle executive offices to a location more than 75 miles from the current location of such offices or (d), in the event such change in control occurs within the final two years prior to the calendar date stated as the termination date of the Agreement in Article II, and if, prior to such stated termination date and prior to termination of Employee's employment, the Company has not offered to enter into an extension of this employment agreement or a new employment agreement providing benefits substantially equal to those under this agreement for a term to extend until at least two years after the date of such change in control. In addition, if Employee's employment hereunder is terminated for reasons other than those set forth in Paragraph 6 of this Article within two (2) years after the effective date of a change in control which was approved by a majority of Employer's Board of Directors, Employee shall be entitled to a cash amount equal to (2.0) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder, and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 10. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 11. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 12. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 11 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the 7 vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. 8 ARTICLE XIII AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided 9 to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the law of Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . SIERRA HEALTH SERVICES, INC. By:______________________________ President P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ Jonathon W. Bunker 2021 Alberti Court Las Vegas, NV 89117 10 EX-10 6 EXHIBIT 10.6 (2) EMPLOYMENT AGREEMENT This Agreement is made this 15th day of November 1997, by and between SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and Frank E. Collins , (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as Executive Vice President, Secretary and General Counsel , and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 2. Employee shall perform such duties as are assigned by the CEO of Employer or his/her designee, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by Employer's CEO or the appropriate Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 4 year period starting November 15, 1997 and terminating December 31, 2001 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 2001 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 2001, 1 at such date as Employer has no further obligations to Employee under Article VII; provided, however, that the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of the corporation at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the future benefits available under said programs. 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any public 2 exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit Employee's right to invest his/her surplus funds in real estate. Employee shall complete a Conflict of Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. ARTICLE VI NONCOMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this 3 Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any rights or remedies, whether 4 in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Noncompetition agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee shall voluntarily terminate employment all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder without cause, except as otherwise set forth in Paragraph 7 of this Article, Employee shall be entitled to twelve (12) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, including those reasons set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 90 days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of 365 days, except in the event of a change in control. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments of such amounts which would otherwise be payable after a change in control, or arising as a result of a change in control, shall 5 be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment due to Employee's conduct that is materially detrimental to the Company's reputation, business relationships, or for misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than twelve (12) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control was not approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 9. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control is approved by a majority of the Board 6 of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, if, within two (2) years after the effective date of the change in control any one of the following occurs: (a) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities or any other action by the Company that results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose an action not taken in bad faith and that is remedied by the Company within 10 days after receipt of written notice by Employee; (b) a reduction in Employee's annual base salary or target bonus; (c) the relocation of the Company's principle executive offices to a location more than 75 miles from the current location of such offices or (d), in the event such change in control occurs within the final two years prior to the calendar date stated as the termination date of the Agreement in Article II, and if, prior to such stated termination date and prior to termination of Employee's employment, the Company has not offered to enter into an extension of this employment agreement or a new employment agreement providing benefits substantially equal to those under this agreement for a term to extend until at least two years after the date of such change in control. In addition, if Employee's employment hereunder is terminated for reasons other than those set forth in Paragraph 6 of this Article within two (2) years after the effective date of a change in control which was approved by a majority of Employer's Board of Directors, Employee shall be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder, and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 10. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 11. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 12. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 11 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the 7 vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. ARTICLE XIII 8 AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the law of Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. 9 IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . ---- ------------------ ---- SIERRA HEALTH SERVICES, INC. By:______________________________ Chief Executive Officer P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ Frank E. Collins 2641 Barbaradale Las Vegas, NV 89102 10 EX-10 7 EXHIBIT 10.6 (3) EMPLOYMENT AGREEMENT This Agreement is made this 15th day of November 1997, by and between SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and William R. Godfrey , (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as Executive Vice President, Administrative Services , and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 2. Employee shall perform such duties as are assigned by the President of Employer or his/her designee, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by Employer's President or the appropriate Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 2 year period starting November 15, 1997 and terminating December 31, 1999 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 1999 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 1999, 1 at such date as Employer has no further obligations to Employee under Article VII; provided, however, that the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of the corporation at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the future benefits available under said programs. 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any public exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit 2 Employee's right to invest his/her surplus funds in real estate. Employee shall complete a Conflict of Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. ARTICLE VI NONCOMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its 3 subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any rights or remedies, whether 4 in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Noncompetition agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee shall voluntarily terminate employment all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder without cause, except as otherwise set forth in Paragraph 7 of this Article, Employee shall be entitled to twelve (12) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, including those reasons set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 90 days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of 365 days, except in the event of a change in control. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments of such amounts which would otherwise be payable after a change in control, or arising as a result of a change in control, shall 5 be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment due to Employee's conduct that is materially detrimental to the Company's reputation, business relationships, or for misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than twelve (12) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control was not approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 9. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control is approved by a majority of the Board 6 of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, if, within two (2) years after the effective date of the change in control any one of the following occurs: (a) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities or any other action by the Company that results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose an action not taken in bad faith and that is remedied by the Company within 10 days after receipt of written notice by Employee; (b) a reduction in Employee's annual base salary or target bonus; (c) the relocation of the Company's principle executive offices to a location more than 75 miles from the current location of such offices or (d), in the event such change in control occurs within the final two years prior to the calendar date stated as the termination date of the Agreement in Article II, and if, prior to such stated termination date and prior to termination of Employee's employment, the Company has not offered to enter into an extension of this employment agreement or a new employment agreement providing benefits substantially equal to those under this agreement for a term to extend until at least two years after the date of such change in control. In addition, if Employee's employment hereunder is terminated for reasons other than those set forth in Paragraph 6 of this Article within two (2) years after the effective date of a change in control which was approved by a majority of Employer's Board of Directors, Employee shall be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder, and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 10. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 11. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 12. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 11 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the 7 vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. 8 ARTICLE XIII AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the law of Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. 9 IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . SIERRA HEALTH SERVICES, INC. By:______________________________ President P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ William R. Godfrey 9517 Coral Way Las Vegas, NV 89117 10 EX-10 8 EXHIBIT 10.6 (4) EMPLOYMENT AGREEMENT This Agreement is made this 15th day of November 1997, by and between SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and Laurence S. Howard, (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as Sr. Vice President, HMO and Insurance Operations , and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 2. Employee shall perform such duties as are assigned by the President of Employer or his/her designee, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by Employer's President or the appropriate Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 2 year period starting November 15, 1997 and terminating December 31, 1999 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 1999 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 1999, 1 at such date as Employer has no further obligations to Employee under Article VII; provided, however, that the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of the corporation at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the future benefits available under said programs. 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any public 2 exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit Employee's right to invest his/her surplus funds in real estate. Employee shall complete a Conflict of Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. ARTICLE VI NONCOMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this 3 Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any rights or remedies, whether 4 in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Noncompetition agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee shall voluntarily terminate employment all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder without cause, except as otherwise set forth in Paragraph 7 of this Article, Employee shall be entitled to twelve (12) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, including those reasons set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 90 days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of 365 days, except in the event of a change in control. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments or such amounts which would otherwise be payable after a change in control, or arising as a result of a change in control, shall 5 be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment due to Employee's conduct that is materially detrimental to the Company's reputation, business relationships, or for misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than twelve (12) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control was not approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 9. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control is approved by a majority of the Board 6 of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, if, within two (2) years after the effective date of the change in control any one of the following occurs: (a) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities or any other action by the Company that results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose an action not taken in bad faith and that is remedied by the Company within 10 days after receipt of written notice by Employee; (b) a reduction in Employee's annual base salary or target bonus; (c) the relocation of the Company's principle executive offices to a location more than 75 miles from the current location of such offices or (d), in the event such change in control occurs within the final two years prior to the calendar date stated as the termination date of the Agreement in Article II, and if, prior to such stated termination date and prior to termination of Employee's employment, the Company has not offered to enter into an extension of this employment agreement or a new employment agreement providing benefits substantially equal to those under this agreement for a term to extend until at least two years after the date of such change in control. In addition, if Employee's employment hereunder is terminated for reasons other than those set forth in Paragraph 6 of this Article within two (2) years after the effective date of a change in control which was approved by a majority of Employer's Board of Directors, Employee shall be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder, and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 10. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 11. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 12. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 11 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the 7 vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. ARTICLE XIII 8 AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the 9 law of Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . SIERRA HEALTH SERVICES, INC. By:______________________________ President P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ Laurence S. Howard 7429 Bush Garden Las Vegas, NV 89129 10 EX-10 9 EXHIBIT 10.6 (5) EMPLOYMENT AGREEMENT This Agreement is made this 15th day of November 1997, by and between SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and Anthony M. Marlon, M.D. , (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as Chief Executive Officer , and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 2. Employee shall perform such duties as are assigned by the Board of Directors, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by the Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 5 year period starting November 15, 1997 and terminating December 31, 2002 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 2002 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 2002, at such date as Employer has no further obligations to Employee under Article VII; provided, however, that 1 the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of the corporation at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the future benefits available under said programs. 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any public exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit Employee's right to invest his/her surplus funds in real estate. Employee shall complete a Conflict of 2 Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. ARTICLE VI NONCOMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such 3 harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any rights or remedies, whether 4 in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Noncompetition agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee shall voluntarily terminate employment, all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder without cause, except as otherwise set forth in Paragraph 7 of this Article, Employee shall be entitled to twenty-four (24) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, including those reasons set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 90 days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of 365 days, except in the event of a change in control. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments of such amounts which would otherwise be payable after a change in control or arising as a result 5 of a change in control shall be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment due to Employee's conduct that is materially detrimental to the Company's reputation, business relationships, or for misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than twelve (12) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and will be entitled to a cash amount equal to (4.0) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following termination of Employee's employment and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder, other than benefits under the SERP and other employee benefit plans of the Company. 9. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this 6 Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 10. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 11. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 10 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT 7 The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. ARTICLE XIII AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, 8 threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the law of Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . SIERRA HEALTH SERVICES, INC. By:______________________________ President P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ Anthony M. Marlon, M.D. 1909 Corta Bella Las Vegas, NV 89134 9 EX-10 10 EXHIBIT 10.6 (6) EMPLOYMENT AGREEMENT This Agreement is made this 15th day of November 1997, by and between SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and Erin E. MacDonald, (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as President and Chief Operating Officer, and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 2. Employee shall perform such duties as are assigned by the CEO of Employer or his/her designee, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by Employer's CEO or the appropriate Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 5 year period starting November 15, 1997 and terminating December 31, 2002 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 2002 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 2002, 1 at such date as Employer has no further obligations to Employee under Article VII; provided, however, that the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of the corporation at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the future benefits available under said programs. 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any 2 public exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit Employee's right to invest his/her surplus funds in real estate. Employee shall complete a Conflict of Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. ARTICLE VI NONCOMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's 3 agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 4 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any rights or remedies, whether in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Noncompetition agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee shall voluntarily terminate employment all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder without cause, except as otherwise set forth in Paragraph 7 of this Article, Employee shall be entitled to eighteen (18) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, including those reasons set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 90 days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of 365 days, except in the event of a change in control. Payment of such amounts shall fully release Employer 5 from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments of such amounts which would otherwise be payable after a change in control or arising as a result of a change in control shall be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment due to Employee's conduct that is materially detrimental to the Company's reputation, business relationships, or for misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than twelve (12) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control was not approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (4.0) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6 9. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control is approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (4.0) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, if, within two (2) years after the effective date of the change in control any one of the following occurs: (a) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities or any other action by the Company that results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose an action not taken in bad faith and that is remedied by the Company within 10 days after receipt of written notice by Employee; (b) a reduction in Employee's annual base salary or target bonus; (c) the relocation of the Company's principle executive offices to a location more than 75 miles from the current location of such offices or (d), in the event such change in control occurs within the final two years prior to the calendar date stated as the termination date of the Agreement in Article II, and if, prior to such stated termination date and prior to termination of Employee's employment, the Company has not offered to enter into an extension of this employment agreement or a new employment agreement providing benefits substantially equal to those under this agreement for a term to extend until at least two years after the date of such change in control. In addition, if Employee's employment hereunder is terminated for reasons other than those set forth in Paragraph 6 of this Article within two (2) years after the effective date of a change in control which was approved by a majority of Employer's Board of Directors, Employee shall be entitled to a cash amount equal to (4.0) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder, and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 10. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 7 11. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 12. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 11 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. 8 ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. ARTICLE XIII AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, 9 whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the law of Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . SIERRA HEALTH SERVICES, INC. By:______________________________ Chief Executive Officer P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ Erin E. MacDonald 9029 Grove Crest Lane Las Vegas, NV 89134 10 EX-10 11 EXHIBIT 10.6 (7) EMPLOYMENT AGREEMENT This Agreement is made this 15th day of November 1997, by and between SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and Michael A. Montalvo , (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as Vice President, Marketing, Sales and Underwriting Operations , and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 2. Employee shall perform such duties as are assigned by the President of Employer or his/her designee, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by Employer's President or the appropriate Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 1 year period starting November 15, 1997 and terminating December 31, 1998 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 1998 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 1998, 1 at such date as Employer has no further obligations to Employee under Article VII; provided, however, that the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of the corporation at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the future benefits available under said programs. 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any 2 public exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit Employee's right to invest his/her surplus funds in real estate. Employee shall complete a Conflict of Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. ARTICLE VI NONCOMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's 3 agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 4 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any rights or remedies, whether in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Noncompetition agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee shall voluntarily terminate employment all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder without cause, except as otherwise set forth in Paragraph 7 of this Article, Employee shall be entitled to six (6) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, including those reasons set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 90 days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of 365 days, except in the event of a change in control. Payment of such amounts shall fully release Employer 5 from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments of such amounts which would otherwise be payable after a change in control, or arising as a result of a change in control, shall be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment due to Employee's conduct that is materially detrimental to the Company's reputation, business relationships, or for misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than three (3) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control was not approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.0) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6 9. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control is approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.0) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, if, within two (2) years after the effective date of the change in control any one of the following occurs: (a) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities or any other action by the Company that results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose an action not taken in bad faith and that is remedied by the Company within 10 days after receipt of written notice by Employee; (b) a reduction in Employee's annual base salary or target bonus; (c) the relocation of the Company's principle executive offices to a location more than 75 miles from the current location of such offices or (d), in the event such change in control occurs within the final two years prior to the calendar date stated as the termination date of the Agreement in Article II, and if, prior to such stated termination date and prior to termination of Employee's employment, the Company has not offered to enter into an extension of this employment agreement or a new employment agreement providing benefits substantially equal to those under this agreement for a term to extend until at least two years after the date of such change in control. In addition, if Employee's employment hereunder is terminated for reasons other than those set forth in Paragraph 6 of this Article within two (2) years after the effective date of a change in control which was approved by a majority of Employer's Board of Directors, Employee shall be entitled to a cash amount equal to (2.0) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder, and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 10. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 7 11. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 12. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 11 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. 8 ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. ARTICLE XIII AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, 9 reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the law of Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. 10 IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . SIERRA HEALTH SERVICES, INC. By:______________________________ President P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ Michael A. Montalvo 1919 Davina Street Las Vegas, NV 89014 11 EX-10 12 EXHIBIT 10.6 (8) EMPLOYMENT AGREEMENT This Agreement is made this 15th day of November 1997, by and between SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and Marie H. Soldo , (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as Executive Vice President, Government Affairs and Special Projects , and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 2. Employee shall perform such duties as are assigned by the CEO of Employer or his/her designee, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by Employer's CEO or the appropriate Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 4 year period starting November 15, 1997 and terminating December 31, 2001 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 2001 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 2001, 1 at such date as Employer has no further obligations to Employee under Article VII; provided, however, that the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of the corporation at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the future benefits available under said programs. 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any 2 public exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit Employee's right to invest his/her surplus funds in real estate. Employee shall complete a Conflict of Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. ARTICLE VI NONCOMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's 3 agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 4 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any rights or remedies, whether in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Noncompetition agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee shall voluntarily terminate employment all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder without cause, except as otherwise set forth in Paragraph 7 of this Article, Employee shall be entitled to twelve (12) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, including those reasons set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 90 days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of 365 days, except in the event of a change in control. Payment of such amounts shall fully release Employer 5 from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments of such amounts which would otherwise be payable after a change in control, or arising as a result of a change in control, shall be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment due to Employee's conduct that is materially detrimental to the Company's reputation, business relationships, or for misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than twelve (12) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control was not approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6 9. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control is approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, if, within two (2) years after the effective date of the change in control any one of the following occurs: (a) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities or any other action by the Company that results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose an action not taken in bad faith and that is remedied by the Company within 10 days after receipt of written notice by Employee; (b) a reduction in Employee's annual base salary or target bonus; (c) the relocation of the Company's principle executive offices to a location more than 75 miles from the current location of such offices or (d), in the event such change in control occurs within the final two years prior to the calendar date stated as the termination date of the Agreement in Article II, and if, prior to such stated termination date and prior to termination of Employee's employment, the Company has not offered to enter into an extension of this employment agreement or a new employment agreement providing benefits substantially equal to those under this agreement for a term to extend until at least two years after the date of such change in control. In addition, if Employee's employment hereunder is terminated for reasons other than those set forth in Paragraph 6 of this Article within two (2) years after the effective date of a change in control which was approved by a majority of Employer's Board of Directors, Employee shall be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder, and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 10. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 7 11. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 12. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 11 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. 8 ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. ARTICLE XIII AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, 9 threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the law of Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . SIERRA HEALTH SERVICES, INC. By:______________________________ Chief Executive Officer P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ Marie H. Soldo 3109 LaMancha Way Las Vegas, NV 89014 10 EX-10 13 EXHIBIT 10.6 (9) EMPLOYMENT AGREEMENT This Agreement is made this 15th day of November 1997, by and between SIERRA HEALTH SERVICES, Inc., a Nevada Corporation, of Las Vegas, Nevada (hereinafter referred to as "Employer"), and James L. Starr, (hereinafter referred to as "Employee"). WITNESSETH WHEREAS, Employer is a publicly traded company engaged in the business of providing managed health care services through subsidiary companies; WHEREAS, Employee has expertise and experience in providing managed health care services; and, WHEREAS, Employee has made and is expected to continue to make a major contribution to the profitability, growth and financial strength of Employer; NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee agree as follows: ARTICLE I EMPLOYMENT/DUTIES AND POWERS 1. Employer hereby employs, engages and hires Employee as Sr. Vice President, Chief Financial Officer , and Employee hereby accepts and agrees to such hiring, engagement and employment, subject to the general supervision and direction of Employer. 2. Employee shall perform such duties as are assigned by the President of Employer or his/her designee, and shall at all times faithfully and to the best of his/her ability perform all the duties that may be required of Employee to the reasonable satisfaction of Employer. Employee shall exercise only those powers for signing contracts and conveyances in the ordinary course of business as are expressly authorized by Employer's President or the appropriate Board of Directors. Employee further agrees to participate in and assist in the development of quality improvement programs offered by Employer. ARTICLE II TERM OF EMPLOYMENT - TERM OF AGREEMENT 1. The term of employment governed by this Agreement shall be for approximately a 2 year period starting November 15, 1997 and terminating December 31, 1999 subject, however, to prior termination as hereinafter provided in Article VII. Unless earlier terminated by the mutual agreement of the parties hereto, this Agreement shall terminate at December 31, 1999 or, if Employee has become entitled to any benefit under Article VII due to termination of employment on or before December 31, 1999, 1 at such date as Employer has no further obligations to Employee under Article VII; provided, however, that the provisions of Article V and Article VI (and this clause of Article II) shall survive any termination of this Agreement. ARTICLE III COMPENSATION AND REVIEW 1. Employer shall pay Employee and Employee shall accept from Employer as payment for Employee's services hereunder, compensation in the form of base salary in the amount as set forth in Attachment A of this Agreement, payable at such times as are deemed appropriate by Employer, but not less than twice a month, and other compensation payable under this Agreement. 2. (a) Employer shall reimburse Employee for all necessary and reasonable business expenses incurred by Employee while performing services pursuant to Employer's direction. (b) Employee agrees to maintain adequate records of expenses, in such detail as Employer may reasonably request. 3. (a) Employee shall also be eligible for those Employee fringe benefit programs, bonus plans, and stock option plans as are made available to other employees of the corporation at the same organizational level, and as approved by the Board of Directors. (b) Except for Employee's vested benefits under the Supplemental Executive Retirement Plan ("SERP"), Employer may, at any time and at its sole discretion, amend any fringe benefit programs, bonus programs, or stock option programs without prior notice to Employee even though such an amendment may decrease the future benefits available under said programs. 4. Employee's performance shall be reviewed at least annually based on established job duties, goals and objectives and other reasonable standards as deemed necessary and appropriate by Employer. ARTICLE IV OTHER EMPLOYMENT Employee shall devote all of his time, attention, knowledge, and skills solely to the business and interest of Employer, unless otherwise authorized by Employer, and Employer shall be entitled to all of the income, benefits, or profits arising from or incident to all work, work associations, services, or advice of Employee, unless otherwise authorized in writing by Employer. Employee shall not, during the term hereof, be interested in any manner, as partner, officer, director, advisor, employee or in any other capacity in any other business similar to Employer's business or any allied trade, or obtain any interest adverse to Employer; provided, however, that Employee may provide advice and consultation to other entities with the written approval of Employer, and further provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest any of his/her surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any 2 public exchange, nor shall anything herein contained be deemed to prevent Employee from investing or limit Employee's right to invest his/her surplus funds in real estate. Employee shall complete a Conflict of Interest form by February 15 of each calendar year and submit it to Employer for review. All conflicts of interest or any potential conflicts of interest which arise during the year must be immediately reported to Employer. All conflict of interest concerns must be resolved to the reasonable satisfaction of Employer as a condition of continuation of employment. ARTICLE V BUSINESS SECRETS 1. Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any proprietary or confidential information concerning any matter affecting or relating to the business of Employer or its subsidiaries, including without limiting the generality of the foregoing, any of their customers, the prices they obtain from providers or have obtained from the sale of, or at which they sell or have sold, its services, or any other information concerning the business of Employer or its subsidiaries, their manner of operation, or their plans, if such a disclosure would be detrimental to the business interests of Employer or its subsidiaries. 2. If Employee's employment hereunder is terminated by either party at any time hereafter, then Employee agrees to turn over to Employer all papers, documents, working papers, correspondence, memos and any and all other documents in Employee's possession relating to or concerning any matter affecting or relating to the business of Employer or its subsidiaries. ARTICLE VI NONCOMPETITION AGREEMENT 1. Employee acknowledges that in Employee's employment hereunder, Employee will have continual contacts with the groups, members, and providers who are covered by or associated with the managed health care programs offered by Employer or its subsidiaries in Nevada and other states. In all of Employee's activities, Employee, through the nature of Employee's work, will have access to and will acquire confidential information related to the business and operations of Employer and its subsidiaries, including, without limiting the generality of the foregoing, member and group lists, and confidential information relating to processes, plans, methods of doing business and special needs of doctors, hospitals, members, groups, pharmacies, or other health care providers who contract with Employer or its subsidiaries. Employee acknowledges that all such information is the property of Employer or its subsidiaries solely and constitutes confidential information of such parties; that the disclosure thereof would cause substantial loss to the goodwill of Employer and its subsidiaries; that disclosure thereof to Employee is being made only because of the position of trust and confidence which Employee will occupy and because of Employee's 3 agreement to the restrictions herein contained; that his knowledge of these matters would enable him, on termination of this Agreement, to compete with Employer or its subsidiaries in a manner likely to cause Employer and its subsidiaries irreparable harm, and disclosure of such matters would, likewise, cause such harm; and that the restrictions imposed upon Employee herein would not prohibit Employee in earning a living. 2. It is understood and agreed by Employee and Employer that the essence of this Employment Agreement is the mutual covenants of the parties herein made, that the present and future members and groups of Employer or its subsidiaries will remain Employer's or its subsidiaries' members and groups during the term of this Agreement and following its termination for any reason. In consideration for the employment and continued employment of Employee by Employer, and also for the amount received by Employee as compensation, Employee hereby irrevocably warrants, covenants, and agrees as follows: (a) during the term of Employee's employment and after leaving the employment of Employer for any reason, whether involuntary or voluntary, Employee will not take any action whatsoever which may or might disturb any existing business relationship of Employer or its subsidiaries with any doctors, groups, members, hospitals, pharmacies or other health care providers in Nevada who contract with Employer or its subsidiaries; (b) for a period of one (1) year after leaving the employment of Employer, Employee will not solicit business from the members or groups of Employer or its subsidiaries in Nevada, or in any manner disrupt any business relationship Employer or its subsidiaries has with any contracted health care provider in Nevada with whom Employee came in contact as an employee of Employer. (c) for a period of one (1) year after leaving the employment of Employer, Employee will not, either directly or indirectly, work for any present or future competitors of Employer operating in the state of Nevada who in any manner offer any managed health care programs, insurance coverage, or administer health care claims for employers. Such competitors shall include, but are not limited to, HMOs, PPOs, insurance companies, utilization management companies, or third party administrators. 3. The one (1) year period specified in this Article will be tolled during any period of breach of any of the terms of Article VI by Employee. 4. Employee agrees that in the event of a breach of any term of this Agreement, and more particularly, in the event of a breach of any of the terms and provisions of Article VI, Employer shall be entitled to secure an order in any suit brought for that purpose to enjoin Employee from violating any of the provisions of the Agreement and that, pending the hearing and the decision on the application for such order, Employer shall be entitled to a temporary restraining order without prejudice to any other remedy available to Employer, all at the expense of Employee should Employer prevail in such action. Employee understands that the covenants of this Article are the essence of this Employment Agreement, and without which no Employment Agreement with Employee would be entered into by Employer. 4 5. The provisions of Article VI shall in no event be construed to be an exclusive remedy and such remedy shall be held and construed to be cumulative and not exclusive of any rights or remedies, whether in law or equity, otherwise available under the terms of this Agreement or under the laws of the United States or the state of Nevada. 6. The covenants and agreements made by Employee in this Article VI shall be construed as an agreement independent of any other provision in the Agreement and the existence of any claim or cause of action by Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer, by injunctive relief or otherwise, of the provisions of Article VI. The invalidity of all or any part of any section or paragraph of this Article VI shall not render invalid the remainder of this Article or any section hereof. 7. No failure or failures on the part of Employer to enforce any violation by Employee of this Noncompetition agreement, shall constitute a waiver of Employer's rights thereafter to enforce all of the terms, covenants, provisions and agreements herein contained. ARTICLE VII TERMINATION OF EMPLOYMENT 1. Termination of employment by either Employer or Employee shall follow established Sierra Health Services Policies and Procedures including appropriate notice, except as otherwise specifically set forth in this Article. 2. Employee may terminate employment hereunder with sixty (60) days prior written notice. If Employee shall voluntarily terminate employment all eligible separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, shall be paid or made available to Employee. 3. If Employer shall terminate Employee's employment hereunder without cause, except as otherwise set forth in Paragraph 7 of this Article, Employee shall be entitled to twelve (12) months salary and all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. 4. In the event Employee's employment hereunder terminates for any reason other than for cause, including those reasons set forth in Paragraph 6 of this Article, Employee and his/her family shall be eligible to remain covered under Employer's health care coverage program, at no expense, for a period of time equal to Employee's length of service or until Medicare eligible, whichever occurs first, following termination of such employment. 5. Notwithstanding any other provision in this Agreement to the contrary, Employee hereby agrees that any separation compensation due to Employee, other than accrued vacation, shall be paid out 25% after the first 90 days, 37 1/2% after the first 180 days, and the remaining 37 1/2% at the end of 365 days, except in the event of a change in control. Payment of such amounts shall fully release Employer 5 from any and all liability of Employer relating to this Agreement or the employment hereunder. Any payments of such amounts which would otherwise be payable after a change in control, or arising as a result of a change in control, shall be made in a lump sum within five (5) business days following the date of the change in control and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6. If Employer shall terminate Employee's employment due to Employee's conduct that is materially detrimental to the Company's reputation, business relationships, or for misappropriation of Employer's funds, Employee shall be eligible for four (4) weeks salary and any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, as full and final payment under this Agreement. Payment of such amounts shall fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 7. (a) If Employee is unable to perform Employee's duties hereunder, by reason of illness or incapacity of any kind, for a period of more than twelve (12) months in excess of accrued sick leave, Employee's employment hereunder may be terminated by Employer at its absolute discretion with one week of prior written notice. (b) If Employee's illness or incapacity shall have ended, and Employee shall have assumed Employee's duties hereunder, prior to the date specified in the notice of termination, Employee shall be entitled to resume Employee's employment hereunder as if such notice had not been given. 8. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control was not approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Employee's right to terminate under this Paragraph 8 may be exercised at the time of the change in control or at any time within two years after the change in control, including upon receipt of any notice that Employer has elected to terminate Employee's employment without cause during such two-year period. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 6 9. In the event of a change in control of Employer, whereby any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Employer representing 51% or more of the combined voting power of the then outstanding securities of Employer, and such change in control is approved by a majority of the Board of Directors of Employer, Employee, at his/her sole option, shall be entitled to terminate his/her employment hereunder and, upon such termination, will be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with any other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level, if, within two (2) years after the effective date of the change in control any one of the following occurs: (a) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities or any other action by the Company that results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose an action not taken in bad faith and that is remedied by the Company within 10 days after receipt of written notice by Employee; (b) a reduction in Employee's annual base salary or target bonus; (c) the relocation of the Company's principle executive offices to a location more than 75 miles from the current location of such offices or (d), in the event such change in control occurs within the final two years prior to the calendar date stated as the termination date of the Agreement in Article II, and if, prior to such stated termination date and prior to termination of Employee's employment, the Company has not offered to enter into an extension of this employment agreement or a new employment agreement providing benefits substantially equal to those under this agreement for a term to extend until at least two years after the date of such change in control. In addition, if Employee's employment hereunder is terminated for reasons other than those set forth in Paragraph 6 of this Article within two (2) years after the effective date of a change in control which was approved by a majority of Employer's Board of Directors, Employee shall be entitled to a cash amount equal to (2.99) times Employee's current salary and the target annual bonus for which Employee is eligible in the year of termination, together with all other separation compensation and benefits as are routinely made available to other employees of Employer at the same organizational level. Payment of such amounts shall be made in a lump sum within five (5) business days following the date such amounts become payable hereunder, and shall, except as otherwise provided in any other benefit program or in this Agreement, fully release Employer from any and all liability of Employer relating to this Agreement or the employment hereunder. 10. Anything contained herein to the contrary notwithstanding in the event that Employer shall discontinue operation of Employer other than as a result of a merger, consolidation or acquisition, then this Agreement shall terminate and the provisions of Article VI shall terminate as of the last day of the month in which Employer ceases operation with the same force and effect as if such last day of the month were originally set as the termination date hereof. 7 11. Any amounts payable under this Article VII shall also be payable to Employee in the event Employee is terminated without cause during the 90-day period prior to a Change in Control. 12. Whether or not Employee becomes entitled to any payments under Paragraphs 1 through 11 of this Article VII, if any payments or benefits received, or to be received, by Employee (including the vesting of any option and other non-cash benefits and property), whether pursuant to any provision of this Agreement or any other plan, arrangement or agreement with Employer or any affiliated company, excluding the Gross-Up Payment described herein (such payments and benefits being the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (such excise tax, including penalties and interest thereon, being the "Excise Tax"), Employer shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after reduction for any Excise Tax on the Total Payments and any federal and Excise Tax on the Gross-Up Payment, shall be equal to the sum of (i) the Total Payments plus (ii) any deductions disallowed for federal income tax purposes because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income multiplied by the Executive's highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. ARTICLE VIII EFFECT OF WAIVER The waiver by either party of a breach of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach thereof. ARTICLE IX ACTUAL ATTORNEY'S FEES EXPENDED Employer and Employee agree that all attorneys fees expended by either party in any dispute, arbitration or litigation concerning this Agreement will be paid by the losing party in that dispute, arbitration or litigation. ARTICLE X NOTICE Any and all notices referred to herein shall be sufficient if furnished in writing, sent by registered mail to the representative parties at the addresses subscribed below their signatures to this Agreement. ARTICLE XI ASSIGNMENT The rights, benefits and obligations of Employee under this Agreement shall be assignable, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against Employer's successors or assigns. 8 ARTICLE XII ENTIRE AGREEMENT This Agreement contains the entire Agreement between the parties, and the parties hereby agree that no other oral representations or agreements have been entered into in connection with this transaction. ARTICLE XIII AMENDMENT No amendment or modification of this Agreement shall be deemed effective, unless or until, it is executed in writing by the parties hereto. ARTICLE XIV VALIDITY This Agreement, having been executed and delivered in the State of Nevada, its validity, interpretation, performance and enforcement will be governed by the laws of that state. ARTICLE XV SEVERABILITY It is mutually agreed that all of the terms, covenants, provisions, and agreements contained herein are severable and that, in the event any of them shall be held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid term, covenant, provision, or agreement were not contained herein. ARTICLE XVI FORUM The parties hereto consent and agree that any action to enforce this Agreement or any provision therein or any rights hereunder or any action relating to the employment of Employee with Employer shall be brought in the State of Nevada. ARTICLE XVII INDEMNIFICATION Employer shall indemnify Employee whether or not then in office, to the fullest extent provided for in Employer's Articles of Incorporation or Bylaws, as in effect, or as may thereafter be amended, modified or revised from time to time (collectively, "Employer's Articles"), or permitted under the law of Nevada or such other state in which Employer may hereafter be domiciled, against any and all costs, claims, judgments, fines, settlements, liabilities, and fees or expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with any proceedings (including without limitation, 9 threatened actions, suits or investigations) arising out of, or relating to, Employee's actions or in actions as a director, officer or employee of Employer at any point during his employment by or service to Employer, whether under this Agreement, any prior employment agreements or otherwise. The indemnification contemplated under this Section shall be provided to Employee unless, at the time indemnification is sought, such indemnification would be prohibited under the law of Nevada or of the state in which Employer may then be domiciled; Employer may rely on the advice of its counsel in determining whether indemnification is so prohibited. 10 IN WITNESS WHEREOF, the parties have executed this Agreement at Las Vegas, Nevada, on the day of , 19 . SIERRA HEALTH SERVICES, INC. By:__________________________ President P. O. Box 15645 Las Vegas, NV 89114-5645 EMPLOYEE By:______________________________ James L. Starr 7621 Angel Crest Circle Las Vegas, NV 89117 11 EX-23 14 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos.2-99954, 33-6920, 33-41542, 33-41543, 33-60901 and 33-82474 of Sierra Health Services, Inc., on Forms S-8 of our report dated February 16, 1998 appearing in this Annual Report on Form 10-K of Sierra Health Services, Inc. for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Las Vegas, Nevada March 25, 1998 -----END PRIVACY-ENHANCED MESSAGE-----