-----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, Jn7QBnYVyqqKMNhSHeIV9nTv/EWlBm8jn3fCbfyUqwgTfNv1ieKxaJnkSCSO1z3J wQAwAIdtVLhKpOfFMKtPMw== 0001015402-03-001382.txt : 20030425 0001015402-03-001382.hdr.sgml : 20030425 20030424201938 ACCESSION NUMBER: 0001015402-03-001382 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030407 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20030425 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFEGUARD HEALTH ENTERPRISES INC CENTRAL INDEX KEY: 0000727303 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 521528581 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12050 FILM NUMBER: 03663218 BUSINESS ADDRESS: STREET 1: 95 ENTERPRISE T CITY: ALISO VIEJO STATE: CA ZIP: 92656-2601 BUSINESS PHONE: 9494254110 8-K 1 doc1.txt SAFEGUARD HEALTH 8-K 04-07-2003 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 APRIL 7, 2003 Date of Report (Date of earliest event reported) SAFEGUARD HEALTH ENTERPRISES, INC. (Exact name of registrant as specified in its charter) DELAWARE 0-12050 52-1528581 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 95 ENTERPRISE, SUITE 100 ALISO VIEJO, CALIFORNIA 92656-2605 (Address of principal executive offices and zip code) (949) 425-4110 (Registrant's telephone number, including area code) (949) 425-4586 (Registrant's facsimile number, including area code) ================================================================================ ITEM 5. OTHER EVENTS On April 7, 2003, the Registrant entered into a series of agreements described below: PURCHASE AND SALE AGREEMENT 1) A Purchase and Sale Agreement (the "PAS Agreement") with Health Net, Inc. ("HNI") to acquire all the issued and outstanding capital stock of its subsidiary, Health Net Dental, Inc. ("HND") (the ''HND Stock''), a California domiciled dental health maintenance organization ("Dental HMO"). The PAS Agreement between the parties describes the transaction, which is subject to certain closing conditions typical of transactions of this type, including but not limited to, (i) appropriate regulatory approval from the California Department of Managed Health Care (the "Department") and (ii) no material adverse change in either party. ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT 2) An Assumption and Indemnity Reinsurance Agreement (the "Reinsurance Agreement") between Health Net Life Insurance Company ("HNL") and SafeHealth Life Insurance Company ("SafeHealth"), a subsidiary of Registrant, under which SafeHealth will reinsure and assume certain dental indemnity and dental preferred provider organization ("PPO") contracts of HNL which are being sold to a Registrant as part of this transaction. The Reinsurance Agreement provides for the transfer from HNL to SafeHealth of substantially all of the dental indemnity and dental PPO business of HNL in California, Arizona and Oregon. The Reinsurance Agreement is subject to certain closing conditions, including but not limited to, the approval by the Oregon Department of Insurance, the filing of certain insurance policy forms with the state departments of insurance in Arizona and Oregon, no material adverse change in either party, and the closing of the PAS Agreement. NETWORK ACCESS AGREEMENT 3) A Network Access Agreement ("Network Agreement") which provides access to the HNL panel of dental PPO providers to the extent that such dental PPO provider contracts can not be assigned for any reason by HNL to SafeHealth. There are no closing conditions with respect to the Network Agreement other than the closing of the PAS Agreement transaction. STRATEGIC RELATIONSHIP AGREEMENT 4) A Strategic Relationship Agreement ("Strategic Agreement") by which HND and SafeHealth will make certain dental products available for sale by HNI to HNI group and individual medical HMO and Preferred Provider Organizational members in California, Arizona and Oregon. The Strategic Agreement will become effective upon the closing of the PAS Agreement. The term of the Strategic Agreement is sixty (60) months with an option for HNI to renew the strategic relationship for an additional sixty (60) month period. Collectively, the PAS Agreement, the Reinsurance Agreement, the Network Agreement and the Strategic Agreement described above are referred to as the "Transactions." CLOSING The Registrant anticipates the Transactions will be completed by the end of the third quarter of 2003, but there can be no assurance that the Transactions will be completed. Assuming the Transactions are completed, after the close of the Transactions, the Registrant plans to cause the merger of HND into and with the Registrant's wholly owned California subsidiary, SafeGuard Health Plans, Inc., a California corporation and a licensee under the Knox-Keene Health Care Service Plan Act of 1975, as amended. PURCHASE PRICE If the Transactions close, the Registrant will pay HNI for the HND Stock and the Transactions the total consideration of (i) nine million dollars ($9,000,000) in cash; plus (ii) an amount equal to the amount of Tangible Net Equity of HND in excess of the minimum amount of Tangible Net Equity required by Title 28, Section 1300.76 of the California Code of Regulations ("Section 1300.76") as of the closing date (the "Excess Amount"). SUMMARY OF THE ACQUISITION HND, a subsidiary of HNI, operates a Dental HMO in the state of California, is licensed as a Specialized Knox-Keene Health Care Service Plan by the Department, and offers Dental HMO plans in the state of California for both individuals and employer groups. HND has established a network of approximately 3,000 licensed dentists in the state of California who have contracted with HND to provide Dental HMO services to enrollees. HNL has established a network of approximately 7,000 licensed dentists in California and Arizona to provide dental PPO services to HNL enrollees. HND and HNL currently provide dental benefits to approximately 450,000 members. LETTER OF INTENT TO PURCHASE HEALTH NET VISION, INC. BY THE REGISTRANT On April 7, 2003, the Registrant and HNI entered into a binding letter of intent ("LOI") whereby Registrant would (i) acquire from HNI all the issued and outstanding capital stock of Health Net Vision, Inc. ("HNV") through a Stock Purchase Agreement (the "Stock Agreement"); (ii) receive all the contracts between HNV and its California clients, members, providers and brokers other than those vision contracts with HNT employees, groups and individuals who or which are enrolled in HNV and who or which also purchased HNT medical products, and the group contracts for Medi-Cal and other similar type government sponsored contracts (the "Government Sponsored Contracts"). Under the LOI, SafeHealth would also acquire from HNL, through an Assumption and Indemnity Reinsurance Agreement and a Network Access Agreement, all of the California commercial vision business underwritten and/or controlled by HNL, including but not limited to, all the group, individual, preferred provider and agent contracts relating to the California commercial vision business of HNL. TERMS OF THE TRANSACTION Under the LOI, Registrant will acquire from HNI one hundred percent (100%) of the issued and outstanding capital stock of HNV (the "Vision Stock"). The assets of HNV shall include its license to conduct business in California as a Specialized Vision Health Care Service Plan pursuant to the Knox-Keene Health Care Service Plan Act of 1975, as amended, and shall also include, but not be limited to, the Minimum Tangible Net Equity requirements of HNV as of the closing, all the HNV provider contracts, agent and broker contracts, and the commercial group and individual member vision contracts. The assets of HNV will not include the Government Sponsored Contracts or the Health Net employees, groups and individuals who or which also purchased HNT medical products. Pursuant to the LOI, HNV and/or SafeHealth, as may be applicable, will enter into an Administrative Services Agreement (the "ASA") upon closing of the transaction to provide for the transition of the vision business maintained by Health Net of Arizona, Inc. ("HNT-AZ"), through December 31, 2004, for which Registrant will charge HNT a percentage of the claims paid by HNV or SafeHealth, as applicable, related to the HNT-AZ vision business. HNL would have the option to extend the ASA for an additional one (1) year period for a rate to be charged by HNV or SafeHealth to compensate HNV or SafeHealth adequately for the services provided under the ASA (collectively the "Vision Transaction"). Under the LOI, SafeHealth would also acquire from HNL, through an Assumption and Indemnity Reinsurance Agreement and a Network Access Agreement, all of the California commercial vision business underwritten and/or controlled by HNL, including but not limited to, all the group, individual, preferred provider and agent contracts relating to the California commercial vision business of HNL. PURCHASE PRICE The purchase price for the Vision Transaction will be an amount equal to (i) three million dollars ($3,000,000) plus; (ii) an amount equal to the amount of Tangible Net Equity of HNV in excess of the Minimum TNE Requirement (the "Excess Amount") and (iii) fifty percent (50%) of the network rental payment received by HNV after closing for the services provided by HNV to an unrelated third party vision network under contract with HNV, commencing upon the closing of the Vision Transaction through the month of service for December 2004. Registrant will pay to HNT in cash or by wire transfer at the closing all components of the Purchase Price except those related to item (iii) above and the Minimum TNE Requirement related solely to HNV's Government Sponsored Contracts. The Minimum TNE Requirement related solely to HNV's Government Sponsored Contracts will be paid to HNT on the last day of the first full quarter following the closing. CLOSING Closing of the Vision Transaction shall occur as of the last day of the calendar month in which a) all required regulatory approvals of the Vision Transaction have been received by the parties; and b) the earlier of the following shall have occurred: (i) December 31, 2003; (ii) the transaction between Registrant and HNI for the purchase and sale of HND shall have terminated; or (iii) the HND Transactions close. NON SOLICITATION PROVISIONS As part of the LOI, HNT agreed that for so long as the LOI remains in effect, it will no longer solicit or entertain offers or enter into any agreements for any transaction that is comparable to the Vision Transaction, and also will not furnish information to any person or entity for such purpose for the period through May 15, 2003, during which period the parties will use their good faith efforts to develop and execute the Definitive Agreements setting forth the terms of the Vision Transaction. Notwithstanding the foregoing, Registrant acknowledged that it is the intent of HNT to enter into a strategic relationship agreement with another party to sell HNT private labeled vision products in California, Oregon and Arizona and that as result of such strategic relationship agreement, HNT will continue to offer and sell vision products in such states. QUALIFICATIONS The description of the Transactions contained in this filing is qualified in its entirety by reference to the provisions of the Purchase and Sale Agreement dated as of April 7, 2003, without exhibits, filed as Exhibit 10.43 to this Current Report on Form 8-K (1), the Network Access Agreement dated as of April 7, 2003, filed as Exhibit 10.44 to this Current Report on From 8-K, the Assumption and Indemnity Reinsurance Agreement dated as of April 7, 2003 filed as Exhibit 10.45 to this Current Report on From 8-K, the Strategic Relationship Agreement dated as of April 7, 2003, filed without exhibits, filed as Exhibit 10.46 to this Current Report on Form 8-K (1) and the Vision LOI dated as of April 7, 2003, filed as Exhibit 10.47. A copy of the Press Release, dated April 7, 2003, issued in connection with these Transactions is also filed as Exhibit 99.1 to this Current Report on Form 8-K. * * * (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.) _____________________________ (1) Registrant agrees to furnish a supplemental copy of schedules and exhibits to the Securities and Exchange Commission upon request. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (A) EXHIBITS EXHIBIT NO. DESCRIPTION ----------- ----------- 10.43 Purchase and Sale Agreement dated as of April 7, 2003, without exhibits, filed herewith (1). 10.44 Network Access Agreement dated as of April 7, 2003, filed herewith. 10.45 Assumption and Indemnity Reinsurance Agreement dated as of April 7, 2003, filed herewith. 10.46 Strategic Relationship Agreement dated as of April 7, 2003, without exhibits, filed herewith (1). 10.47 Vision Letter of Intent dated as of April 7, 2003, filed herewith. 99.1 Press Release, dated April 7 2003 regarding these Transactions, filed herewith. * * * (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.) (1) Registrant agrees to furnish a supplemental copy of schedules and exhibits to the Securities and Exchange Commission upon request. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SAFEGUARD HEALTH ENTERPRISES, INC. Date: April 25, 2003 By: /s/ Dennis L. Gates ------------------------------------------- DENNIS L. GATES Senior Vice President and Chief Financial Officer Date: April 25, 2003 By: /s/ Ronald I. Brendzel ------------------------------------------- RONALD I. BRENDZEL Senior Vice President and Secretary INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ------------ ----------- 10.43 Purchase and Sale Agreement dated as of April 7, 2003, without exhibits, filed herewith (1). 10.44 Network Access Agreement dated as of April 7, 2003, filed herewith. 10.45 Assumption and Indemnity Reinsurance Agreement dated as of April 7, 2003, filed herewith. 10.46 Strategic Relationship Agreement dated as of April 7, 2003, without exhibits, filed herewith (1). 10.47 Vision Letter of Intent dated as of April 7, 2003, filed herewith. 99.1 Press Release, dated April 7 2003 regarding these Transactions, filed herewith. (1) Registrant agrees to furnish a supplemental copy of schedules and exhibits to the Securities and Exchange Commission upon request. EXHIBIT 10.43 TO CURRENT REPORT ON FORM 8-K DATED AS OF APRIL 7, 2003 --------------------------------------------------------------------- ______________________________________________________________________________ PURCHASE AND SALE AGREEMENT BY AND BETWEEN SAFEGUARD HEALTH ENTERPRISES, INC. PURCHASER AND HEALTH NET, INC. SELLER DATED AS OF APRIL 7, 2003 ______________________________________________________________________________ TABLE OF CONTENTS ARTICLE I DEFINITIONS 2 Section 1.1 Certain Definitions . . . . . . . . . . . . . . . . . . . 2 Section 1.2 Other Definitions . . . . . . . . . . . . . . . . . . . . 5 ARTICLE II THE TRANSACTIONS 7 Section 2.1 General . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.2 Purchase and Sale of the Shares . . . . . . . . . . . . . 7 Section 2.3 Assumption and Indemnity Reinsurance Agreement. . . . . . 7 Section 2.4 HNL Contracts . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.5 Non-Assignable Contracts. . . . . . . . . . . . . . . . . 8 Section 2.6 Books and Records . . . . . . . . . . . . . . . . . . . . 8 Section 2.7 Strategic Relationship. . . . . . . . . . . . . . . . . . 9 Section 2.8 Transition Services Agreement . . . . . . . . . . . . . . 9 Section 2.9 Network Access Agreement. . . . . . . . . . . . . . . . . 9 Section 2.10 Purchase Price. . . . . . . . . . . . . . . . . . . . . . 9 Section 2.11 Distribution of Excess Tangible Net Equity. . . . . . . . 9 Section 2.12 Purchase Price Allocation 10 Section 2.13 Closing . . . . . . . . . . . . . . . . . . . . . . . . .10 Section 2.14 Adjustment to Purchase Price. . . . . . . . . . . . . . .10 Section 2.15 Deliveries at the Closing by Seller . . . . . . . . . . .11 Section 2.16 Deliveries at the Closing by Purchaser. . . . . . . . . .12 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER 12 Section 3.1 Organization of Seller. . . . . . . . . . . . . . . . . .12 Section 3.2 Authorization, Validity and Enforceability. . . . . . . .13 Section 3.3 No Violation or Breach. . . . . . . . . . . . . . . . . .13 Section 3.4 Consents and Approvals. . . . . . . . . . . . . . . . . .13 Section 3.5 Organization and Qualification of the Company . . . . . .14 Section 3.6 Organization and Qualification of HNL . . . . . . . . . .14 Section 3.7 Capitalization of the Company . . . . . . . . . . . . . .14 Section 3.8 Title to the Shares . . . . . . . . . . . . . . . . . . .14 Section 3.9 Options or Other Rights . . . . . . . . . . . . . . . . .15 Section 3.10 Financial Statements. . . . . . . . . . . . . . . . . . .15 Section 3.11 No Material Adverse Change. . . . . . . . . . . . . . . .16 Section 3.12 Permits . . . . . . . . . . . . . . . . . . . . . . . . .17 Section 3.13 Compliance with Law . . . . . . . . . . . . . . . . . . .17 Section 3.14 Legal Proceedings . . . . . . . . . . . . . . . . . . . .18 Section 3.15 Contracts . . . . . . . . . . . . . . . . . . . . . . . .18 Section 3.16 Employees . . . . . . . . . . . . . . . . . . . . . . . .19 Section 3.17 Employee Benefit Matters. . . . . . . . . . . . . . . . .20 Section 3.18 No Brokers 20 Section 3.19 Title to and Condition of Properties. . . . . . . . . . .20 Section 3.20 Real Property Leases. . . . . . . . . . . . . . . . . . .21 Section 3.21 Insurance . . . . . . . . . . . . . . . . . . . . . . . .21 i Section 3.22 Environmental Matters . . . . . . . . . . . . . . . . . .21 Section 3.23 Software. . . . . . . . . . . . . . . . . . . . . . . . .21 Section 3.24 Transactions With Affiliates. . . . . . . . . . . . . . .21 Section 3.25 Improper Payments . . . . . . . . . . . . . . . . . . . .22 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER 22 Section 4.1 Organization of Purchaser . . . . . . . . . . . . . . . .22 Section 4.2 Authorization, Validity and Enforceability. . . . . . . .22 Section 4.3 No Violation or Breach. . . . . . . . . . . . . . . . . .22 Section 4.4 Consents and Approvals. . . . . . . . . . . . . . . . . .23 Section 4.5 Legal Proceedings . . . . . . . . . . . . . . . . . . . .23 Section 4.6 Certain Governmental Consents . . . . . . . . . . . . . .23 Section 4.7 Investment Representation . . . . . . . . . . . . . . . .23 Section 4.8 No Brokers. . . . . . . . . . . . . . . . . . . . . . . .24 Section 4.9 Investigation by Purchaser. . . . . . . . . . . . . . . .24 ARTICLE V COVENANTS OF PURCHASER AND SELLER 25 Section 5.1 Conduct of Business . . . . . . . . . . . . . . . . . . .25 Section 5.2 Consents and Approvals. . . . . . . . . . . . . . . . . .27 Section 5.3 Cooperation and Further Assurances. . . . . . . . . . . .27 Section 5.4 Access to Information . . . . . . . . . . . . . . . . . .27 Section 5.5 Notice of Litigation and Requests . . . . . . . . . . . .28 Section 5.6 Notice of Changes and Defaults. . . . . . . . . . . . . .28 Section 5.7 Confidentiality . . . . . . . . . . . . . . . . . . . . .28 Section 5.8 Publicity . . . . . . . . . . . . . . . . . . . . . . . .29 Section 5.9 Distribution of Excess Tangible Net Equity. . . . . . . .29 Section 5.10 Transfer of HNL Contracts . . . . . . . . . . . . . . . .29 Section 5.11 Reinsurance Agreement . . . . . . . . . . . . . . . . . .30 Section 5.12 Strategic Relationship Agreement. . . . . . . . . . . . .30 Section 5.13 Transition Service Agreement. . . . . . . . . . . . . . .30 Section 5.14 Network Access Agreement. . . . . . . . . . . . . . . . .30 Section 5.15 Termination of Contracts. . . . . . . . . . . . . . . . .30 Section 5.16 Employment Matters; Severance . . . . . . . . . . . . . .30 Section 5.17 Name Change . . . . . . . . . . . . . . . . . . . . . . .31 Section 5.18 Sale of MediCal and Healthy Families Business . . . . . .32 Section 5.19 Interaffiliate Accounts . . . . . . . . . . . . . . . . .32 Section 5.20 Non-Competition . . . . . . . . . . . . . . . . . . . . .32 ARTICLE VI CONDITIONS TO PURCHASER'S OBLIGATIONS 33 Section 6.1 Representations, Warranties and Covenants . . . . . . . .33 Section 6.2 No Proceeding or Litigation . . . . . . . . . . . . . . .33 Section 6.3 Corporate Action. . . . . . . . . . . . . . . . . . . . .33 Section 6.4 Consents and Approvals. . . . . . . . . . . . . . . . . .33 Section 6.5 Resignation of Officers and Directors . . . . . . . . . .34 Section 6.6 Transfer of HNL Contracts . . . . . . . . . . . . . . . .34 Section 6.7 Strategic Relationship Agreement. . . . . . . . . . . . .34 Section 6.8 Transfer of Books and Records . . . . . . . . . . . . . .34 ii Section 6.9 Reinsurance Agreement . . . . . . . . . . . . . . . . . .34 Section 6.10 Network Access Agreement. . . . . . . . . . . . . . . . .34 Section 6.11 Transition Services Agreement . . . . . . . . . . . . . .34 ARTICLE VII CONDITIONS TO SELLER'S OBLIGATIONS 34 Section 7.1 Representations, Warranties and Covenants . . . . . . . .34 Section 7.2 No Proceeding or Litigation . . . . . . . . . . . . . . .34 Section 7.3 Corporate Action. . . . . . . . . . . . . . . . . . . . .35 Section 7.4 Consents and Approvals. . . . . . . . . . . . . . . . . .35 Section 7.5 Purchase Price. . . . . . . . . . . . . . . . . . . . . .35 Section 7.6 Strategic Relationship Agreement. . . . . . . . . . . . .35 Section 7.7 Reinsurance Agreement . . . . . . . . . . . . . . . . . .35 Section 7.8 Network Access Agreement. . . . . . . . . . . . . . . . .35 Section 7.9 Transition Services Agreement . . . . . . . . . . . . . .35 ARTICLE VIII SURVIVAL, INDEMNIFICATION AND ARBITRATION 35 Section 8.1 Survival. . . . . . . . . . . . . . . . . . . . . . . . .35 Section 8.2 Indemnification . . . . . . . . . . . . . . . . . . . . .35 Section 8.3 Treatment of Indemnity Payments . . . . . . . . . . . . .37 Section 8.4 Mitigation of Loss. . . . . . . . . . . . . . . . . . . .37 Section 8.5 Subrogation . . . . . . . . . . . . . . . . . . . . . . .37 Section 8.6 Tax Indemnification . . . . . . . . . . . . . . . . . . .37 Section 8.7 Exclusive Remedy. . . . . . . . . . . . . . . . . . . . .37 Section 8.8 Arbitration . . . . . . . . . . . . . . . . . . . . . . .37 ARTICLE IX TAX MATTERS 38 Section 9.1 Seller Indemnification. . . . . . . . . . . . . . . . . .38 Section 9.2 Purchaser and the Company Indemnification . . . . . . . .39 Section 9.3 Preparation of Tax Returns. . . . . . . . . . . . . . . .39 Section 9.4 Refunds or Credits. . . . . . . . . . . . . . . . . . . .39 Section 9.5 Section 338(h)(10) Election . . . . . . . . . . . . . . .40 Section 9.6 Mutual Cooperation. . . . . . . . . . . . . . . . . . . .41 Section 9.7 Contests. . . . . . . . . . . . . . . . . . . . . . . . .41 Section 9.8 Survival of Obligations . . . . . . . . . . . . . . . . .42 ARTICLE X TERMINATION 42 Section 10.1 Termination . . . . . . . . . . . . . . . . . . . . . . .42 Section 10.2 Effect of Termination . . . . . . . . . . . . . . . . . .42 ARTICLE XI MISCELLANEOUS 43 Section 11.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . .43 Section 11.2 Fees and Expenses . . . . . . . . . . . . . . . . . . . .44 Section 11.3 Entire Agreement; Waivers and Amendments. . . . . . . . .44 Section 11.4 Assignment; Binding Effect. . . . . . . . . . . . . . . .44 Section 11.5 Severability. . . . . . . . . . . . . . . . . . . . . . .44 Section 11.6 Force Majeure . . . . . . . . . . . . . . . . . . . . . .45 Section 11.7 Governing Law . . . . . . . . . . . . . . . . . . . . . .45 iii Section 11.8 Headings. . . . . . . . . . . . . . . . . . . . . . . . .45 Section 11.9 Counterparts. . . . . . . . . . . . . . . . . . . . . . .45 Section 11.10 No Third Party Beneficiaries. . . . . . . . . . . . . . .45 SCHEDULES 47 EXHIBIT A REINSURANCE AGREEMENT 49 EXHIBIT B STRATEGIC RELATIONSHIP AGREEMENT 50 EXHIBIT C NETWORK ACCESS AGREEMENT 51 EXHIBIT D SEVERANCE PLAN 52 EXHIBIT E HEALTH NET SEVERANCE POLICY 53 iv PURCHASE AND SALE AGREEMENT This PURCHASE AND SALE AGREEMENT is made and entered into as of April 7, 2003, among SafeGuard Health Enterprises, Inc., a Delaware corporation, or its Designee ("Purchaser") and Health Net, Inc., a Delaware corporation ("Seller"). W I T N E S S E T H: ------------------- WHEREAS, Seller is the beneficial and record owner of 475 shares of common stock, $.10 par value per share (the "Shares"), of Health Net Dental, Inc., a California specialized health care service plan (the "Company"), which Shares constitute all of the issued and outstanding capital stock of the Company; WHEREAS, the Company provides prepaid dental HMO coverage for both commercial and government members in California and administers dental PPO and dental indemnity products underwritten by Health Net Life Insurance Company, a wholly-owned subsidiary of Seller ("HNL"), in California, Oregon and Arizona; WHEREAS, Purchaser desires to purchase the Shares from Seller, and Seller desires to sell the Shares to Purchaser, upon the terms and subject to the conditions set forth herein; WHEREAS, Purchaser desires to purchase from HNL, and HNL desires to sell to Purchaser or its Designee, all of the California, Arizona and Oregon dental PPO and dental indemnity insurance business underwritten and/or controlled by HNL, including all the group and individual dental insurance policies and certificates, dental provider agreements and agent contracts comprising the Dental Business Assets; WHEREAS, Seller and Purchaser agree that those dental PPO and dental indemnity policies and the liabilities relating thereto shall be transferred by HNL to SafeHealth Life Insurance Company, an Affiliate of Purchaser ("SafeHealth"), through an Assumption and Indemnity Reinsurance Agreement (the "Reinsurance Agreement"); WHEREAS, Purchaser and Seller desire to enter into a strategic relationship agreement whereby each party will market the products of the other party in California, Arizona and Oregon (the "Strategic Relationship Agreement"); and WHEREAS, the transactions contemplated by this Agreement, the Reinsurance Agreement, the Strategic Relationship Agreement, the Transition Services Agreement and the Network Access Agreement constitute the "Transactions." NOW, THEREFORE, in consideration of the promises set forth above and of the representations, warranties, covenants and agreements contained herein, Seller and Purchaser hereby agree as follows: ARTICLE I DEFINITIONS ----------- Section 1.1 Certain Definitions. The following terms shall, when used in this Agreement, have the following meanings: "Affiliate" means, with respect to any Person, any entity that directly or --------- indirectly through one or more intermediaries controls, is controlled by, or is under common control with such Person. For purposes of this definition and the definition of "Subsidiaries" below, "control" (or "controlled", "controlled by" and "under common control with" as the context may require) of a Person means the possession, direct or indirect, of the power to vote fifty percent (50%) or more of the voting securities of such Person. "Books and Records" means the originals or copies of all books and records ------------------- (including computer generated or stored information) in the possession or control of HNL, the Company or the Seller and relating primarily to and necessary for the operation by Purchaser of the Dental Business, including lists of dental PPO and dental indemnity insureds of HNL, claims files, information files and data related to the dental PPO and dental indemnity dental insurance underwritten by HNL, communications, inventory of current forms, business records, claim forms, sales records, underwriting records, financial records, personnel records and compliance records, but excluding (i) personnel records relating to Employees terminated by Seller as of the Closing Date to the extent transfer of such personnel records is limited by applicable Law, (ii) except to the extent expressly provided herein, information constituting proprietary information, trade secrets, or know-how of Seller, HNL or their Affiliates, including internal management reports but excluding such Books and Records that are required by Purchaser to operate the Dental Business, and (iii) any records that Seller or HNL is required by any applicable Law to retain. "Business Day" means any day except a Saturday, Sunday or a day on which -------------- banks located in Los Angeles, California are required or are authorized by Law or by executive order to close. "Closing Balance Sheet" means that balance sheet of the Company as of the ------------------------ Closing Date prepared by Seller in accordance with SAP separately setting forth the Excess Tangible Net Equity, the other assets, properties, liabilities and stockholders equity of the Company as of the Closing Date. "Code" means the Internal Revenue Code of 1986 and the Treasury Regulations ---- promulgated thereunder, as in effect on the date hereof. "Dental Business" means (i) the pre-paid dental HMO coverage for both ----------------- commercial and government members in California provided by the Company, and (ii) the dental PPO and dental indemnity insurance policies and certificates underwritten by HNL and providing coverage to subscribers and their dependents in California, Arizona and Oregon. "Dental Business Assets" means (i) the dental PPO and dental indemnity -------------------------- insurance policies and certificates underwritten by HNL in California, Arizona and Oregon, (ii) the Books and Records and (iii) the HNL Contracts. -2- "Department" means the California Department of Managed Health Care. ---------- "Designee" means an Affiliate or Subsidiary of Purchaser approved by -------- Seller. "Effective Date" means effective date of the Reinsurance Agreement. --------------- "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended. "GAAP" means generally accepted accounting principles consistently applied ---- throughout the specified period and in the comparable period in the immediately preceding year. "Governmental Authority" means any government or political subdivision ----------------------- thereof, whether federal, state or local, or any agency, commission, department or other instrumentality of any such government or political subdivision. "Knowledge of Seller" means the actual knowledge of David W. Anderson, --------------------- Roupen Berberian, Ivan N. Berger, Douglas A. King, Susan Klarner, Juanell Hefner, Gerald Nosewicz and Christopher P. Wing. "Knowledge of Purchaser" means the actual knowledge of James E. Buncher, ----------------------- Dennis L. Gates and Ronald I. Brendzel. "Law" means all applicable laws, decisions, rules, regulations, ordinances, --- codes, statutes, judgments, injunctions, orders, decrees, licenses, permits, policies, administrative interpretations and other requirements of Governmental Authorities. "Liabilities" means, with respect to any Person, any direct or indirect ----------- indebtedness, liability, claim, loss, damage, deficiency or obligation required to be set forth or otherwise disclosed on a financial statement of such Person under GAAP or SAP, as appropriate. "Lien" means any lien, pledge, mortgage, security interest, claim, charge, ---- lease, easement, option, right of first refusal or other limitation on transfer, or other encumbrance or restriction. "Litigation" means any action, suit, claim or administrative or arbitration ---------- proceeding. "Material Contract" means any written contract, agreement, arrangement, ------------------ instrument, bond, commitment, franchise, indemnity, indenture, lease, license, or understanding (other than the Transaction Documents) to which the Company is subject or which is a HNL Contract that (i) obligates the Company or HNL to pay an amount in excess of $50,000 in any twelve-month period or $100,000 in any two year period; (ii) provides for the extension of credit to an unaffiliated third party in an amount greater than $50,000 (other than capitation payments made in the ordinary course of business); (iii) provides for a guaranty by the Company or HNL of obligations of others in excess of $50,000; (iv) constitutes an employment agreement or personal service contract not terminable on less than sixty (60) days' notice without penalty; or (v) expressly limits, in any material respect, the ability of the Company or HNL to engage in any line of business, compete with any person or expand the nature or geographic scope of its business. Notwithstanding the foregoing, the term "Material Contract(s)" does not include (i) -3- agreements with dentists, dental service providers and providers of dental supplies, or purchasers of dental coverage entered into by the Company in the ordinary course of business, unless such contract includes a provision for a minimum payment in excess of $50,000 in any twelve-month period or $100,000 in any two year period. "Person" means any individual, corporation, partnership, limited liability ------ company, firm, joint venture, association, joint-stock company, trust, unincorporated association, Governmental Authority or other entity or organization. "Policy Liabilities" means those liabilities of HNL reinsured and assumed ------------------- by SafeHealth pursuant to the Reinsurance Agreement and as more specifically defined by the Reinsurance Agreement. "Purchaser Material Adverse Effect" means any material adverse change in, ------------------------------------ or material adverse effect on, the business, financial condition or operations of Purchaser and its Subsidiaries, taken as a whole; provided, however, that the -------- ------- effects of changes that are generally applicable to (i) the industries or markets in which Purchaser and its Subsidiaries operate; (ii) the United States economy or local economy in which the Purchaser operates; or (iii) the United States securities markets shall be excluded from the determination of Purchaser Material Adverse Effect; and provided, further, that any adverse effect on -------- ------- Purchaser and its Subsidiaries resulting from the execution of this Agreement and the Transactions contemplated hereby shall also be excluded from the determination of Purchaser Material Adverse Effect. "SAP" means statutory accounting principles prescribed or permitted by the --- Department consistently applied throughout the specified period and in the comparable period in the immediately preceding year in connection with the preparation of the Financial Statements of the Company. "Seller Material Adverse Effect" means any material adverse change in, or --------------------------------- material adverse effect on, the business, financial conditions or operations of the Company or the HNL Dental Business, taken as a whole; provided, however, -------- ------- that the effects of changes that are generally applicable to (i) the industries or markets in which Seller, the HNL Dental Business or Company operate; (ii) the United States economy or local economy in which Seller, the HNL Dental Business or the Company operate; or (iii) the United States securities markets shall be excluded from the determination of Seller Material Adverse Effect; and provided, -------- further, that any adverse effect on Seller, the HNL Dental Business or the - ------- Company resulting from the execution of this Agreement, the transactions contemplated hereby, any facts or circumstances primarily related to Purchaser, or changes in the business, financial conditions or operations of Seller, the HNL Dental Business or the Company resulting from the continuation of an existing trend shall also be excluded from the determination of Seller Material Adverse Effect. "Statutory Tangible Net Equity" means the minimum Tangible Net Equity ------------------------------- required of the Company by Title 28, section 1300.76 of the California Code of Regulations. "Subsidiaries" means, with respect to any Person, each entity controlled by ------------ such Person. For purposes of this definition, "controlled" has the meaning specified in the definition of "Affiliate." -4- "Tangible Net Equity" means the actual tangible net equity of the Company --------------------- calculated in accordance with Title 28, section 1300.76 of the California Code of Regulations. "Tax" means any federal, state, county, local, foreign or other tax --- (including, without limitation, income taxes, premium taxes, excise taxes, sales taxes, use taxes, gross receipts taxes, franchise taxes, ad valorem taxes, severance taxes, capital levy taxes, transfer taxes, withholding, employment and payroll-related taxes, property taxes and import duties), and includes interest, additions to tax assessments, fines and penalties with respect thereto. "Tax Returns" means any report, return, statement, or other written ------------ information required to be supplied to a taxing authority in connection with Taxes. "Transaction Documents" means this Agreement, the Assumption and Indemnity ---------------------- Reinsurance Agreement, the Strategic Relationship Agreement, the Transition Services Agreement, the Network Access Agreement, and each other agreement and document required to be executed and delivered in connection with this Agreement, the Assumption and Indemnity Agreement, the Strategic Relationship Agreement, the Transition Services Agreement and the Network Access Agreement. "WARN" means the Worker Adjustment and Retraining Notification Act (29 ---- U.S.C. Sec. 2101 et seq.) Section 1.2 Other Definitions. The following terms shall, when used in this Agreement, have the meanings ascribed to such terms in the Sections set forth below: Term Section ---- --------- 338 Elections 9.5(a) Additional States 5.20 Allocation 9.5(b) ASO 3.15(g) Balance Sheet Accountants 2.14 Closing 2.13 Closing Date 2.13 Company Recitals Competitor 5.20 Dispute 8.8 Employees 3.16 -5- Employee Plans 3.17 Excess Tangible Net Equity 2.11 FHC Lease 5.15 Final Balance Sheet 2.14 Financial Statements 3.10 HNL Recitals HNL Contracts 2.4 HNL Financial Information 3.10(e) Indemnifiable Loss 8.3 Indemnified Party 8.2 Indemnifying Party 8.2 Indemnitee 8.3 Indemnity Payment 8.3 JAMS 8.8(a) Multi-Business Company 5.20 Network Access Agreement 2.9 Optional Termination Date 10.1 Permit(s) 3.12 Proposed Adjustment Notice 2.14 Purchase Price 2.10 Purchaser Preamble Reinsurance Agreement Recitals Retained Employees 5.16 SafeHealth Recitals Securities Act 4.7 -6- Seller Preamble Seller Entity 5.20 Shares Recitals Software 3.23 Strategic Relationship Agreement Recitals Survival Period 8.1 Transactions Recitals Transition Services Agreement 2.8 ARTICLE II THE TRANSACTIONS ---------------- Section 2.1 General. Subject to the terms, provisions and conditions of this Agreement, on the Closing Date, Seller shall, or shall cause the appropriate Seller Subsidiary to, (i) sell, convey, transfer, assign, deliver or otherwise transfer to Purchaser or its Designee, and Purchaser or its Designee shall acquire from Seller, or the appropriate Seller Subsidiary, the Dental Business Assets and the Shares, and (ii) enter into the Transactions with the Purchaser or its Designee. The designation of a Designee by Purchaser shall not affect any liability of Purchaser hereunder, and except as Seller may otherwise agree in writing, Purchaser shall be liable for all obligations of any Designee under this Agreement and the other Transaction Documents. The material assets and properties owned or leased by the Company are set forth in Schedule 2.1. Section 2.2 Purchase and Sale of the Shares. Upon the terms and subject to the conditions set forth in this Agreement, on the Closing Date, Seller shall sell, transfer, assign and deliver to Purchaser, and Purchaser shall purchase and acquire the Shares from Seller. Section 2.3 Assumption and Indemnity Reinsurance Agreement. On the Closing Date, Seller shall cause HNL and Purchaser shall cause SafeHealth to enter into the Reinsurance Agreement attached hereto as Exhibit A, whereby effective on the Effective Date, HNL shall cede to SafeHealth, and SafeHealth shall reinsure and assume the Policy Liabilities. Section 2.4 HNL Contracts. On the Closing Date, except as provided in Section 2.5, Seller shall cause HNL to transfer and assign to Purchaser, or its Designee, all of HNL's right, title and interest in its agreements with providers of dental services and dental supplies, agents and other contracts or agreements set forth on Schedule 2.4 which contracts represent all of the dental provider and agent agreements of HNL relating to the Dental Business in California, Oregon and Arizona (collectively, the "HNL Contracts"); and Purchaser or its Designee shall assume the liabilities of HNL under the HNL Contracts, provided, however, that neither Purchaser nor any Purchaser Designee shall assume (x) any obligation to pay any amounts (whether or not due at Closing) arising under the HNL Contracts prior to the Closing, or (y) any -7- liability attributable to a failure by HNL to comply with its obligations under the HNL Contracts prior to the Closing Date. Any such assignment and transfer shall be evidenced by an assignment and assumption agreement or such other agreement as the parties reasonably determine is necessary or appropriate. Section 2.5 Non-Assignable Contracts. (a) Notwithstanding anything to the contrary in this Agreement, to the extent that any HNL Contract would be subject to termination or restriction or is not capable of being assigned, transferred or sublicensed without the consent or waiver of the other party thereto or any third party (which consent or waiver has not been obtained), or if such assignment, transfer or sublicense would constitute a breach thereof or a violation of any Law, this Agreement and the other Transaction Agreements shall not constitute an assignment, transfer, sublease or sublicense thereof. (b) Seller agrees to use commercially reasonable efforts prior to the Closing to obtain consents and waivers and to attempt to eliminate any impediments to an assignment of any HNL Contract referred to above and to obtain any other consents and waivers necessary to assign and transfer the HNL Contracts to Purchaser or Purchaser's Designee at the Closing. (c) To the extent that any HNL Contract cannot be transferred, then Seller and Purchaser or its Designee shall enter into such commercially reasonable arrangements (including subcontracting if permitted) to provide to the parties the economic (taking into account Tax costs and benefits) and operational equivalent, to the extent permitted, of obtaining such consent or waivers necessary to assign and transfer the HNL Contracts. Section 2.6 Books and Records. On the Closing Date, Seller shall sell, convey, assign, deliver or otherwise transfer to Purchaser or its Designee the Books and Records, provided that Seller may retain copies of any such Books and Records as Seller or HNL may reasonably determine are necessary or desirable to conduct their businesses. Nothing in this Section 2.6 shall require Seller or HNL to transfer to Purchaser or its Designee any Books and Records that Seller or HNL is required by any applicable Law to retain and such Books and Records shall remain the property of Seller or HNL to the extent required by such Law. Seller shall allow and Seller shall cause HNL to allow Purchaser or its Designee reasonable access to, and the right at Purchaser's written request and at its own expense to make and retain copies of, any Books and Records described in the preceding sentence, on and after the Closing Date. Section 2.7 Strategic Relationship. On the date hereof, Seller and Purchaser or its Designee shall enter into the Strategic Relationship Agreement, substantially in the form attached hereto as Exhibit B, effective as of the Closing Date, pursuant to which the parties will, among other things, market and sell the dental products of Purchaser through Seller's sales distribution channels and Seller's medical products and ancillary products through Purchaser's sale distribution channels. Section 2.8 Transition Services Agreement. Seller and Purchaser shall negotiate in good faith the terms of a transition service agreement (the "Transition Service Agreement"), pursuant to which Seller or its designees shall agree to provide or arrange for the provision of -8- certain administrative and support functions on or after the Closing Date, including but not limited to, accounting and information systems support, reasonably necessary or appropriate for the proper management and administration of the Dental Business at commercially reasonable pricing, and Purchaser shall cause the Company or its Designee to provide certain administrative and support functions at commercially reasonable pricing on or after the Closing Date necessary to support Seller's vision business Section 2.9 Network Access Agreement. On the date hereof, Seller and Purchaser shall cause their respective Affiliates to enter into a network access agreement substantially in the form attached hereto as Exhibit C (the "Network Access Agreement"), effective as of the Closing Date, pursuant to which Seller shall use its commercially reasonable efforts to provide Purchaser and the Company continued access after the Closing to the dentists and other ancillary providers of dental related services with a contract with HNL to provide such services in the event such contracts by their terms cannot be assigned by HNL to Purchaser. Section 2.10 Purchase Price. As consideration for the Transactions, Purchaser shall pay to Seller on the Closing Date, an amount equal to (i) nine million US Dollars ($9,000,000) in cash or by wire transfer of immediately available funds to such account as Seller shall designate at least two (2) Business Days prior to the Closing, plus (ii) if a positive number, an amount equal to the Excess Tangible Net Equity of the Company on the Closing Date (the "Purchase Price"). In addition, at Closing, Seller shall deliver to Purchaser the Closing Balance Sheet. The Purchase Price shall be subject to adjustment as provided in Section 2.14. Section 2.11 Distribution of Excess Tangible Net Equity. Prior to Closing, Seller shall cause the Company to request from the Department permission to reduce the Tangible Net Equity of the Company to an amount equal to the Statutory Tangible Net Equity. The difference, if any, between the Tangible Net Equity of the Company and the Statutory Tangible Net Equity of the Company as of the date the Tangible Net Equity is determined shall be referred to herein as the "Excess Tangible Net Equity." Upon approval of the Department, Seller shall cause the Company to dividend or otherwise distribute to Seller, that portion of the Excess Tangible Net Equity authorized by the Department. Section 2.12 Purchase Price Allocation. The parties agree that the Purchase Price shall be allocated among the Transactions in accordance with the allocation set forth in Schedule 2.12. The parties shall file such forms as are necessary or appropriate with the Internal Revenue Service in accordance with the Code reflecting such allocation. All Tax Returns filed and positions taken with respect to the allocation of the Purchase Price by the Company and Purchaser shall be on a basis consistent with the allocation agreed upon by the parties in Schedule 2.12. Section 2.13 Closing. Subject to the satisfaction or waiver of all of the conditions precedent to closing set forth in Articles VI and VII hereof, the closing of the Transactions (the "Closing") shall take place at the offices of Health Net, Inc., 21650 Oxnard Street, Woodland Hills, California 91367 at 12:00 p.m., local time, on or before September 30, 2003, or such other time, date or location as Purchaser and Seller may mutually agree upon (the "Closing Date"). -9- Section 2.14 Adjustment to Purchase Price. (a) Not more than 180 days following the Closing Date, Purchaser shall deliver to Seller a balance sheet of the Company as of the Closing Date (the "Final Balance Sheet") which shall be prepared in accordance with SAP utilizing the same methodologies and procedures used to prepare the Closing Balance Sheet. The Final Balance Sheet shall provide a categorization of the assets and liabilities comprising the Excess Tangible Net Equity of the Company and the other assets and liabilities of the Company as of the Closing Date. At the same time Purchaser delivers the Final Balance Sheet to Seller, Purchaser shall also deliver to Seller a statement setting forth in reasonable detail the calculation of the Excess Tangible Net Equity and the other assets and liabilities of the Company used to prepare the Final Balance Sheet. (b) Seller shall be afforded the opportunity to review the Final Balance Sheet and shall be provided full access to the books, records and other relevant documents containing information on which the Final Balance Sheet is based, including but not limited to, work papers, reserve schedules and actuarial reports, as well as access to the accountants of Purchaser responsible for the preparation of the Final Balance Sheet. The Final Balance Sheet shall become final and binding on the parties on the sixtieth (60th) day following the date such Final Balance Sheet is delivered to Seller by Purchaser, unless (i) Seller delivers to Purchaser during such sixty (60) day period a notice identifying proposed adjustment(s) to the Final Balance Sheet and explaining the reasons therefor (a "Proposed Adjustment Notice"), in which event such matter shall be handled as set forth in paragraph (c) below, or (ii) Seller, in connection with its review of the Final Balance Sheet, does not receive all documents and materials and/or access to or cooperation from Purchaser or its outside accountants that are reasonably requested, in which event said period for delivering a Proposed Adjustment Notice shall be extended until the twentieth (20th) day following the date on which Seller receives all such documents, materials, access and cooperation. Any Dispute regarding the adequacy of the documents and materials provided by Purchaser to Seller shall be resolved by the Balance Sheet Accountants as provided in paragraph (c) below. (c) If a Proposed Adjustment Notice is delivered within the period set forth above, then Seller and Purchaser shall negotiate in good faith to attempt to resolve any Dispute with respect to any proposed adjustments contained in the Proposed Adjustment Notice. If Seller and Purchaser cannot resolve such Dispute within ten (10) Business Days commencing on the date of delivery of the Proposed Adjustment Notice, then either Purchaser or Seller may recommend a firm of independent certified public accountants of nationally recognized standing that is not providing services to either Purchaser, Seller or their Affiliates to review the disputed calculation, and whose determination shall be binding upon the parties. The firm of independent certified public accounts retained to make a determination with respect to any disputed calculation shall be designated by agreement between Seller and Purchaser (the "Balance Sheet Accountants"); provided, however, if the parties fail to agree, the Balance Sheet Accountants - -------- ------- shall be PriceWaterhouseCoopers. If PriceWaterhouseCoopers acts as the Balance Sheet Accountant, no principal of PriceWaterhouseCoopers with a pre-existing professional or familial relationship with either of the parties or any of their respective officers or directors may be utilized. In making its determination with respect to whether any adjustments to the Final Balance Sheet are appropriate, the Balance Sheet Accountants shall evaluate those items or amounts in the disputed calculation to which Seller has objected and shall determine whether -10- such items have been prepared in accordance with the terms of this Agreement and any applicable accounting principles. The fees and expenses of the Balance Sheet Accountants, if any, shall be borne pro-rata by Seller and Purchaser, based upon the difference between their respective calculations and the final calculations of the Balance Sheet Accountants. (d) After all disputes with respect to the Final Balance Sheet have been resolved pursuant to the procedures set forth in this Section 2.14, (i) if the amount of the Excess Tangible Net Equity on the Final Balance Sheet exceeds the Excess Tangible Net Equity on the Closing Balance Sheet, then Purchaser shall pay to Seller cash equal to the difference between the Excess Tangible Net Equity on the Final Balance Sheet and the Excess Tangible Net Equity on the Closing Balance Sheet; and (ii) if the Excess Tangible Net Equity on the Final Balance Sheet is less than the Excess Tangible Net Equity on the Closing Balance Sheet, Seller shall pay to Purchaser cash equal to the amount of the difference between the Excess Tangible Net Equity on the Final Balance Sheet and the Excess Tangible Net Equity on the Closing Balance Sheet. (e) Purchaser shall not compromise or settle any claim or account receivable of the Company for less than the full value assigned to such claim or account receivable on the Closing Balance Sheet in exchange for any direct or indirect benefit prior to final resolution of all Disputes respecting the Purchase Price without the prior written consent of Seller. Section 2.15 Deliveries at the Closing by Seller. At the Closing, Seller shall deliver or cause to be delivered to Purchaser: (a) a stock certificate or certificates representing the Shares, accompanied by duly executed stock powers, in a form reasonably satisfactory to Purchaser; (b) written assignments of the HNL Contracts, as applicable; (c) a receipt for the Purchase Price; (d) the opinions, certificates and other documents required to be delivered by Seller to Purchaser at the Closing pursuant to this Agreement; (e) the Books and Records and such seals and stock certificates of the Company in the control of Seller as Purchaser shall reasonably request; (f) the Closing Balance Sheet; (g) the Reinsurance Agreement, duly executed by HNL; (h) the Strategic Relationship Agreement, duly executed by Seller; (i) the Network Access Agreement, duly executed by HNL; and (j) the Transition Services Agreement duly executed by Seller. Section 2.16 Deliveries at the Closing by Purchaser. At the Closing, Purchaser shall deliver or cause to be delivered to Seller: -11- (a) the Purchase Price in cash or by wire transfer of immediately available funds to such account or accounts as Seller shall instruct Purchaser in writing at least two (2) Business Days prior to the Closing Date; (b) a receipt for the Shares; (c) the opinions, certificates and other documents required to be delivered by Purchaser to Seller at the Closing pursuant to this Agreement; (d) the Reinsurance Agreement, duly executed by SafeHealth; (e) the Strategic Relationship Agreement, duly executed by Purchaser or its Designee; (f) the Network Access Agreement, duly executed by Purchaser or its Designee; and (g) the Transition Services Agreement, duly executed by Purchaser. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER ---------------------------------------- Seller hereby represents and warrants to Purchaser as follows: Section 3.1 Organization of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own the Shares and to conduct its business as it is presently being conducted except where failure to be so organized, existing and in good standing or to have such power and authority would not have a Seller Material Adverse Effect. Section 3.2 Authorization, Validity and Enforceability. Seller, and its respective Affiliates that are parties to any of the Transaction Documents, have the corporate power and authority to execute, deliver and perform their obligations under the Transaction Documents to which they are parties. Seller, or its respective Affiliates that are parties to any of the Transaction Documents, have taken all necessary corporate action to authorize the execution, delivery and performance of the Transaction Documents to which they are parties and the consummation of the transactions contemplated thereby. The Transaction Documents to which Seller, or its respective Affiliates, are parties have been duly executed and delivered by Seller, or its respective Affiliate, and assuming due and valid authorization, execution and delivery thereof by all other parties thereto, constitute the legal, valid and binding obligations of Seller, or its respective Affiliate, enforceable against Seller, or its respective Affiliate, in accordance with their respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting rights of creditors and by general principles of equity regardless of whether enforcement is sought in a proceeding at law or in equity. Section 3.3 No Violation or Breach. Except as set forth in Schedule 3.3 hereto, Seller's execution, delivery and performance of this Agreement and the other Transaction Documents to which it is party, and the consummation by Seller of the transactions contemplated hereby and thereby in accordance with the terms and conditions hereof and thereof, do not and -12- will not conflict with, constitute a violation or breach of, constitute a default or give rise to any right of termination or acceleration of any right or obligation of Seller, HNL, solely with respect to the Dental Business, or the Company, or result in the creation or imposition of any Lien upon the property of Seller, the Company or the Dental Business of HNL by reason of the terms of (a) the Certificate of Incorporation or By-laws of Seller, HNL or the Company, (b) any contract, agreement, lease, indenture or other instrument to which Seller, HNL or the Company is a party or by or to which Seller or its assets or properties, or the Company or its assets or properties, or the Dental Business Assets of HNL may be bound or subject, or (c) to the Knowledge of Seller, any order, judgment, injunction, award or decree of any court, arbitrator or Governmental Authority or any statute, law or regulation applicable to Seller, the Company or the Dental Business of HNL, except for such violations, breaches or defaults which would (A) not have a Seller Material Adverse Effect or (B) become applicable as a result of the business or activities in which Purchaser is or proposes to be engaged or as a result of any acts or omissions by, or the status of any facts pertaining to, Purchaser. Section 3.4 Consents and Approvals. Except as set forth in Schedule 3.4 hereto, no consent, approval, authorization or order of, registration or filing with, or notice to, any Governmental Authority or any other Person is necessary to be obtained, made or given by Seller, HNL or the Company in connection with the execution, delivery and performance by Seller, HNL and the Company of this Agreement or any other Transaction Document to which Seller, HNL or the Company is party or for the consummation by Seller, HNL or the Company of the transactions contemplated hereby or thereby except for such filings, registrations, notifications, authorizations, consents or approvals the failure of which to obtain would (A) not have a Seller Material Adverse Effect and would not materially adversely affect the ability of Seller, HNL or the Company to consummate the transactions contemplated by this Agreement and the Transaction Documents or (B) become applicable as a result of the business or activities in which Purchaser is or proposes to be engaged or as a result of any acts or omissions by, or the status of any facts pertaining to, Purchaser. Section 3.5 Organization and Qualification of the Company. The Company is a California corporation operating as a specialized health care service plan duly organized, validly existing and in good standing under the laws of the State of California. The Company has all requisite corporate power and authority to own its assets and to conduct its business as such assets and business are presently owned and conducted except where the failure to have such power and authority, either individually or in the aggregate, would not have a Seller Material Adverse Effect. Except as set forth in Schedule 3.5 hereto, on the date of this Agreement, the Company is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the operation of its business or the properties owned by it make such licensing or qualification necessary or desirable except where failure to be licensed as qualified to do business, and to be in good standing would not have a Seller Material Adverse Effect. The Company does not have any Subsidiaries. Section 3.6 Organization and Qualification of HNL. HNL is a California corporation operating as a life and disability insurance company duly organized, validly existing and in good standing under the laws of the State of California. HNL has all requisite corporate power and authority to own the Dental Business Assets owned by it and to conduct its Dental Business as such assets and business are presently owned and conducted except where the failure to have -13- such power and authority, either individually or in the aggregate, would not have a Seller Material Adverse Effect. Except as set forth in Schedule 3.6 hereto, on the date of this Agreement, HNL is duly licensed or qualified to do business and is in good standing in Arizona and Oregon to operate its Dental Business and own the Dental Business Assets owned by it, except where failure to be licensed or qualified to do business, and to be in good standing would not have a Seller Material Adverse Effect. Section 3.7 Capitalization of the Company. As of the date hereof, the Company's authorized capital stock consists of 1,000 shares of common stock, $.10 par value per share, of which 475 have been issued and are outstanding. Seller is the record and beneficial owner of the Shares which constitute all of the issued and outstanding capital stock of the Company. The Shares are duly authorized, validly issued, fully paid and non-assessable, and are free of any contractual or statutory preemptive rights. Section 3.8 Title to the Shares. Upon delivery of the certificate or certificates representing the Shares in accordance with this Agreement, Purchaser will acquire good and marketable title to the Shares, free and clear of any Liens (except for any Liens arising from acts of Purchaser or any of its Affiliates or representatives), subject to the restrictions on transferability imposed by applicable federal and state securities Law. Section 3.9 Options or Other Rights. Except for this Agreement, there is no (a) outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other contract or agreement of any kind to purchase or otherwise to receive from the Company or Seller or any Affiliate thereof any outstanding, authorized but unissued, unauthorized or treasury shares of common stock or any other security of the Company, (b) outstanding security of any kind of the Company other than the Shares, or (c) outstanding contract or other agreement to purchase, redeem or otherwise acquire any outstanding shares of common stock or any other security of the Company. Section 3.10 Financial Statements. (a) Seller has heretofore made available to Purchaser true and complete copies of the annual statutory financial statements and audited statutory financial statements of the Company for the calendar years ending December 31, 2000, December 31, 2001, and unaudited statutory financial statements for the four quarters of calendar year 2002 in each case filed with the Department (the "Financial Statements"). The Financial Statements, at the time such Financial Statements were prepared, present fairly, in all material respects, the statutory financial condition of the Company as of the dates thereof and the statutory results of operations for each of the periods ended at such dates in each case in accordance with SAP. (b) Except as disclosed on Schedule 3.10(b) hereto and except (a) for ----------------- liabilities and obligations incurred in the ordinary course of business after December 31, 2002, (b) for liabilities and obligations disclosed in or covered by the audited statutory financial statement of the Company as of December 31, 2002, and (c) for liabilities and obligations incurred in connection with the transactions contemplated hereby or otherwise as contemplated by this Agreement, since December 31, 2002, the Company has not incurred any liabilities or obligations that would be required to be reflected or reserved against in a balance sheet of the Company, prepared in -14- accordance with SAP as applied in preparing the unaudited consolidated balance sheet of the Company, as included in the Financial Statements. Seller has made available to Purchaser copies of all material disclosed on Schedule 3.10(b). ---------------- (c) To the Knowledge of Seller, all accounts receivable, notes receivable and other receivables of the Company, whether or not reflected in the Financial Statements, arise out of transactions in the ordinary course of business. Aged accounts receivable reports of the Company dated as of December 31, 2002 are attached as Schedule 3.10(c). Except as reflected in the aged ----------------- accounts receivable report and to the extent of the accrued reserve, if any, to the Knowledge of Seller, none of such accounts receivable have been disputed or denied or is uncollectible for any reasons or subject to any legitimate offsets of any kind. (d) To the Knowledge of Seller, the accounts payable and accrued expenses reflected on the Financial Statements, except those to be reflected on the Closing Balance Sheet, reflect all material amounts owed by the Company in respect of trade accounts due and other payables required by SAP to be identified on such Company Financial Statement. To the Knowledge of Seller, no account payable or accrued expenses of the Company is past due or otherwise in default in any material respect by the Company. (e) Schedule 3.10 (e) sets forth the 2002 consolidated year to date ------------------- financial information for the HNL Dental Business (the "HNL Financial Information"). The HNL Financial Information, at the time such HNL Financial Information was prepared, presents fairly, in all material respects, the unaudited results of operation of the HNL Dental Business as of the dates thereof. Section 3.11 No Material Adverse Change. Since December 31, 2002, except as (i) contemplated hereby or relating to the Transactions contemplated hereby (ii) disclosed on Schedule 3.11 hereto, or (iii) disclosed in the Financial Statements: (a) the Company and the Dental Business of HNL have not suffered any change constituting a Seller Material Adverse Effect; (b) the Company has not agreed to the attaching, placing or granting of, or the agreement to attach, place or grant, any Lien on any asset of the Company, or any agreement relating to or contemplating any of the foregoing not in the ordinary course of business, and HNL has not agreed to the attaching, placing or granting of, or the agreement to attach, place or grant, any Lien on any of the HNL Dental Business Assets, or any agreement relating to or contemplating any of the foregoing not in the ordinary course of business; (c) the Company has not sold or transferred assets of the Company worth in excess of $50,000 in the aggregate, excluding the disposition of damaged or obsolete equipment in the ordinary course of business; (d) HNL has not sold or transferred any of the Dental Business Assets of HNL worth in excess of $50,000 in the aggregate; (e) the Company and HNL, solely with respect to HNL's Dental Business, have not made any material change in its accounting systems, policies or practices; -15- (f) the Company and HNL, solely with respect to HNL's Dental Business, have not entered into or terminated any contract or any other commitment, contract, agreement, or transaction (including, without limitation, any material borrowing or capital expenditure or sale or other disposition of any material assets), in excess of $50,000 outside the ordinary course of business; (g) the Company has not authorized any redemption, repurchase, or other acquisition of, or redeemed, repurchased or acquired, any of its capital stock; (h) the Company has not authorized any issuance of or issued any of its capital stock or securities convertible into or rights to acquire any such capital stock; (i) the Company has not suffered any default or breach in any material respect under any Material Contract or Permit that is material to the Dental Business, and HNL, solely with respect to HNL's Dental Business, has not suffered any default or breach in any material respect under any Material Contract or any Permit that is material to HNL's Dental Business; (j) the Company has not authorized any material change to (i) increase Employee compensation levels, (ii) change the manner in which Employees are compensated, (iii) increased supplemental, fringe, or health and welfare benefits provided to any employees, or (iv) paid any bonuses to Employees or officers of the Company; and (k) the Company and HNL have not made any agreements or commitments by the Company or HNL, respectively, to do any of the foregoing. Section 3.12 Permits. Except as listed on Schedule 3.12, the Company has the lawful authority and all governmental authorizations, certificates of authority, licenses or permits necessary for or required to conduct its business operations as presently conducted as a Knox-Keene Specialized Health Care Service Plan and HNL has the lawful authority and all governmental authorizations, certificates of authority, licenses or permits necessary to conduct its Dental Business as presently conducted (collectively, the "Permits"). As of the date of this Agreement, there are no pending or, to the Knowledge of Seller, threatened legal, administrative, arbitration, or other proceedings of any kind nor any pending or, to the Knowledge of Seller, threatened governmental investigations by any Governmental Authority or by any public or private group, with respect to revocation, cancellation, suspension or nonrenewal of any Permit, or which assert or allege any material violation of, or non-compliance with, any governmental requirements or which would have a Seller Material Adverse Effect. Section 3.13 Compliance with Law. (a) Except as listed on Schedule 3.13, to the Knowledge of Seller, the ------------- Company has made all material filings with Governmental Authorities in all states in which the Company operates, required for the conduct of its business operations as such are presently conducted, and HNL has made all material filings with Governmental Authorities required for the conduct of the Dental Business in all states in which HNL operates the Dental Business. Except as listed on Schedule 3.13, the Company currently satisfies in all material -------------- respects the requirements under the regulations of the Department for its operation as a Specialized Knox-Keene Health Care Service Plan, and HNL currently satisfies in all material respects the requirements for the -16- operation of the Dental Business under the regulations of the California Department of Insurance and the other states in which HNL operates the Dental Business, except where the Company's and HNL's failure to satisfy any requirement would not, individually or in the aggregate, have a Seller Material Adverse Effect. (b) There are no judgments, consent decrees, or injunctions of any court, or Governmental Authority by which the Company or HNL are bound or to which the Company and/or HNL's Dental Business is subject, except such judgments, decrees or injunctions which would not have a Seller Material Adverse Effect. To the Knowledge of Seller, except as set forth on Schedule 3.13, the -------------- Company and HNL, solely with respect to HNL's Dental Business, are not subject to and have not received any request for information, notice, demand letter, administrative inquiry or formal or informal complaint or claim from any Governmental Authority. Except as set forth on Schedule 3.13, the Company's and ------------- HNL's operation of the Dental Business as presently conducted, do not violate or fail to comply in any material respect with any applicable Law, except those which would not have a Seller Material Adverse Effect, and, to the Knowledge of Seller, the Company and HNL have not received any notices alleging any such violation or non-compliance. Section 3.14 Legal Proceedings. Except as set forth on Schedule 3.14 hereto, there is no pending or, to the Knowledge of Seller, threatened Litigation, against or involving the Company or the Dental Business of HNL. Section 3.15 Contracts. (a) Seller has delivered or made available to Purchaser, copies of all the Material Contracts in effect on the date of this Agreement. Except as set forth on Schedule 3.15(a), to the Knowledge of Seller, the Company is not in ----------------- violation or in breach of, or default under any Material Contract. To the Knowledge of Seller, (i) the Company has not received any written notice of cancellation with respect to any Material Contract or been advised that the other party thereto intends to cancel any such agreement; (ii) there are no outstanding disputes under any Material Contract; (iii) each such contract is with an unrelated third party entered into on an arms-length basis in the ordinary course of business, (iv) there are no verbal amendments, modifications or other understandings relating to such contracts that are legally binding on the parties thereto; and (v) there are no obligations that have accrued to refund all or any portion of the fees that have been paid under any Material Contract. To the Knowledge of Seller, except as set forth on Schedule 3.15(a), ---------------- the Company is not party to a provider or broker agreement that contains pricing terms materially different from the dental provider agreements referred to in Section 3.15(b), the dental service provider agreements referred to in Section 3.15(c) or the broker agreements referred to in Section 3.15(i). (b) Dentist Provider Contracts. Seller has made available to Purchaser ---------------------------- copies of all representative forms of dentist provider contracts to which the Company and HNL were a party as of December 31, 2002. As of December 31, 2002, the Company was party to approximately 3,027 dentist provider contracts and HNL was party to approximately 6,974 dentist provider contracts. Attached hereto as Schedule 3.15(b) is a list of all dentist providers who or which were a party to - ---------------- a dentist provider contract with the Company as of December 31, 2002. -17- (c) Dental Service Provider Contracts. As of December 31, 2002, the Company --------------------------------- was not a party to any dental service provider contracts (other than dentist provider contracts) and HNL was not a party to any dental service provider contracts (other than dentist provider contracts). (d) Group Contracts. Seller has made available to Purchaser copies of all ---------------- representative forms employer group agreements with 200 or more employees/subscribers to which the Company or HNL in connection with the Dental Business were a party as of December 31, 2002. As of December 31, 2002, the Company was a party to approximately 59 employer group agreements with 200 or more subscribers, and HNL in connection with the Dental Business was party to approximately 16 employer group agreements with 200 or more subscribers. (e) Individual Subscriber Contracts. Seller has made available to Purchaser ------------------------------- copies of all representative forms of all individual subscriber agreements to which the Company or HNL with respect to the Dental Business were a party as of December 31, 2002. As of December 31, 2002, the Company was a party to approximately 11,168 individual subscriber agreements, and HNL in connection with the Dental Business was a party to approximately 414 individual subscriber agreements. (f) Management Contracts. Schedule 3.15(f) lists all management services --------------------- ----------------- agreements, marketing, administrative services and third-party administrator contracts to which the Company or HNL in connection with its Dental Business were a party as of December 31, 2002. Copies of all such contracts have been made available to Purchaser. (g) ASO Contracts. As of December 31, 2002, the Company was not a party to -------------- any ASO contracts and HNL in connection with its Dental Business was not a party to any ASO contracts. (h) Commission Agreements. Schedule 3.15(h) lists all the contracts with ---------------------- ----------------- other entities to which the Company or HNL in connection with its Dental Business were a party and by which the Company or HNL in connection with its Dental Business received commission or fee income as of December 31, 2002. Copies of all such contracts have been made available to Purchaser. (i) Producer Agreements. Seller has made available to Purchaser copies of -------------------- all representative forms of contracts with brokers or agents with whom or which the Company or HNL in connection with the Dental Business were a party as of December 31, 2002. As of December 31, 2002, the Company was party to approximately (TO BE PROVIDED) contracts with brokers and agents, and HNL was party to approximately (TO BE PROVIDED) contracts with brokers and agents in connection with its Dental Business. Attached hereto as Schedule 3.15(i) is a ---------------- list of all brokers and agents of the Company who or which were party to a contract with the Company as of December 31, 2002. Section 3.16 Employees. (a) Schedule 3.16(a) hereto lists (i) all employees of the Company and ----------------- all persons employed by the Company or Health Net Vision, Inc., an Affiliate of the Company, on the date hereof that support or service the Dental Business ("Employees"), (ii) their job titles, (iii) annual rates of compensation, (iv) accrued vacation and personal days as of the most recent regular payroll date immediately preceding December 31, 2002, (v) other fringe benefits, if any, (vi) a description of any severance arrangements, if any, and (vii) the amounts payable with respect to -18- such accrued vacation and personal days as of the most recent payroll date immediately preceding December 31, 2002 and the rate at which such vacation and personal days will accrue after the date of this Agreement. (b) Except as shown on Schedule 3.16(b), the Company is not bound by ----------------- any written contract of employment or any consulting or similar agreement with any Employee of the Company and, subject to applicable Law, all oral employment contracts are terminable at will. A copy of all such employment, consulting or similar agreements have been made available to Purchaser. (c) Except as set forth in Schedule 3.16(c), the Company is not a party to ---------------- any employment or other agreement with an Employee of the Company, whether written or oral, pursuant to which the Company has agreed to make a loan to, or guarantee any loan of, any Employee of the Company, or relating to any bonus, deferred compensation, severance pay or similar plan, agreement, arrangement or understanding. (d) Except as specified in the written agreements identified in Schedule -------- 3.16(d), the Company is not bound, and following the Closing will not be bound, - ------- by any express or implied contract or agreement to employ, directly or as a consultant or otherwise, any person for any specific period of time or until any specific age. (e) Except as listed on Schedule 3.16(e), to the Knowledge of Seller, no ---------------- "leased employees" within the meaning of Section 414(n)(2) of the Code or independent contractors work, on average, more than ten hours per week for the Company, or as of the date of this Agreement have worked for the Company for more than six months, except for providers who or which contracted with the Company to provide dental services or dental supplies to subscribers in connection with the Dental Business. Section 3.17 Employee Benefit Matters. (a) Schedule 3.17 includes a correct and complete list of, and Seller -------------- has made available to Purchaser true and correct copies of material employee benefit plans maintained for the benefit of employees or former employees of the Company or dependents or beneficiaries of any employee or former employee of the Company, whether or not subject to ERISA (the "Employee Plans"). (b) Each Employee Plan has been operated and administered in all material respects in accordance with its terms and applicable Law, including without limitation ERISA and the Code, except where the failure to administer the Employee Plan would not reasonably be expected to have a Seller Material Adverse Effect. Section 3.18 No Brokers. Except as set forth on Schedule 3.18, no broker, finder or investment banker has been retained or engaged on behalf of Seller or the Company or is entitled to any brokerage, finder's or other fee, commission or compensation from Seller or the Company in connection with the transactions contemplated by this Agreement. Seller shall pay any brokerage, finder's or other fee, commission or compensation owing to any broker, finder or investment banker retained or engaged on behalf of Seller or the Company, and Seller shall indemnify and hold Purchaser harmless for any such fees, commission or compensation. -19- Section 3.19 Title to and Condition of Properties. Except as set forth on Schedule 3.19, the Company has good and marketable title, or valid and effective leasehold rights in the case of leased property, to all of the assets reflected on the Financial Statements, and all personal property owned or leased by it or used by it in the conduct of its business are used in such a manner as to create the appearance or reasonable expectation that the same is owned or leased by it, free and clear of all Liens. HNL has good and marketable title to all of the Dental Business Assets owned by it and such Dental Business Assets are used by HNL in the conduct of the Dental Business of HNL in such a manner as to create the appearance or reasonable expectation that the same is owned by it, free and clear of all Liens. To the Knowledge of Seller, there is no potential action or assertion of rights by any party, governmental or other, and no proceedings with respect thereto have been instituted of which Seller, the Company or HNL has notice, that have a Seller Material Adverse Effect. To the Knowledge of Seller, the Company has not received any notices of default or other violations from any landlord or lessor regarding any properties leased by the Company which, either individually or in the aggregate, is reasonably likely to have a Seller Material Adverse Effect. None of the assets owned, leased or used by the Company in the operation of its business, or by HNL in operation of its Dental Business, violates or fails to comply in any material respect with any applicable Law and the Company and HNL have not received any notice of an alleged violation thereof except such alleged violations that would not have a Seller Material Adverse Effect. Section 3.20 Real Property Leases. The Company is not a party to any real property leases. Section 3.21 Insurance. Schedule 3.21 lists all insurance policies and coverages maintained by or for the Company, including but not limited to, real and personal property insurance, comprehensive liability insurance, automobile liability insurance, workers' compensation insurance, stop loss insurance, reinsurance, medical malpractice insurance and professional liability insurance. Schedule 3.21 lists all stop loss or reinsurance policies and coverages maintained by or for HNL with respect to the Dental Business. Except as reflected on Schedule 3.21, all such insurance shall remain in full force and effect after the Closing. Section 3.22 Environmental Matters. To the Knowledge of Seller, the Company has not received any notice from any Governmental Authority or private person or entity advising it that the Company, its assets or its business operations, is or has been in violation of any environmental law or any applicable environmental permit or that the Company is responsible (or potentially responsible) for the cleanup of any pollutants, contaminants, hazardous or toxic wastes, substances or materials. To the Knowledge of Seller, the Company is not the subject of federal, state, local or private litigation or proceedings involving a demand for damages or other potential liability with respect to violations of environmental laws except such litigation or proceeding which would not have a Seller Material Adverse Effect. Section 3.23 Software. Schedule 3.23 sets forth a true and complete list of all software programs and other information technology owned directly by the Company or licensed directly by the Company (the "Software"). Except for the Software, the Company shall not, as of the Closing Date, own or otherwise have the right to use by license or otherwise, any software programs, technologies, information systems or other information technology used by the Company. -20- Section 3.24 Transactions With Affiliates. Except as disclosed on Schedule 3.24, to the Knowledge of Seller, other than dental benefits provided by the Company or HNL, there are no loans, leases, agreements, contracts or other transactions between the Company and any Affiliate of the Company. Section 3.25 Improper Payments. Except as listed on Schedule 3.25, to the Knowledge of Seller, neither the Company nor HNL, with respect to the HNL Dental Business, nor any stockholder, director, officer, employee or agent of the Company or HNL has made any improper bribes, kickbacks or other payments to, or received any such payments from, customers, vendors, suppliers or other persons contracting with the Company or HNL, with respect to the HNL Dental Business, and has not proposed or offered to make or receive any such payments. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER ------------------------------------------- Purchaser represents and warrants to Seller as follows: Section 4.1 Organization of Purchaser. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its assets and properties and to conduct its business as presently being conducted except where failure to be so organized, existing, and in good standing or to have such power and authority would not have a Purchaser Material Adverse Effect. Section 4.2 Authorization, Validity and Enforceability. Purchaser, and its respective Affiliates that are parties to any of the Transaction Documents, have the corporate power and authority to execute, deliver and perform their obligations under the Transaction Documents to which they are parties. Purchaser, or its Affiliates that are parties to any of the Transaction Documents, have taken all necessary corporate action to authorize the execution, delivery and performance of the Transaction Documents to which they are parties and the consummation of the transactions contemplated thereby. The Transaction Documents to which Purchaser, or its Affiliates, are parties have been duly executed and delivered by Purchaser, or its Affiliate, and, assuming due and valid authorization, execution, and delivery by all of the other parties thereto constitute the legal, valid and binding obligations of Purchaser, or its Affiliate, enforceable against Purchaser, or its Affiliate, in accordance with their respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting rights of creditors generally and by general principles of equity regardless of whether enforcement is sought in a proceeding at law or in equity. Section 4.3 No Violation or Breach. Except as set forth in Schedule 4.3, Purchaser's and Purchaser's Affiliates' execution, delivery and performance of this Agreement and the other Transaction Documents to which Purchaser or its Affiliate is party, and the consummation by Purchaser and its Affiliates of the transactions contemplated hereby and thereby in accordance with the terms and conditions hereof and thereof, do not and will not conflict with, constitute a violation or breach of, constitute a default or give rise to any right of termination or acceleration of any right or obligation of Purchaser or any of its Affiliates under, or result in the creation or -21- imposition of any Lien upon the property of Purchaser by reason of the terms of (a) the Certificate of Incorporation or By-laws of Purchaser or any of its Affiliates, (b) any contract, agreement, lease, indenture or other instrument to which Purchaser or any of its Affiliates is a party or by or to which Purchaser's or any of its Affiliate's assets or properties may be bound or subject, or (c) to the Knowledge of Purchaser, any order, judgment, injunction, award or decree of any court, arbitrator or Governmental Authority or any Law applicable to Purchaser or any of its Affiliates except for such violations, breaches or defaults which would (A) not have a Purchaser Material Adverse Effect or (B) become applicable as a result of business activities in which Seller is or proposes to be engaged or as a result of any acts or omissions by, or the status of any facts pertaining to, Seller. Section 4.4 Consents and Approvals. Except as set forth in Schedule 4.4 hereto, no consent, approval, authorization or order of, registration or filing with, or notice to, any Governmental Authority or any other Person is necessary to be obtained, made or given by Purchaser or any of its Affiliates in connection with the execution, delivery and performance by Purchaser of this Agreement or the other Transaction Documents to which Purchaser or any of its Affiliates is party or for the consummation by Purchaser or any of its Affiliates of the transactions contemplated hereby or thereby except for such filings, registrations, notifications, authorizations, consents or approvals the failure of which to obtain would (A) not have a Purchaser Material Adverse Effect and would not materially adversely affect the ability of Purchaser to consummate the transactions contemplated by this Agreement and the Transaction Documents or (B) become applicable as a result of the business or activities in which Seller is or proposes to be engaged or as a result of any acts or omissions by, or the status of any facts pertaining to, Seller. Section 4.5 Legal Proceedings. Except as set forth in Schedule 4.5 hereto, Purchaser is not bound by or subject to any order, judgment, injunction, award or decree of any court, Governmental Authority or arbitration tribunal which, either individually or in the aggregate, is reasonably likely to have a Purchaser Material Adverse Effect. Except as set forth in Schedule 4.5, there is no pending or, to the Knowledge of Purchaser, threatened Litigation against or involving Purchaser or any Affiliate that is a party to a Transaction Document which, either individually or in the aggregate, is reasonably likely to have a Purchaser Material Adverse Effect. Section 4.6 Certain Governmental Consents. As of the date hereof, to the Knowledge of Purchaser, there is no reason to believe that any Person, judicial authority, or Governmental Authority whose authorization, consent, or approval of the transactions contemplated by this Agreement or any other Transaction Document to which it or any of its Affiliates is party is required to be obtained will not give such authorization, approval, or consent based solely on facts and circumstances relating to Purchaser, any of its Affiliates or the past operations of Purchaser or any Affiliate of Purchaser. Section 4.7 Investment Representation. Purchaser has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its investment in the Shares. Purchaser has been given the opportunity to examine all documents provided by, conduct due diligence and ask questions of, and to receive answers from, Seller and the Company and their representatives concerning the terms and conditions of an investment in -22- the Shares; provided, however, that the representations and warranties made by Seller pursuant to Article III, shall be unaffected by any such examination, due diligence or any information which may have been discovered by Purchaser as a result thereof. Purchaser is purchasing the Shares for its own account for investment purposes only and without a view to the public distribution or resale thereof or of any interest therein. Purchaser acknowledges that the offering and sale of the Shares as contemplated by this Agreement are intended to be exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(1) of the Securities Act, and may not be resold by Purchaser except pursuant to an effective registration statement under the Securities Act or an exemption from registration thereunder and pursuant to registration or qualification (or exemption therefrom) under applicable state securities laws. Section 4.8 No Brokers. No broker, finder or investment banker has been retained or engaged on behalf of Purchaser or is entitled to any brokerage, finder's or other fee, commission or compensation from Purchaser in connection with the transactions contemplated by this Agreement. Section 4.9 Investigation by Purchaser. In entering into this Agreement, Purchaser: (a) acknowledges that, except for the specific representations and warranties of Seller contained in Article III hereof, none of Seller, the Company, HNL, or any of their respective directors, officers, employees, Affiliates, controlling persons, agents, advisors or representatives, makes or shall be deemed to have made any representation or warranty, either express or implied, as to the accuracy or completeness of any of the information (including, without limitation, any reserve estimates, projections, forecasts, budgets or other forward-looking information) provided or otherwise made available to Purchaser or any of its directors, officers, employees, Affiliates, controlling persons, agents, advisors or representatives (including, without limitation, in any management presentations, supplemental information or other materials or information with respect to any of the above). With respect to any such reserve estimate, projection or forecast delivered by or on behalf of Seller to Purchaser, except for the representations and warranties of Seller in Article III, Purchaser acknowledges that: (A) there are uncertainties inherent in attempting to make such projections and forecasts or reserve calculations; (B) it is familiar with such uncertainties; (C) it is taking full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts or reserve calculations so furnished to it; (D) it is not acting in reliance on any such projection or forecast or reserve calculation so furnished to it; and (E) except for proposed Final Balance Sheet adjustments consistent with the procedure set forth in Section 2.14, it shall have no claim against any such Person with respect to any such projection or forecast or reserve calculation; and (b) agrees, to the fullest extent permitted by Law, that Seller and its directors, officers, employees, Affiliates, controlling persons, agents, advisors or representatives shall not have any liability or responsibility whatsoever to Purchaser or any of its directors, officers, employees, Affiliates, controlling persons, agents, advisors or representatives on any basis (including, without limitation, in contract or tort, under federal or state securities laws or otherwise) based upon any information provided or otherwise made available, or statements made, (or omissions to so provide, make available or state), to Purchaser or any of its directors, officers, employees, Affiliates, controlling persons, agents, advisors or representatives, including, without limitation, -23- in respect of the specific written representations and warranties of Seller set forth in Article III hereof, except as and only to the extent expressly set forth in this Agreement with respect to such representations and warranties and subject to the limitations and restrictions contained in this Agreement; provided, however, that nothing contained in this Section 4.9(b) shall limit - -------- ------- liability for the specific written representations and warranties of Seller set forth in Article III hereof. ARTICLE V COVENANTS OF PURCHASER AND SELLER --------------------------------- Purchaser and Seller hereby covenant and agree as follows: Section 5.1 Conduct of Business. From and after the date hereof and prior to the Closing Date, except as otherwise required or contemplated hereunder, disclosed on Schedule 5.1, hereto or as consented to in writing by Purchaser, Seller shall use its reasonable best efforts to: (a) cause the Company and HNL to carry on the Dental Business in the ordinary course and substantially in the same manner as heretofore carried on; (b) cause the Company to use its reasonable best efforts to preserve its assets and cause HNL to use its reasonable best efforts to preserve the Dental Business Assets; (c) cause the Company not to enter into any contract or agreement and cause HNL not to enter into any contract or agreement relating to the Dental Business, other than (i) such contracts or agreements that are entered into in the ordinary course of business consistent with past practice; and (ii) any such contract or agreement not entered into in the ordinary course of business consistent with past practice and pursuant to which the Company or HNL receives or is reasonably expected to receive payments, or makes or is reasonably expected to make payments of less than $50,000 per calendar year; (d) cause the Company and HNL, solely with respect to the HNL Dental Business, not to make without prior written notice to Purchaser (i) any material change, except in the ordinary course of business, in its assets (including, but not limited to, any change in the composition of such assets so as to materially alter the proportion of cash thereof) or liabilities, or (ii) any commitment for any capital expenditures including, without limitation, replacements of equipment in the ordinary course of business, involving, in the aggregate, more than $50,000; (e) cause the Company and Health Net Vision, Inc. not to (i) make any increase in the compensation payable or to become payable to any of the Employees of the Company or Health Net Vision, Inc. (including any bonus or incentive payment or arrangement), other than normal yearly salary increases and scheduled increases under presently existing compensation plans, and currently anticipated bonuses pursuant to existing bonus arrangements; or (ii) make, amend, or enter into any written employment or consulting contract with any Employee or independent consultant or any bonus, stock option, profit sharing, pension, retirement or other similar payment or arrangement other than in the ordinary course of business; (f) cause the Company not to enter into any agreement for the purchase of capital stock of any other entity; -24- (g) cause the Company not to carry on any negotiations with other parties relating to the acquisition of capital stock or any material assets of the Company or merge or consolidate with or into any entity or sell or otherwise dispose of, or purchase, any material assets or properties (other than sales of obsolete inventory or equipment and purchases of items of inventory or equipment in replacement therefore, in the ordinary course of business consistent with past business practice) or enter into any agreement in respect of such merger, consolidation, purchases, sales, and dispositions; (h) cause HNL not to carry on any negotiations or enter any agreement with other parties relating to the sale of any of HNL's Dental Business Assets; (i) cause the Company not to enter into or engage in any material transaction with any officer, director, shareholder or Affiliate of the Company except for the payment of salaries in the ordinary course of business; (j) cancel, surrender or let lapse any insurance or reinsurance policies issued to the Company or to HNL, solely as such policies relate to HNL's Dental Business; (k) not permit the Company, except in the ordinary course of business, to (i) create, incur or assume any indebtedness for borrowed money; (ii) mortgage, pledge or otherwise encumber or subject to any Lien any of its properties or assets; or (iii) create or assume any other indebtedness; (l) not permit the Company to issue any shares of capital stock of any class or grant any warrants, options or rights to subscribe for any shares of capital stock of any class or securities convertible into or exchangeable for, or which otherwise confer on the holder any right to acquire, any shares of capital stock of any class; (m) inform Purchaser regarding all discussions, correspondence or negotiations relating to any existing or proposed new group dental HMO, dental PPO or dental indemnity contracts of the Company or HNL involving 1,000 or more subscribers; (n) not modify, amend or renew any group dental HMO, dental PPO or dental indemnity contract of the Company or HNL involving 1,000 or more subscribers without the prior written consent of Purchaser, which consent shall not be unreasonably withheld or delayed other than in the ordinary course of business; (o) advise Purchaser promptly in writing of any material adverse change in the financial condition of the Company or HNL's Dental Business; and (p) cause the Company and HNL to use reasonable efforts not to take any action that would prevent compliance with any of the conditions in Article VI of ---------- this Agreement. Section 5.2 Consents and Approvals. (a) Within thirty (30) days of the date hereof, the parties hereto shall file with the appropriate Governmental Authority any applications, notices or other documents necessary to obtain any authorizations, consents or approvals that are required to be obtained, made or given -25- to consummate the Transactions contemplated hereby and each of the parties shall use their reasonable best efforts to obtain any such necessary authorization, consent, approval from such Governmental Authority as is required to be obtained, made or given by such party to consummate the Transactions contemplated by this Agreement. (b) The parties hereto shall cooperate and coordinate with each other, and Seller shall cause the Company and HNL to cooperate with Purchaser, in seeking to obtain any necessary authorization, consent, approval or other action of any judicial authority or Governmental Authority as is required to be obtained by such other party to consummate the Transactions contemplated by this Agreement and the parties shall provide, and Seller shall cause the Company and HNL to provide, such information and communications to such judicial authorities and Governmental Authorities as may be required by such judicial authorities and Governmental Authorities in connection therewith or as the other party may reasonably request in connection therewith. Section 5.3 Cooperation and Further Assurances. Subject to the terms and conditions hereof, each of the parties hereto covenants and agrees to use its reasonable best efforts to take, or cause to be taken, all actions or do, or cause to be done, all things necessary, proper or appropriate to consummate and make effective the transactions contemplated hereby and to cause the fulfillment of the parties' obligations hereunder and to satisfy the conditions set forth in Articles VI and VII, to the extent within its control. Section 5.4 Access to Information. Prior to the Closing Date, subject to Section 5.7 hereof, Seller shall make available and allow Purchaser and its authorized representatives, at Purchaser's expense, to have reasonable access to the Company's books, records, contracts, facilities and personnel and to HNL's books, records, contracts, facilities and personnel relating solely to the Dental Business, and to personnel of Seller having knowledge of the Company or the Dental Business of HNL, for inspection, examination or verification. Any such access or examination shall be conducted upon reasonable prior notice and under reasonable circumstances during normal business hours and shall not unreasonably interfere with the operations and activities of Seller, HNL or the Company. Seller shall cause its employees and representatives, and those of the Company and HNL, to cooperate in good faith with Purchaser and its representatives in connection with any such access and examination, provided, however, that nothing herein shall require Seller, HNL or the Company to disclose any information to Purchaser if such disclosure would violate applicable Law or the provisions of any confidentiality agreement to which Seller, HNL or the Company or any of their Affiliates is a party. If information requested by Purchaser is withheld pursuant to this Section 5.4 and not disclosed by Seller, HNL or Company, Seller, HNL or the Company, as appropriate, shall notify Purchaser that certain requested information shall not be disclosed and provide a general description of the type of information withheld and the basis for nondisclosure. Unless otherwise required by Law and until the Closing Date, Purchaser shall hold any such information which is nonpublic in confidence in accordance with Section 5.7 of this Agreement. Section 5.5 Notice of Litigation and Requests. (a) From the date hereof through the Closing Date, Seller shall promptly notify Purchaser of any Litigation of the type required to be disclosed in Section 3.14 hereof that is commenced -26- or, to the Knowledge of Seller, threatened against the Company, or against any property or asset of the Company, or against any officer or director of the Company with respect to the affairs of the Company, or with respect to the Dental Business of HNL, and of any request for additional information or documentary materials by any Governmental Authority, in connection with the transactions contemplated hereby. (b) From the date hereof through the Closing Date, Purchaser shall promptly notify Seller of any Litigation of the type required to be described in Section 4.5 hereof that is commenced or to the Knowledge of Purchaser, threatened against Purchaser, or against any property or asset of Purchaser, or against any officer or director of Purchaser with respect to the affairs of Purchaser, or against any Affiliate of Purchaser that is party to a Transaction Document and of any request for additional information or documentary materials by any Governmental Authority, in connection with the transactions contemplated hereby. Section 5.6 Notice of Changes and Defaults. From the date hereof through the Closing Date, (i) Seller shall promptly notify Purchaser of the occurrence or the non-occurrence of any event, condition or circumstance, or the discovery of an inaccuracy, omission or mistake, of which it becomes aware during such period that would have a Seller Material Adverse Effect, and (ii) Purchaser shall promptly notify Seller of the occurrence or the non-occurrence of any event, condition or circumstance, or the discovery of any inaccuracy, omission or mistake, of which it becomes aware during such period that would have a Purchaser Material Adverse Effect. Section 5.7 Confidentiality. (a) From the date hereof through the Closing Date, Purchaser, its Affiliates and their respective representatives shall keep all non-public information with respect to Seller, the Company, HNL and their Affiliates provided to it by Seller or any of its representatives in connection with the transactions contemplated hereby strictly confidential, and shall not disclose any of the same without obtaining Seller's prior written consent, unless otherwise required by applicable Law or Governmental Authority. In the event that this Agreement is terminated, Purchaser and its Affiliates shall return to Seller all non-public documents, and copies thereof, provided to Purchaser or its Affiliates by Seller or any of its representatives, and shall otherwise continue to comply with the foregoing provisions of this Section 5.7. From and after the Closing Date, Purchaser and its Affiliates and their respective representatives shall keep, and Purchaser shall cause the Company and its representatives to keep, all non-public information with respect to Seller, its Affiliates other than the Company, and the pre-Closing business and operations of the Company and HNL provided to it by Seller, the Company, HNL or any of their representatives strictly confidential, and shall not disclose any of the same without obtaining Seller's prior written consent unless otherwise required by applicable Law or Governmental Authority. Before any disclosure of information, Purchaser shall give reasonable prior notice to Seller of the intended disclosure and, if requested by Seller, shall use reasonable efforts to obtain a protective order or similar protection for Seller, HNL and the Company. (b) Seller and its representatives shall keep all non-public information with respect to Purchaser and its Affiliates provided to it by Purchaser or any of its representatives in connection with the transactions contemplated hereby strictly confidential, and shall not disclose any of the -27- same without obtaining Purchaser's prior written consent unless otherwise required by applicable Law or Governmental Authority. Before any disclosure of information, Seller shall give reasonable prior notice to Purchaser of the intended disclosure and, if requested by Purchaser, shall use reasonable efforts to obtain a protective order or similar protection for Purchaser. In the event that this Agreement is terminated, Seller shall return to Purchaser all non-public documents, and copies thereof, provided to Seller by Purchaser or any of its representatives. Section 5.8 Publicity. Except as may be required under applicable Law or stock exchange rules, from the date hereof through the Closing Date, each of the parties hereto shall use its best efforts to prevent, and shall cause its Affiliates and all representatives to not engage in, encourage or support any publicity, announcement or disclosure of any kind or form in connection with this Agreement or the transactions contemplated hereby, unless the parties hereto agree in advance on the form, timing and content of any such publicity, announcement or disclosure, whether to the financial community, Governmental Authorities or members of the public. If any such announcement or disclosure is required by applicable Law or stock exchange rules, the party required to make such disclosure shall use its reasonable best efforts to provide the other party with prior notice of the required disclosure. Notwithstanding the foregoing, Seller acknowledges that Purchaser will be required to disclose and generally describe this Agreement and the Transactions contemplated by this Agreement in public filings with the Securities and Exchange Commission. Purchaser shall share drafts of any filings Purchaser is required to make with the Securities and Exchange Commission prior to making such filings and Purchaser shall incorporate any revisions to such filings reasonably requested by Seller which are provided to Purchaser by Seller within ten (10) days after receipt by Seller of a proposed draft of such filing. The parties shall jointly prepare and issue a press release regarding the Transactions, in such form as is mutually agreeable to the parties. Section 5.9 Distribution of Excess Tangible Net Equity. At or prior to the Closing, subject to receipt of all necessary regulatory approvals therefore, Seller shall cause the Company to dividend or otherwise distribute that portion of the Excess Tangible Net Equity authorized by the Department. Section 5.10 Transfer of HNL Contracts. At the Closing, subject to receipt of necessary regulatory approvals therefore, if any, and subject to the limitations of Section 2.5 hereof, Seller shall cause HNL to transfer and assign to Purchaser, or its Designee, all of HNL's right, title and interest in the HNL Contracts; and Purchaser or its Designee shall assume the liabilities of HNL under the HNL Contracts provided, however, that neither Purchaser nor any Purchaser Designee shall assume (x) any obligation to pay any amounts (whether or not due at Closing) arising under the HNL Contracts prior to the Closing, or (y) any liability attributable to a failure by HNL to comply with the foregoing prior to the Closing Date. Any such assignment and transfer shall be evidenced by an assignment and assumption agreement or such other agreement as the parties reasonably determine is necessary or appropriate. Section 5.11 Reinsurance Agreement. Seller and Purchaser shall cause their respective Affiliates to enter into, effective as of the Closing Date, the Reinsurance Agreement. Section 5.12 Strategic Relationship Agreement. Seller and Purchaser or its Designee shall enter into, effective as of the Closing Date, the Strategic Relationship Agreement. -28- Section 5.13 Transition Service Agreement. Seller and Purchaser shall negotiate in good faith and enter into on or after the Closing, the Transition Service Agreement. Section 5.14 Network Access Agreement. Seller and Purchaser shall cause their respective Affiliates to enter into, effective as of the Closing Date, the Network Access Agreement. Section 5.15 Termination of Contracts. Except for any (i) inter-Affiliate contracts necessary to administer the Dental Business on or after the Closing Date, (ii) any contract under which the Company is obligated to provide, arrange for the provision of, or indemnify for the costs of dental services and supplies of the Employees of Seller and its Affiliates and (iii) the arrangement related to that certain real property lease dated April 9, 1997 by and between Foundation Health Corporation and The Irvine Company (the "FHC Lease"), all contracts between the Company and any Affiliate of the Company shall be terminated effective as of the Closing Date. Seller and Purchaser agree to use their commercially reasonable efforts and exercise good faith to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary and proper to settle expeditiously any obligations arising from any inter-Affiliate contract terminated as required by this Section 5.15. With respect to the FHC Lease, Seller shall make available for use by the Company until May 31, 2004, the 49,920 rentable square feet ("RSF") subject to the FHC Lease, and the Company shall pay rent to Seller for the use of such space at a base rent of $1.40 per RSF per month and a common area charge of $.33 per RSF per month. The Company shall have the right to terminate its occupancy of the of the space subject to the FHC Lease upon sixty (60) days notice to Seller and payment of one month's base rent. Section 5.16 Employment Matters; Severance. (a) Purchaser may, but is not required by this Agreement, to offer continued employment to the Employees after the Closing Date. Purchaser shall pay all costs associated with any such continued employment, including all salary, benefits, relocation expenses, and other compensation to Employees accruing from and after the Closing Date. Schedule 5.16 contains a summary of ------------- the benefit plans and arrangements Purchaser intends to provide Employees retained after the Closing. Not later than ninety (90) days prior to the Closing Date, Purchaser shall provide Seller with a list of those Employees it intends to retain after the Closing (the "Retained Employees") and the list of Retained Employees may be amended by Purchaser prior to Closing unless any proposed amendment would result in any cost, liability or prejudice to Seller or any Employee. Purchaser shall offer or cause the Company to offer Retained Employees cash compensation for a period of six (6) months after the Closing equivalent to their most recent base compensation immediately preceding the Closing Date, provided, however, Purchaser shall have the right to negotiate -------- ------- with individual Retained Employees for the purpose of offering such Retained Employees alternative positions with cash compensation appropriate for such positions which may be less than their most recent base compensation immediately preceding the Closing Date. On or prior to the Closing Date, Seller may terminate or transfer any Employee other than the Retained Employees. Seller and Purchaser shall pay severance to those Employees so terminated and any Retained Employee terminated by Purchaser after the Closing in accordance with the severance methodology set forth as Exhibit D hereto, provided, however, to --------- -------- ------- the extent a "Group One" Employee (as that term is defined in Exhibit D hereto) --------- is retained as an employee -29- by Seller or any Affiliate of Seller instead of terminated by Seller, the Vision Severance Credit shall be reduced by that percentage of each such retained Group One Employee's time spent on vision business as set forth on Schedule 3.16(a) ---------------- multiplied by the total severance obligations attributable to each such Employee as of the Closing Date. Any Employee terminated pursuant to this Section 5.16 shall be provided severance (i) according to Seller's severance policy set forth as Exhibit E hereto, if such Employee is terminated at Closing or within the six --------- (6) month period following the Closing; or (ii) according to Purchaser's then current severance policy, if such Employee is terminated after expiration of such six (6) month period. Calculation of all employee benefits provided to Retained Employees by Purchaser, including but not limited to, severance for any Retained Employee terminated by Purchaser after the expiration of the six (6) month period shall include credit for such Retained Employee's time as an employee of the Company. (b) Seller shall provide any notice required by WARN resulting from the termination of Employees prior to the Closing Date, and Purchaser shall provide any notice required by WARN resulting from the termination of any Retained Employees. Section 5.17 Name Change. Except in accordance with the terms of the Strategic Relationship Agreement, Purchaser shall cease using any and all trade names, trademarks, logos and trade dress belonging to Seller or its Affiliates, including, without limitation, those containing the words "Health Net" "Health Net Dental," "Health Net Life" or any other name, term or identification that suggests, simulates or is confusing due to its similarity to any of the foregoing, in its literature, inventory, products, labels packaging, supplies or other materials relating to the Company as soon as practicable, but in any event, subject to any applicable approval by Governmental Authorities, within one hundred and twenty (120) days after the Closing Date. Unless otherwise provided in the Strategic Relationship Agreement, after one hundred and twenty (120) days, any inventory of Company supplies utilized by Purchaser shall be relabeled (by sticker or other reasonable method) with Purchaser's own trade name and trade marks. Insofar as the Company's name is used in the Company's outstanding agreements, Purchaser and the Company shall be entitled to use the names set forth therein to the extent necessary to enforce fully the provisions of those agreements until the termination or renewal of those agreements in the ordinary course. Section 5.18 Sale of MediCal and Healthy Families Business. If within one (1) year of the Closing Date, Purchaser enters into one or more definitive agreements to sell or otherwise transfer the Company's MediCal or Healthy Families business to an unaffiliated entity or entities, Purchaser shall pay Seller upon the consummation of such transaction(s) one-third (1/3) of the gross consideration received by Purchaser in connection with any such transactions. Section 5.19 Interaffiliate Accounts. The parties acknowledge that all interaffiliate accounts of the Company may not be settled as of the Closing and that any post-Closing settlements of interaffiliate accounts shall be settled within sixty (60) days after the Closing, provided that any further adjustments required thereafter shall be taken into account in the preparation of the Final Balance Sheet. Purchaser agrees to cooperate as necessary to settle any such interaffiliate accounts. -30- Section 5.20 Non-Competition. Except as provided below, during the sixty (60) months immediately following the Closing Date, Seller agrees that neither it nor any of its Affiliates (a "Seller Entity") shall, without the prior written consent of the Purchaser: (a) directly or indirectly acquire a majority interest (whether by merger, consolidation, purchase of stock or assets, or otherwise) of any Competitor (as defined below); or (b) engage, directly or indirectly, in the dental HMO, dental PPO or dental indemnity insurance business in California, Arizona and Oregon, and to the extent Seller exercises its option to extend the Strategic Relationship Agreement to additional states, engage directly or indirectly in the dental HMO, dental PPO or dental indemnity insurance business in any such additional states (the "Additional States"). For purposes of this Section, a "Competitor" shall mean an entity that derives 25% or more of its gross revenue during the calendar year next preceding the date of determination, from the dental HMO, dental PPO or dental indemnity insurance business in California, Arizona, Oregon, or if relevant, any Additional States. Notwithstanding the foregoing, the restrictions contained in this Section 5.20 shall not prohibit the acquisition by a Seller Entity of ownership of an entity that offers or operates a dental HMO, dental PPO or dental indemnity insurance business in the states of California, Arizona or Oregon, or if relevant, any Additional States and is part of an organization with multiple businesses (a "Multi-Business Company"), whether the ownership by a Seller Entity results from the consummation of a transaction in which the Multi-Business Company is either acquired by a Seller Entity or in which the Multi-Business Company acquires a Seller Entity, or by merger or consolidation; provided that the dental HMO, dental PPO and dental indemnity insurance business - -------- of the Multi-Business Company does not account for more than thirty (30%) percent of the annual gross revenues of the combined operations of the Multi-Business Company and the Seller Entity. The restrictions contained in this Section 5.20 shall have no further force or effect in the event the Strategic Relationship Agreement is terminated based upon a breach thereof by Purchaser. ARTICLE VI CONDITIONS TO PURCHASER'S OBLIGATIONS ------------------------------------- The obligation of Purchaser to purchase the Shares at the Closing is subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: Section 6.1 Representations, Warranties and Covenants. All of the representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except that any such representation and warranty that is given as of a particular date and relates solely to a particular date or period shall be true as of such date or period, and Seller shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by Seller on or prior to the Closing Date. Seller shall have delivered to Purchaser a certificate dated the Closing Date and signed by an executive officer of Seller to the foregoing effect. -31- Section 6.2 No Proceeding or Litigation. No injunction, order, decree or other relief having the force of law shall have been issued by any judicial authority or Governmental Authority and be in effect, restraining, prohibiting, modifying or preventing the consummation of the transactions contemplated hereby. No action, suit or proceeding shall have been instituted and be continuing by any Governmental Authority or any other Person to restrain, modify or prevent the consummation of the transactions contemplated hereby. Section 6.3 Corporate Action. Seller shall have delivered to Purchaser a copy of the resolutions duly adopted by the Board of Directors of Seller authorizing the execution and delivery of this Agreement and the performance of the transactions contemplated hereby by Seller, certified by the Secretary or an Assistant Secretary of Seller. Section 6.4 Consents and Approvals. All approvals, authorizations, consents and other actions required to be obtained from, and all filings and notices required to be made with or given to, any judicial authority or Governmental Authority in connection with the transactions contemplated by this Agreement shall have been obtained, made or given, as the case may be, and shall be in full force and effect (without any term, condition or restriction reasonably unacceptable to Purchaser), and any waiting period required by applicable Law or any Governmental Authority shall have expired or been earlier terminated. Purchaser shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such approvals, authorizations, consents and other actions, the making of such filings and the giving of such notices. Section 6.5 Resignation of Officers and Directors. Seller shall have caused the officers and directors of the Company to have tendered to the Company their resignations as officers and directors of the Company, effective as of the Closing Date. Section 6.6 Transfer of HNL Contracts. Subject to the limitations contained in Section 2.5, Seller shall have caused HNL to assign or otherwise transfer the HNL Contracts to Purchaser, or its Designee. Section 6.7 Strategic Relationship Agreement. Seller and Purchaser, or its Designee, shall have entered into the Strategic Relationship Agreement. Section 6.8 Transfer of Books and Records. HNL and Seller shall transfer to Purchaser or its Designee the Books and Records. Section 6.9 Reinsurance Agreement. HNL and SafeHealth shall have entered into the Reinsurance Agreement. Section 6.10 Network Access Agreement. Seller and Purchaser shall have entered into the Network Access Agreement. Section 6.11 Transition Services Agreement. The Seller and Purchaser shall have entered into the Transition Services Agreement. -32- ARTICLE VII CONDITIONS TO SELLER'S OBLIGATIONS ---------------------------------- The obligation of Seller to sell the Shares to Purchaser at the Closing is subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: Section 7.1 Representations, Warranties and Covenants. All of the representations and warranties of Purchaser contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, and Purchaser shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by Purchaser on or prior to the Closing Date. Purchaser shall have delivered to Seller a certificate dated the Closing Date and signed by an executive officer of Purchaser to the foregoing effect. Section 7.2 No Proceeding or Litigation. No injunction, order, decree or other relief having the force of law shall have been issued by any judicial authority or Governmental Authority and be in effect, restraining, prohibiting, modifying or preventing the consummation of the transactions contemplated hereby. No action, suit or proceeding shall have been instituted and be continuing by any Governmental Authority or any other Person to restrain, modify or prevent the consummation of the transactions contemplated hereby. Section 7.3 Corporate Action. Purchaser shall have delivered to Seller a copy of the resolutions duly adopted by the Board of Directors of Purchaser authorizing the execution and delivery of this Agreement and the performance of the transactions contemplated hereby by Purchaser, certified by the Secretary or an Assistant Secretary of Purchaser. Section 7.4 Consents and Approvals. All approvals, authorizations, consents and other actions required to be obtained from, and all filings and notices required to be made with or given to, any judicial authority or Governmental Authority in connection with the transactions contemplated by this Agreement shall have been obtained, made or given, as the case may be, and shall be in full force and effect (without any term, condition or restriction reasonably unacceptable to Seller), and any waiting period required by applicable Law or any Governmental Authority shall have expired or been earlier terminated. Seller shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such approvals, authorizations, consents and other actions, the making of such filings and the giving of such notices. Section 7.5 Purchase Price. Seller shall have received the Purchase Price in the manner specified in Section 2.8. Section 7.6 Strategic Relationship Agreement. Seller and Purchaser, or its Designee, shall have entered into the Strategic Relationship Agreement. Section 7.7 Reinsurance Agreement. HNL and SafeHealth shall have entered into the Reinsurance Agreement. -33- Section 7.8 Network Access Agreement. Seller and Purchaser shall have entered into the Network Access Agreement. Section 7.9 Transition Services Agreement. Seller and Purchaser shall have entered into the Transition Services Agreement. ARTICLE VIII SURVIVAL, INDEMNIFICATION AND ARBITRATION ----------------------------------------- Section 8.1 Survival. The representations and warranties of the parties contained herein, or in any Schedule hereto or certificate delivered as provided hereunder, shall survive until the second annual anniversary of the Closing Date (the "Survival Period"); provided, however, that the representations and warranties made in Section 9.1 shall survive for the period set forth in Section 9.7. Section 8.2 Indemnification. Seller hereby agrees to indemnify Purchaser against and to hold Purchaser harmless from any damages, liabilities, losses or costs (including, without limitation, reasonable attorneys' fees and expenses) (i) arising out of or due to any inaccuracy in any representation or breach of any warranty of Seller contained herein (or in any Schedule hereto or certificate delivered as provided hereunder) or in any other Transaction Document to which it is party, or the breach or nonfulfillment of any covenant, agreement or other obligation of Seller under this Agreement or any other Transaction Document to which it is party, provided, however, that Seller shall have no liability to Purchaser as a result of the breach of any representation or warranty to the extent that Purchaser had actual knowledge that such representation or warranty was incorrect or untrue prior to the Closing Date, and (ii) arising out of or due to any Litigation pending or hereafter instituted respecting actions or omissions by the Company occurring prior to the Closing Date, including but not limited to, any matters set forth in Schedule 3.14. Any provision or reserve for damages, liabilities, losses or costs relating to any Litigation pending or threatened against the Company included on Financial Statements of the Company shall be reversed prior to the Closing. (a) Purchaser hereby agrees to indemnify Seller against and to hold Seller harmless from any damages, liabilities, losses or costs (including, without limitation, reasonable attorneys' fees and expenses) arising out of or resulting directly or indirectly from any inaccuracy in any representation or breach of any warranty of Purchaser contained herein (or in any Schedule hereto or certificate delivered as provided hereunder) or in any other Transaction Document to which it is party or the breach or nonfulfillment of any covenant, agreement or other obligation of Purchaser under this Agreement or any other Transaction Document to which it is party, provided, however, that Purchaser -------- ------- shall have no liability to Seller as a result of the breach of any representation or warranty to the extent that Seller had actual knowledge that such representation or warranty was incorrect or untrue prior to the Closing Date. (b) The right of any party hereto to indemnification shall be limited to claims asserted in writing delivered by such party to the other party hereto during the Survival Period. The indemnification to which either party hereto is entitled from the other party hereto pursuant to this Section 8.2 shall become effective only after the amount of such liability suffered or incurred by the party entitled to indemnification exceeds in the aggregate $250,000 and such liability shall -34- be limited to those amounts in excess thereof. In any event, the maximum indemnification amount to which either party hereto is entitled from the other party hereto pursuant to this Section 8.2 shall not exceed $5,000,000. (c) Any dispute with respect to any amounts owed by Seller to Purchaser or by Purchaser to Seller under this indemnification provision shall be subject to arbitration as provided in Section 8.8 hereunder. (d) The party seeking indemnification under this Section (the "Indemnified Party") agrees to give prompt notice to the party against whom indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any claim, suit, action or arbitration in respect of which indemnity may be sought under this Section. The Indemnifying Party may, and at the request of the Indemnified Party shall, participate in and control the defense of any such claim, suit, action or arbitration proceeding at its own expense. The Indemnifying Party shall not be liable under this Section for any settlement effected without its consent (which shall not be unreasonably withheld or delayed) of any claim, suit, action or proceeding in respect of which indemnity may be sought hereunder. Section 8.3 Treatment of Indemnity Payments. (a) The parties agree that any payment made under Section 8.2 hereof will be treated by Seller and/or Purchaser on their Tax Returns as an adjustment to the Purchase Price. The amount which an Indemnifying Party is required to pay to, for or on behalf of the other party (hereinafter referred to as an "Indemnitee") pursuant to this Article VIII shall be adjusted (including, ---------- without limitation, retroactively) (i) by any insurance proceeds actually recovered by or on behalf of such Indemnitee in reduction of the related indemnifiable loss (the "Indemnifiable Loss") and (ii) to take account of any ------------------ Tax benefit realized as a result of any Indemnifiable Loss. Amounts required to be paid, as so reduced, are hereinafter sometimes called an "Indemnity Payment." ----------------- If an Indemnitee has received or has had paid on its behalf an Indemnity Payment for an Indemnifiable Loss and subsequently receives insurance proceeds for such an Indemnifiable Loss, or realizes any Tax benefit as a result of such Indemnifiable Loss, then the Indemnitee shall (i) promptly notify the Indemnifying Party of the amount and nature of such proceeds and benefits and (ii) pay to the Indemnifying Party the amount of such insurance proceeds or Tax benefits or, if lesser, the amount of the Indemnity Payment. Section 8.4 Mitigation of Loss. Each Indemnitee is obligated to use reasonable efforts to mitigate the amount of any Loss for which it is entitled to seek indemnification hereunder, and the Indemnifying Party shall not be required to make any payment to an Indemnitee in respect of such Loss to the extent such Indemnitee failed to comply with the foregoing obligation. Section 8.5 Subrogation. Upon making any Indemnity Payment, the Indemnifying Party will, to the extent of such payment, be subrogated to all rights of the Indemnitee against any third party in respect of the Loss to which the payment relate; provided, however, that until the Indemnitee recovers full payment of its Loss, any and all claims of the Indemnifying Party against any such third party on account of such payment are hereby made expressly subordinated and subjected in right of payment of the Indemnitee's rights against such third party. Without limiting the generality of any other provision hereof, each such Indemnitee and Indemnifying -35- Party will duly execute upon request all instruments reasonably necessary to evidence and perfect the above described subrogation and subordination rights. Section 8.6 Tax Indemnification. Notwithstanding anything in this Article VIII to the contrary, the rights and obligations of the parties with respect to indemnification (and all limitations applicable to such indemnification) for any and all representations, warranties, covenants, and other agreements set forth in Article IX shall be governed solely by the indemnification provisions of Article IX. Section 8.7 Exclusive Remedy. Following the Closing, the indemnities provided for in this Article VIII shall be the sole and exclusive remedies of the parties and their respective officers, directors, employees, Affiliates, agents, representatives, successors and assigns for any breach of or inaccuracy in any representation or warranty or any breach, nonfulfillment or default in the performance of any of the covenants or agreements contained in this Agreement (but not any such covenants or agreements to the extent they are by their terms to be performed after the Closing Date). The parties shall not be entitled to a rescission of this Agreement or to any further indemnification rights or claims of any nature whatsoever in respect thereof (whether by contract, common law, statute, law, regulation or otherwise, including, without limitation, under the Racketeer Influence and Corrupt Organizations Act of 1970, as amended), all of which the parties hereby waive, provided, however, nothing herein is intended to waive any claims for intentional fraud. Section 8.8 Arbitration. In the event of any dispute between the parties hereto relating to, arising out of, or in connection with any provision of this Agreement or any other Transaction Document (hereinafter a "Dispute"), the parties to this Agreement and their representatives, designees, successors and assigns agree that any such Dispute shall be settled by binding arbitration to take place in Orange County, California; provided, however, that nothing herein shall preclude the parties from seeking equitable judicial relief pending arbitration, including but not limited to injunctive or other provisional relief. The parties agree that this agreement to arbitrate shall survive any termination of this Agreement or any other Transaction Document. (a) Any arbitration hereunder shall be conducted by a single arbitrator chosen from the panel of arbitrators of the Judicial Arbitration & Mediation Services ("JAMS") with experience and expertise in the dental HMO or dental indemnity insurance business. If a JAMS arbitrator with specific experience in the dental HMO or dental indemnity insurance business is not available, the arbitrator must have general experience in the health insurance industry. Within ten (10) days of notice of a Dispute from Seller to Purchaser or notice from Purchaser to Seller, the Seller and Purchaser shall use their best efforts to choose a mutually agreeable arbitrator. If the Purchaser and the Seller cannot agree on an arbitrator, the arbitrator shall promptly be selected by JAMS. (b) The party submitting a Dispute to arbitration hereunder shall present its case to the arbitrator and the other party hereto in written form within twenty (20) days after the appointment of the arbitrator. The other party hereto shall then have twenty (20) days to submit a written response to the arbitrator and the original party who submitted the Dispute to arbitration. After timely receipt of each party's case, the arbitrator shall have twenty (20) days to render his or her decision. -36- (c) The arbitrator is relieved from judicial formalities and, in addition to considering the rules of law, the limitations contained in this Agreement and the customs and practices of the health care industry, shall make his or her award with a view to effectuating the intent of this Agreement. The decision of the arbitrator shall be final and binding upon the parties, and judgment may be entered thereon in a court of competent jurisdiction. Each party shall bear its own cost of arbitration, and the costs of the arbitrator shall be shared equally among each party to a Dispute. ARTICLE IX TAX MATTERS ----------- Section 9.1 Seller Indemnification. Seller shall be liable for, and shall indemnify and hold Purchaser harmless against, all Taxes of the Company payable for any taxable year or taxable period ending on or before the Closing Date, but only to the extent such Taxes exceed the amount of Taxes that have been reserved for in the Financial Statements, and any premium taxes arising on account of any premium with respect to the HNL Dental Business allocable to coverage prior to the Closing Date. To appropriately apportion any income Taxes relating to any taxable year beginning before (and ending after) the Closing Date, the parties shall apportion such income Taxes to the taxable period ending on or before the Closing Date by a closing of the Company's books consistent with its past practice for reporting items, except that (i) exemptions, allowances or deductions that are calculated on a time basis, such as the deduction for depreciation, shall be apportioned on a time basis and (ii) all Taxes relating to actions outside the ordinary course of business, occurring after the Closing shall be apportioned to the period ending after the Closing Date and all Taxes relating to actions outside the ordinary course of business, occurring prior to the Closing shall be apportioned to the period ending on the Closing Date. To appropriately apportion any non-income Taxes relating to any taxable year beginning before (and ending after) the Closing Date, the parties shall apportion such non-income Taxes to the taxable period ending on or before the Closing Date as follows: (x) ad valorem Taxes (including, without limitation, real and personal property taxes ) shall be accrued on a daily basis over the period for which such Taxes are levied, or if it cannot be determined over the period such Taxes are being levied, over the fiscal period of the relevant taxing authority, in each case irrespective of the lien or assessment date of such Taxes, (y) all Taxes relating to actions outside the ordinary course of business occurring after the Closing shall be apportioned to the period ending after the Closing Date and (z) franchise and other privilege Taxes not measured by income shall be accrued on a daily basis over the period to which the privilege relates. Section 9.2 Purchaser and the Company Indemnification. Purchaser and the Company shall be liable for, and shall indemnify and hold Seller and any of its Affiliates harmless against, any and all Taxes imposed on the Company relating or apportioned to any taxable year or portion thereof ending after the Closing Date including, without limitation, all Taxes relating to actions outside the ordinary course of business occurring after the Closing, on the Closing Date. Section 9.3 Preparation of Tax Returns. Seller shall prepare and file, or cause to be filed, all Tax Returns (including amended Tax Returns) relating to the Company for any Tax period ending on or prior to the Closing Date. Purchaser shall prepare and file, or cause to be filed, all other Tax Returns relating to the Company. -37- Section 9.4 Refunds or Credits. Purchaser or the Company shall promptly pay to Seller any refunds or credits (including interest paid by the IRS thereon) relating to Taxes for which Seller may be liable under Section 9.1 hereof except to the extent such refund or credit is included as an asset on the Closing Balance Sheet and used to calculate the Excess Tangible Net Equity. If Purchaser or Company receives a refund from the IRS relating to Taxes for which Seller may be liable under Section 9.1 hereof and fails to pay such refund to Seller within thirty (30) days of receipt, Purchaser shall pay interest on such refund at the rate of one-percent (1%) until such amount is paid to Seller. For purposes of this Section 9.4, the terms "refund" and "credit" shall include a reduction in Taxes and the use of an overpayment of Taxes as an audit or other Tax offset. Receipt of a refund shall occur upon the filing of a Tax Return or an adjustment thereto using such reduction, overpayment or offset, or upon the receipt of cash. Upon the request of Seller, Purchaser shall prepare and file, or cause to be prepared and filed, all claims for refunds relating to such Taxes; provided, however, that Purchaser shall not be required to file such claims for refund to the extent such claims for refund would have a Purchaser Material Adverse Effect in future periods or to the extent the claims for refund relate to a carryback of an item. Purchaser shall be entitled to all other refunds and credits of Taxes; provided, however, that Purchaser will not allow the amendment of any Tax Return relating to any Taxes for a period (or portion thereof) ending on or prior to the Closing Date or the carryback of an item to a period ending prior to Closing without Seller's consent. Section 9.5 Section 338(h)(10) Election. (a) Purchaser shall have the right, but not the obligation, to require Seller upon written request delivered to Seller within one hundred and eighty (180) days after the Closing Date, to join with Purchaser in making the elections provided for in section 338(g) and section 338(h)(10) of the Code (the "338 Elections"). If Purchaser exercises its right to make the 338 Elections, Purchaser and Seller shall also make such other similar elections as may be necessary for state and local income tax purposes provided that such elections achieve substantially the same results to Purchaser, Seller and the Company as the 338 Elections achieve for federal income tax purposes and, for purposes of this Agreement, the term "338 Elections" shall be deemed to include any such state and local income tax elections. Purchaser and Seller shall comply fully with all filings and other requirements necessary to effectuate the 338 Elections on a timely basis and agree to cooperate in good faith with each other in the preparation and timely filing of all Tax Returns required to be filed in connection with the making of the 338 Elections, including the exchange of information and the joint preparation and filing of Form 8023 (including related schedules). (b) The fair market value, "aggregate deemed sales price," and "adjusted grossed-up basis" (as those terms are defined in the Treasury Regulations promulgated under section 338 of the Code) of each asset of the Company shall be determined in accordance with the allocation (the "Allocation") mutually agreed upon, in writing, by Purchaser and Seller. Purchaser and Seller shall (i) assist each other in the preparation of the Allocation; (ii) agree to act in accordance with the Allocation in the preparation and filing of all Tax Returns and in the course of any tax audits, appeals, or litigation relating thereto; and (iii) each notify the other as soon as reasonably practicable of any audit adjustment or proposed audit adjustment by any taxing authority that affects or may affect the Allocation. -38- (c) If Purchaser and Seller make the 338 Elections, the Tax attributable to the gain realized by the Company on the deemed sale of its assets pursuant to the 338 Elections shall be allocated and paid (i) by Seller, to the extent of the amount of Tax that, if the 338 Elections had not been made, would have been imposed on the gain realized by Seller on the sale of the Shares pursuant to this Agreement, and (ii) by Purchaser, to the extent of the remaining portion of such Tax. Any Tax imposed upon Seller that is attributable to the 338 Elections and that is in excess of the amount described in clause (i) of the immediately preceding sentence shall be paid by Purchaser to Seller at least five (5) Business Days prior to the due date for payment of such Tax. (d) For purposes of Section 9.5(c), the "amount of the Tax that, if the 338 Elections had not been made, would have been imposed on the gain realized by Seller on the sale of the Shares pursuant to this Agreement" shall be the excess of (i) the aggregate amount of Tax that would have been imposed on Seller (or the consolidated, combined, or unitary group of which Seller is a member) for the taxable period that includes the Closing Date if the 338 Elections had not been made over (ii) the aggregate amount of Tax that would have been imposed on Seller (or the consolidated, combined, or unitary group of which Seller is a member) for such taxable period if the 338 Elections had not been made and Seller recognized no gain on the sale of the Shares. Within sixty (60) days following the Closing Date, Seller shall provide Purchaser a calculation of such excess, showing all information necessary to the computation, and which shall include a schedule that sets forth the determination (including any and all adjustments made pursuant to the federal consolidated tax return rules as provided in sections 1502 and 1503 of the Code and the Treasury Regulations promulgated pursuant to such sections) of Seller's adjusted tax basis in the Shares as of the Closing Date. (e) The Tax described in Sections 9.5(c) and 9.5(d) shall be increased or decreased, as the case may be, by any adjustments to such Tax that occur after the Closing Date. (f) Each party shall use its best efforts to minimize the amount of any Tax allocable to the other pursuant to Section 9.5(c). (g) Notwithstanding anything in this Article IX to the contrary, if Purchaser and Seller make the 338 Elections, Purchaser shall pay or cause to be paid all Tax allocable to Purchaser pursuant to Section 9.2(c). Section 9.6 Mutual Cooperation. As soon as practicable, but in any event within fifteen (15) days after either Seller's or Purchaser's request, as the case may be, Purchaser shall deliver to Seller or Seller shall deliver to Purchaser, as the case may be, such information and other data relating to the Tax Returns and Taxes of the Company and shall provide such other assistance as may reasonably be requested, to cause the completion and filing of all Tax Returns or to respond to audits by any taxing authorities with respect to any Tax Returns or taxable periods or to otherwise enable Seller, Purchaser or the Company to satisfy their accounting or Tax requirements. For a period of five years from and after the Closing, Purchaser and Seller shall, and shall cause their Affiliates to, maintain and make available to the other party, on such other party's reasonable request, copies of any and all information, books and records referred to in this Section 9.6. After such five-year period, Purchaser or Seller may dispose of such information, books and records, provided that prior to such disposition, Purchaser or Seller shall give the other party the opportunity to take possessions of such information, books and records. -39- Section 9.7 Contests. Whenever any taxing authority asserts a claim, makes an assessment or otherwise disputes the amount of Taxes for which Seller is or may be liable under this Agreement, Purchaser shall, if informed of such an assertion, promptly inform Seller within five (5) Business Days, and Seller shall have the right to control any resulting proceedings and to determine whether and when to settle any such claim, assessment or dispute to the extent such proceedings or determinations affect the amount of Taxes for which Seller may be liable under the Agreement. If Purchaser fails to provide such notice and such failure shall prejudice Seller's ability to defend such assessment, then Seller's obligation under Section 9.1 shall be null and void with regard to such assessment. Whenever any taxing authority asserts a claim, makes an assessment or otherwise disputes the amount of Taxes for which Purchaser is liable under this Agreement, Purchaser shall have the right to control any resulting proceedings and to determine whether and when to settle any such claim, assessment or dispute, except to the extent such proceedings affect the amount of Taxes for which Seller may be liable under this Agreement. Section 9.8 Survival of Obligations. The obligations of the parties set forth in this Article IX shall be unconditional and absolute, and shall remain in effect until 30 days after the expiration of the applicable statute of limitations. ARTICLE X TERMINATION ----------- Section 10.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) by mutual agreement of the parties hereto in writing; (b) at the election of either party hereto if any of the conditions to its obligation to consummate the transactions contemplated hereby have not been fulfilled as of June 30, 2003 (the "Optional Termination Date"), provided, -------- however, that in the event the Closing of the transactions contemplated hereby - ------- has not occurred prior to the Optional Termination Date solely because of the failure to obtain consents, approvals, permits or authorizations as required by the conditions set forth in Sections 6.4 or 7.4, despite the responsible party using its commercially reasonable efforts to obtain such consents, approvals permits or authorizations, the Optional Termination Date will automatically be amended to be September 30, 2003; or (c) at the election of Seller if Purchaser has failed to provide reasonably satisfactory written evidence of the availability of, or commitment for, sufficient funds in an aggregate amount of not less than the anticipated Purchase Price, as may be adjusted pursuant to Section 2.4 hereof, plus all contemplated fees and expenses expected to be incurred by Purchaser related to the Transactions contemplated by this Agreement within fifteen (15) days of the date of this Agreement. Section 10.2 Effect of Termination. If this Agreement is terminated pursuant to Section 10.1, this Agreement shall thereafter become void and of no force and effect, and neither party hereto shall have any liability to the other party hereto in respect of this Agreement, except that Sections 5.9 (Confidentiality), Section 8.8 (Arbitration) and 11.2 (Fees and Expenses), and this Article X shall survive any such termination. -40- ARTICLE XI MISCELLANEOUS ------------- Section 11.1 Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered by hand by certified process server, certified or registered mail (postage prepaid and return receipt requested), by a nationally recognized overnight courier service (appropriately marked for overnight delivery) or by facsimile (with request for immediate confirmation of receipt in a manner customary for communications of such respective type). Notices shall be effective upon receipt and shall be addressed as follows: (a) if to Purchaser to: SafeGuard Health Enterprises, Inc. 95 Enterprise, Suite 100 Aliso Viejo, California 92656 Attn.: James E. Buncher President and Chief Executive Officer Tel: (949) 425-4100 Fax: (949) 425-4101 with a copy to: Ronald I. Brendzel Senior Vice President and General Counsel SafeGuard Health Enterprises, Inc. 95 Enterprise, Suite 100 Aliso Viejo, California 92656 Tel: (949) 425-4110 Fax: (949) 425-4586 and David K. Meyercord Strasburger and Price, LLP 901 Main Street, Ste. 4300 Dallas, Texas 75202-3794 Tel: (214) 651-4525 Fax: (214) 659-4023 (b) if to Seller to: Health Net, Inc. Att: General Counsel 21650 Oxnard Street Woodland Hills, California 91367 Tel: (818) 676-7601 Fax: (818) 676-7503 -41- with a copy to: Kenneth B. Schnoll Sonnenschein Nath & Rosenthal 685 Market Street San Francisco, CA 94105 Tel: (415) 882-0210 Fax: (415) 543-5472 or to such other respective addresses as Seller or Purchaser shall designate to the other by notice in writing, provided that notice of a change of address shall be effective only upon receipt. Section 11.2 Fees and Expenses. Except as otherwise provided herein, each of the parties to this Agreement shall pay its respective fees and expenses (including, without limitation, the fees and expenses of any investment bankers, counsel, actuaries, accountants or other representatives) incurred in connection with this Agreement and the transactions contemplated hereby, whether or not such transactions are consummated. Section 11.3 Entire Agreement; Waivers and Amendments. This Agreement (including the Exhibits and the Schedules hereto) and the other Transaction Documents contain the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements written or oral, with respect hereto and thereto. This Agreement and the other Transaction Documents may be amended or modified, and the terms hereof and thereof may be waived, only by a writing signed by parties hereto or thereto, as the case may be, or, in the case of a waiver, by the party waiving compliance. Section 11.4 Assignment; Binding Effect. This Agreement and the other Transaction Documents may not be assigned or delegated, in whole or in part, by any party hereto or thereto without the prior written consent of the other hereto or thereto, which consent shall not be unreasonably withheld. This Agreement and the other Transaction Documents shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective permitted successors and assigns. Section 11.5 Severability. In the event that any provision of this Agreement or any other Transaction Document shall be declared invalid or unenforceable by a court of competent jurisdiction, such provision, to the extent declared invalid or unenforceable, shall not affect the validity or enforceability of the other provisions of this Agreement or any other Transaction Document, as the case may be. In the event that any such provision shall be declared unenforceable due to its scope, breadth or duration, then it shall be modified to the scope, breadth or duration permitted by law or judicial authority and shall continue to be fully enforceable as so modified. Section 11.6 Force Majeure. No party hereto shall be liable for any delay or failure in the performance of any obligation under this Agreement or for any loss or damage (including indirect or consequential damage) to the extent that such nonperformance, delay, loss or damage results from any contingency which is beyond the control of such party, provided such -42- contingency is not caused by the fault or negligence of such party. A contingency for purposes of this Agreement shall be acts of God, fires, floods, earthquakes, explosions, storms, wars, hostilities, acts of terrorism, blockades, public disorders, quarantines, restrictions, embargoes, strikes or other labor disturbances, and compliance with any Law, order or control of, or insistence of any Governmental Authority or military authority. Section 11.7 Governing Law. This Agreement and the other Transaction Documents shall be governed by and construed in accordance with the internal laws of the State of California, without giving effect to the principles of conflicts of law thereof. Section 11.8 Headings. The Article and Section headings in this Agreement and the other Transaction Documents are inserted for convenience of reference only, and shall not affect the interpretation of this Agreement or the other Transaction Documents. Section 11.9 Counterparts. This Agreement and any of the other Transaction Documents may be executed in counterparts, each of which shall be deemed an original and both of which shall together constitute one fully executed agreement. Section 11.10 No Third Party Beneficiaries. Nothing in this Agreement or in any other Transaction Document is intended to give any Person, other than the parties to the Transaction Documents, their successors, and permitted assigns, any legal or equitable right or remedy hereunder or thereunder, or in respect to any provision hereof or thereof. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK] -43- IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf as of the date first above written. SAFEGUARD HEALTH ENTERPRISES, INC. Purchaser By: /s/ James E. Buncher --------------------------------------------- Name: James E. Buncher Title: President and Chief Executive Officer By: /s/ Ronald I. Brendzel --------------------------------------------- Name: Ronald I. Brendzel Title: Senior Vice President and Secretary HEALTH NET, INC. Seller By: /s/ B. Curtis Westen --------------------------------------------- Name: B. Curtis Westen Title: Senior Vice President, General Counsel and Secretary -44- DISCLOSURE SCHEDULES -------------------- THE SECTION NUMBERS IN THE DISCLOSURE SCHEDULES CORRESPOND TO THE SECTION NUMBERS IN THE PURCHASE AND SALE AGREEMENT PROVIDED, HOWEVER, IT IS ACKNOWLEDGED BY THE PARTIES THAT ANY INFORMATION DISCLOSED HEREIN UNDER ANY SECTION NUMBER SHALL BE DEEMED TO BE DISCLOSED AND INCORPORATED IN EVERY OTHER SECTION OF THE AGREEMENT. NOTHING HEREIN CONSTITUTES AN ADMISSION OF LIABILITY OF THE SELLER OR AN ADMISSION AGAINST THE INTEREST OF SELLER. 2.1 Material assets and Properties Owned or Leased by the Company 2.4 HNL Contracts 2.12 Purchase Price Allocation 3.3 No Violation or Breach 3.4 Consents and Approvals 3.5 Organization and Qualification of the Company 3.6 Organization and Qualification of HNL 3.10(b) Undisclosed Liabilities 3.10(c) Aged Accounts Receivable 3.10(e) HNL Financial Information 3.11 No Material Adverse Change 3.12 Permits 3.13 Compliance with Law 3.14 Legal Proceedings 3.15(a) Material Contracts 3.15(f) Management Contracts 3.15(h) Commission Agreements 3.16(a) Employees 3.16(b) Employer Contracts 3.16(c) Employer Loans and Guarantees -45- 3.16(d) Consultant List 3.16(e) Leased Employers and Independent Contractors 3.17 Employee Benefit Plans 3.18 No Brokers 3.19 Title and Condition of Properties 3.21 Insurance 3.23 Information Technology and Software 3.24 Transactions with Affiliates 3.25 Improper Payments 4.3 No Violation or Breach (Purchase) 4.4 Consents and Approvals (Purchaser) 4.5 Legal Proceedings (Purchaser) 5.1 Conduct of Business 5.16 Employee Benefit Plans (Purchaser) -46- EXHIBIT A REINSURANCE AGREEMENT --------------------- -47- EXHIBIT B STRATEGIC RELATIONSHIP AGREEMENT -------------------------------- -48- EXHIBIT C NETWORK ACCESS AGREEMENT ------------------------ -49- EXHIBIT D SEVERANCE PLAN -------------- -50- EXHIBIT E HEALTH NET SEVERANCE POLICY --------------------------- -51- EX-10.44 3 doc2.txt EXHIBIT 10.44 TO CURRENT REPORT ON FORM 8-K DATED AS OF APRIL 7, 2003 --------------------------------------------------------------------- NETWORK ACCESS AGREEMENT This NETWORK ACCESS AGREEMENT (the "Agreement") is made and entered into this 7th day of April, 2003 by and between Health Net Life Insurance Company, a California domiciled life and disability insurance company ("HNL"), and SafeHealth Life Insurance Company, a California domiciled life and disability insurance company ("SafeHealth"). RECITALS -------- WHEREAS, HNL has developed and maintains a network of providers of dental care and dental services to provide quality dental health care services in a timely and efficient manner consistent with good dental practices at contracted rates; WHEREAS, pursuant to the Purchase and Sale Agreement by and between Health Net, Inc. and SafeGuard Health Enterprises, Inc. dated April 7, 2003 ("Purchase and Sale Agreement"), SafeGuard Health Enterprises, Inc. agreed, among other things, to purchase and Health Net, Inc. agreed, among other things, to transfer and assign to SafeGuard Health Enterprises, Inc. or its Designee, all of HNL's right, title and interest in the agreements between the Dental Providers (as defined herein) under contract with HNL to provide dental services or dental supplies to HNL Subscribers (as defined herein) in California, Arizona and Oregon capable of being assigned or transferred by HNL to SafeGuard Health Enterprises, Inc. or its Designee; WHEREAS, as a condition to the obligation of the parties to consummate the Purchase and Sale Agreement, the parties agreed to enter into an agreement at the Closing to use commercially reasonable efforts to provide SafeHealth as the Designee of SafeGuard Health Enterprises, Inc. continued access after the Closing to those Dental Providers with dental provider agreements which HNL is not able to assign to SafeHealth; WHEREAS, HNL and SafeHealth desire to enter into this Agreement under which HNL will use its commercially reasonable efforts to provide SafeHealth with access to the Dental Providers. NOW, THEREFORE, in consideration of the mutual covenants, terms and conditions herein contained and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS ----------- Capitalized terms used in this Agreement and not otherwise defined shall have the meanings given such terms in the Purchase and Sale Agreement. For purposes of this Agreement, the following terms shall have the meanings specified below. -1- "Assumption and Indemnity Reinsurance Agreement" means the Assumption and ------------------------------------------------ Indemnity Reinsurance Agreement by and between Health Net Life Insurance Company and SafeHealth Life Insurance Company dated April 7, 2003. "Change of Control" means the acquisition, in a single transaction or in a ------------------ series of related transactions, by a person, an entity or a group of persons acting in concert of fifty-one percent (51%) or more of the voting securities of a party, or fifty-one percent (51%) or more of the aggregate value of the assets of a party. "Contract" mean a contract between HNL and a Dental Provider for the -------- provision of Covered Services to HNL Subscribers in force as of the Effective Date. "Covered Services" means those dental services and dental supplies that are ----------------- described in a Subscriber Agreement. "Dispute" shall have the meaning set forth in Section 7.01. ------- "Dental Provider" means a dentist, dental health service provider, or a ---------------- dental supply provider who or which as of the Effective Date is party to a Contract with HNL to provide dental services or dental supplies to HNL Subscribers who reside in California, Arizona or Oregon. "Effective Date" means the Closing Date of the Purchase and Sale Agreement --------------- by and between Health Net, Inc. and SafeGuard Health Enterprises, Inc. dated April 7, 2003. "HNL Subscriber" means the person who has entered into an individual or --------------- group Subscriber Agreement with HNL or any of its Affiliates and who is eligible to receive Covered Services from HNL or any of its Affiliates. For purposes of this Agreement, Subscribers under Non-Novated Dental Policies (as defined in the Assumption and Indemnity Reinsurance Agreement) shall be considered HNL Subscribers and Non-Novated Dental Policies shall be considered HNL Subscriber Agreements. "JAMS" shall have the meaning set forth in Section 7.02. ---- "Losses" shall have the meaning set forth in Section 8.02. ------ "Network List" shall have the meaning set forth in Section 2.04. ------------- "Non-Novated Dental Policies" shall have the meaning set forth in the --------------------------- Assumption and Indemnity Reinsurance Agreement. "Notice of Transfer" shall have the meaning set forth in Section 2.02. -------------------- "Novated Dental Policies" shall have the meaning set forth in the --------------------------- Assumption and Indemnity Reinsurance Agreement. "Participating Dental Provider" means any Dental Provider who or which has ------------------------------- not consented to the assignment by HNL of their Contract to SafeHealth, but who or which has -2- otherwise consented to provide dental services or dental supplies to SafeHealth Subscribers in California, Arizona or Oregon on the same terms and conditions as contained in the Contract with such Dental Provider and who or which SafeHealth determines meets the credentialing and contracting criteria established by SafeHealth. "SafeHealth Subscriber" means the person who has entered into an individual --------------------- or group Subscriber Agreement with SafeHealth or any of its Affiliates and who is eligible to receive Covered Services from SafeHealth or any of its Affiliates. For purposes of this Agreement, Subscribers under Novated Dental Policies (as defined in the Assumption and Indemnity Reinsurance Agreement) shall be considered SafeHealth Subscribers and Novated Dental Policies shall be considered SafeHealth Subscriber Agreements. "Subscriber Agreement" means an agreement with a Subscriber that describes --------------------- the Covered Services and which sets forth the terms and conditions of coverage and enrollment. ARTICLE II HNL SERVICES ------------ Section 2.1 Access to Network. Subject to and consistent with the ------------------- terms and conditions of this Agreement, HNL shall provide to SafeHealth access to the Dental Providers who or which allow such access under their Contracts for the purpose of providing dental services or dental supplies to SafeHealth Subscribers. SafeHealth shall cooperate with HNL to arrange access by SafeHealth Subscribers to any Dental Provider whose Contract does not expressly permit such access and who or which SafeHealth determines meets the credentialing and contracting criteria established by SafeHealth. Section 2.2 Notice to Dental Providers. HNL and SafeHealth shall ----------------------------- jointly prepare and deliver to each Dental Provider a notice informing each Dental Provider of the agreement reached between HNL and SafeHealth for the transfer of the Dental Policies from HNL to SafeHealth pursuant to the Assumption and Indemnity Reinsurance Agreement and requesting each Dental Provider to consent to the assignment by HNL of such Dental Provider's Contract to SafeHealth (the "Notice of Transfer"). The expense of preparing and delivering the Notice of Transfer to each Dental Provider shall be shared equally by the parties. The parties shall use commercially reasonable efforts to take such actions or cause to be done such things necessary, proper or appropriate to obtain the consent of the Dental Providers to the assignment by HNL of their Contracts to SafeHealth. Upon receipt of a consent by a Dental Provider to the assignment by HNL of his, her or its Contract to SafeHealth, HNL shall take such actions necessary or appropriate to effect the assignment of such Dental Provider Contracts to SafeHealth. Section 2.3 Access to Dental Providers. SafeHealth understands and ----------------------------- acknowledges that certain Dental Providers may elect not to consent to the assignment of their Contract by HNL to SafeHealth. When HNL has information that a Dental Provider has indicated that he, she or it will not consent to the assignment by HNL of such Dental Provider's Contract to SafeHealth, HNL shall use its commercially reasonable efforts to cause each such Dental Provider selected by SafeHealth to provide dental services or dental supplies to SafeHealth Subscribers on the same basis, terms and conditions as such Dental Provider has agreed to -3- provide Covered Services to HNL Subscribers, provided, however, that HNL shall -------- ------- not be required to take any action with respect to any Contract that would constitute a breach thereof, a violation of Law, or that would result in a failure by HNL to provide access to HNL Subscribers to an adequate network of Dental Providers. Section 2.4 Network List. Thirty (30) days prior to the Effective ------------- Date, HNL shall deliver to SafeHealth a list of Dental Providers (the "Network List") in a mutually acceptable electronic format that is accurate as of the end of the calendar month preceding delivery of the Network List. The Network List shall contain information regarding each Dental Provider including name, billing address, facility office address, telephone number, tax identification number, the Contract fee schedule, Contract effective date, Contract termination date, and any specialty. On a monthly basis thereafter, HNL shall deliver to SafeHealth (i) updates of all information contained in the Network List and any additional information in HNL's possession reasonably necessary for SafeHealth to monitor and maintain an accurate database of Dental Providers and to maintain the sufficiency and accuracy of SafeHealth's claim processing and payment systems, (ii) a list of all Dental Providers who or which have consented to the assignment of their Contract from HNL to SafeHealth, and (iii) a list of all Dental Providers who or which have agreed to be Participating Dental Providers. Section 2.5 Maintenance of Network. HNL shall use commercially ------------------------ reasonable efforts to maintain and enforce all provisions of the Contracts with Participating Dental Providers, provided, however, HNL shall not be required to -------- ------- recruit or enter into a contract with any person or entity who or which is not a Dental Provider as of the Effective Date. Section 2.6 Termination of Contracts. HNL shall notify SafeHealth as ------------------------- soon as reasonably practicable of the receipt by HNL of a notice of a Participating Dental Provider's intention to terminate his, her or its Contract. Nothing herein shall preclude HNL from terminating any Participating Dental Provider either for cause or at the direction of SafeHealth in a manner consistent with the provisions of the Contract of each Participating Dental Provider. If the Contract of a Participating Dental Provider terminates, the obligation of HNL to use its commercially reasonable efforts to cause such Participating Dental Provider to provide dental services or dental supplies to SafeHealth Subscribers shall cease effective on the date such termination becomes effective. Section 2.7 Communications. HNL shall notify SafeHealth in writing -------------- promptly after receiving any actual or constructive notice of any investigation, complaint, grievance or adverse action against any Participating Dental Provider, including without limitation (i) any action against a Participating Dental Provider's state license, accreditation, or certification, or (ii) any event or circumstance which reasonably could be expected to interfere materially with, modify, or alter the performance of any Participating Dental Provider's duties or obligations under its Contract. Section 2.8 Grievance Procedure. HNL and SafeHealth shall cooperate to ------------------- resolve any questions or complaints involving a Participating Dental Provider related to dental services or dental supplies provided to SafeHealth Subscribers. -4- ARTICLE III OBLIGATIONS OF SAFEGUARD ------------------------ Section 3.1 Direct Contracting. As soon as reasonably practicable ------------------- after the Effective Date, SafeHealth shall use commercially reasonable efforts to contract directly with the those Dental Providers who or which (i) do not consent to the assignment of their Contract from HNL to SafeHealth, (ii) who or which SafeHealth determines meet the SafeHealth credentialing requirements as of the Effective Date, and (iii) who or which SafeHealth determines are necessary or desirable to provide dental services or dental supplies to SafeHealth Subscribers. If any Dental Provider enters into a direct contractual relationship with SafeHealth, HNL's obligations to SafeHealth with respect to such Dental Provider pursuant to this Agreement shall cease, provided, however, -------- ------- HNL shall maintain its Contract with any Dental Provider that contracts directly with SafeHealth if necessary to provide HNL Subscribers under Non-Novated Dental Policies with access to an adequate network of Dental Providers. Section 3.2 Agreements with Contracting Providers. SafeHealth hereby ---------------------------------------- accepts and agrees to comply with all provisions of the Contracts with Participating Dental Providers, including but not limited to, the responsibility to make payment to any Participating Dental Provider for dental services or dental supplies provided by the Participating Dental Providers to SafeHealth Subscribers according to the fee schedule applicable to each Contract. Any fee schedule maintained by HNL with a Participating Dental Provider shall be provided by HNL upon request to the SafeHealth. Upon receipt of the written consent of SafeHealth, HNL may amend the fee schedule applicable to any Participating Dental Provider in a manner consistent with the terms of the Contract with such Participating Dental Provider. Notwithstanding the foregoing, SafeHealth shall not modify in any way any obligation of the parties set forth in the applicable Contracts executed between HNL and the Participating Dental Providers. Section 3.3 Payment of Dental Provider Fees. ------------------------------------ (a) SafeHealth shall retain full responsibility for the payment of all fees related to dental services and dental supplies provided to SafeHealth Subscribers by Participating Dental Providers, excluding applicable copayment, coinsurance and deductible amounts. SafeHealth shall at all times retain full responsibility for determining compensability and for payment or non-payment of claims for fees from Participating Dental Providers pertaining to SafeHealth Subscribers. (b) HNL shall promptly forward to SafeHealth any claims for fees received by HNL from Participating Dental Providers pertaining to SafeHealth Subscribers and payable by SafeHealth, unless SafeHealth has made alternate arrangements in advance with a Participating Dental Provider to submit claims directly to SafeHealth for payment. SafeHealth shall pay the claims for fees of Participating Dental Providers for dental services or dental supplies provided to SafeHealth Subscribers as soon as practical, but subject to the following minimum standard: 95% of the monthly volume of clean claims shall be paid or denied within thirty (30) days of receipt by SafeHealth. For purposes of this Section 3.03, "clean claim" means a claim that has no defect or impropriety, including any lack of any required substantiating documentation, or particular circumstances requiring special treatment that prevents timely payments from being -5- made on the claim. SafeHealth shall promptly notify HNL if they determine that the minimum reimbursement standards are not met regularly. Section 3.4 Credentialing. SafeHealth shall annually ------------- re-credential the Participating Dental Providers utilizing SafeHealth's credentialing criteria as of the Effective Date. If a Participating Dental Provider fails to meet the SafeHealth credentialing criteria, upon the request of SafeHealth, HNL shall terminate the Contract of such Participating Dental Provider in accordance with its terms. SafeHealth shall require the Participating Dental Providers to maintain all professional liability and general liability insurance coverage required by Law or their Contract. Subject to any applicable confidentiality requirements, HNL and its authorized representatives shall have the right, upon prior written notice, at all reasonable times during normal business hours, to inspect, review and make copies of all books and records of SafeHealth reasonably related to the credentialing of Participating Dental Providers. Section 3.5 Quality of Service. SafeHealth shall monitor the quality -------------------- of Covered Services provided by the Participating Dental Providers to HNL Subscribers and SafeHealth Subscribers through a quality management program consistent with the prevailing practices and procedures of SafeHealth as of the Effective Date. In the event the standard or quality of care or service furnished by a Participating Dental Provider is found to be unacceptable under such program, SafeHealth shall promptly notify HNL and either (i) use commercially reasonable efforts to ensure that such Participating Dental Provider corrects the specified deficiency, or (ii) direct HNL to terminate the Contract of such Participating Dental Provider in accordance with its Terms. HNL shall cooperate with SafeHealth and use reasonable efforts to obtain the cooperation of Participating Dental Providers with SafeHealth's provider profiling and performance measurement programs and processes. Section 3.6 Use of Information. SafeHealth may provide the names of -------------------- Participating Dental Providers to SafeHealth Subscribers in provider directories or otherwise and may use such information as otherwise necessary to carry out the terms of this Agreement, including but not limited to, attempting to contract directly with Dental Providers pursuant to Section 3.01. SafeHealth shall not otherwise use the names, symbols, trademarks or service marks of Participating Dental Providers without the prior written consent of HNL and the Participating Dental Providers. Section 3.7 Subscriber Services. SafeHealth shall perform all -------------------- duties relating to SafeHealth Subscriber services, grievances, appeals and coordination of care under the SafeHealth Subscriber Agreements. Section 3.8 Covered Services. Communications as to the scope of ----------------- Covered Services under the SafeHealth Subscriber Agreements and the availability of same to SafeHealth Subscribers shall be the sole responsibility of the SafeHealth. -6- ARTICLE IV TERM AND TERMINATION -------------------- Section 4.1 Term. The term of this Agreement shall be for a period of ---- one (1) year, commencing on the Effective Date. Section 4.2 Termination on Mutual Consent. This Agreement may be -------------------------------- terminated at any time by mutual agreement of the parties hereto in writing. Section 4.3 Termination for Cause. Either party may terminate this ----------------------- Agreement for cause by providing the other party thirty (30) days written notice of its intention to terminate upon the occurrence of any of the following: (a) If a party fails to remit any amounts due under this Agreement within ninety (90) days of the date such amount is due and payable. (b) If a party breaches a material term, covenant or condition of this Agreement and fails to cure such breach within thirty (30) days of receiving written notice of such breach from the non-breaching party. The written notice of such breach shall make specific reference to the action causing breach. If the breaching party fails to cure its breach to the reasonable satisfaction of the non-breaching party during the thirty (30) day cure period, this Agreement shall terminate at the option of the non-breaching party. In the event such cure cannot reasonably be completed within such thirty (30) day period, then commencement of such cure within such thirty (30) days and its diligent prosecution shall, subject to the party's other rights to terminate the Agreement, extend the period to cure the breach for an additional period reasonably necessary to complete the cure. (c) If a party engages in fraudulent, illegal or grossly negligent conduct with respect to its duties and obligations under this Agreement, the other party shall have the right to terminate this Agreement, upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non-defaulting party by reason of the defaulting party's conduct. (d) If a party becomes unable to perform its obligations under the Contracts or this Agreement because of financial impairment or loss of authority to act under Law, or by action of any Governmental Authority, the other party shall have the right to terminate this Agreement immediately. (e) In the event of a Change of Control of one party, the other party shall have the right to terminate this Agreement effective as of the effective date of the Change of Control. Section 4.4 Post-Termination Rights and Responsibilities. ------------------------------------------------ Termination of this Agreement shall not terminate rights and obligations of the parties which by their nature extend beyond the term. Upon the expiration or earlier termination of this Agreement, upon the written request of SafeHealth, SafeHealth and HNL shall coordinate the transfer of SafeHealth Subscribers to dental providers other than the Dental Providers in a manner consistent with the SafeHealth Subscribers' need for continuity of dental services and dental supplies. -7- ARTICLE V RELATIONSHIP OF THE PARTIES --------------------------- Section 5.1 Relationship of Parties. The parties to this ------------------------- Agreement are and shall remain independent contractors. Neither party is the employee or agent of the other party, except as set forth herein, and neither party has an express or implied right to bind the other party. The parties do not intend to form a joint venture, partnership, or to be governed by Law relating to any relationship other than that of independent contractors. Neither party is authorized to modify, alter or waive the terms of any product issued by the other party. Section 5.2 Dental Providers. SafeHealth acknowledges that all ----------------- Participating Dental Providers are independent contractors and are not employees of HNL, or any HNL Affiliate. None of the parties hereto shall attempt, directly or indirectly, to control, direct or interfere with the practice of medicine or dentistry by any Participating Dental Provider. ARTICLE VI PROTECTION OF CONFIDENTIAL INFORMATION -------------------------------------- Section 6.1 License to Use HNL Materials. HNL may from time to -------------------------------- time provide to SafeHealth certain materials, brochures, reporting forms, and other related material, whether in a printed or electronic format, pertaining to the Participating Dental Providers. HNL grants to SafeHealth a non-exclusive license to use during the term of this Agreement any such nonconfidential or nonproprietary materials in a manner consistent with this Agreement and the Contracts of each Participating Dental Provider. Section 6.2 Confidentiality of Information. During the term of this -------------------------------- Agreement and at all times thereafter, SafeHealth shall refrain from disclosing to any person any confidential or trade secret information of HNL. Upon termination of this Agreement, SafeHealth shall immediately surrender and return to HNL all documents relating to HNL's confidential or trade secret information, including but not limited to, utilization review and quality assurance plans, utilization review data bases, fee schedules and schedules of charges, billing systems, any and all operating manuals or similar materials, including without limitation the policies, procedures, methods of doing business developed by HNL, other property belonging to HNL, or other matters that are trade secrets of HNL. SafeHealth agrees that all such documents and materials are the sole property of HNL and that SafeHealth shall not make any copies thereof. Upon the termination of this Agreement, neither party shall use or permit the use for any purpose any of the other party's proprietary or confidential information or trade secrets. Section 6.3 Subscriber Confidential Information. -------------------------------------- (a) The parties shall maintain the confidentiality of any personal information, including health information, pertaining to Subscribers and dependents of Subscribers including, without limitation, files, records, reports, and other information prepared and maintained in connection with this Agreement, in accordance with all applicable Law. (b) Each party shall obtain any necessary consent or authorization from Subscribers and the dependents of Subscribers with respect to the release to the other party of any non-public -8- personal information, including health information, relating to such Subscribers or dependents of Subscribers, by means of a general or specific release, as appropriate. Each party shall notify the other if it becomes aware that proper authorizations have not been obtained with respect to the release of non-public personal or health information of a Subscriber or a dependent of a Subscriber. ARTICLE VII DISPUTE RESOLUTION ------------------ Section 7.1 Arbitration. In the event of any dispute between the ----------- parties hereto relating to, arising out of, or in connection with any provision of this Agreement (hereinafter a "Dispute"), the parties to this Agreement and their representatives, designees, successors and assigns agree that any such Dispute shall be settled by binding arbitration to take place in Orange County, California; provided, however, that nothing herein shall preclude the parties -------- ------- from seeking equitable judicial relief pending arbitration, including but not limited to injunctive or other provisional relief. Section 7.2 Selection of Arbitrator. Any arbitration hereunder shall ------------------------- be conducted by a single arbitrator chosen from the panel of arbitrators of the Judicial Arbitration & Mediation Services ("JAMS") with experience and expertise in the dental HMO or dental indemnity insurance business. If a JAMS arbitrator with specific experience in the dental HMO or dental indemnity insurance business is not available, the arbitrator must have general experience in the health insurance industry. Within ten (10) days of notice of a Dispute from HNL to SafeHealth or notice from SafeHealth to HNL, HNL and SafeHealth shall use their best efforts to choose a mutually agreeable arbitrator. If HNL and SafeHealth cannot agree on an arbitrator, the arbitrator shall promptly be selected by JAMS. Section 7.3 Procedures. The party submitting a Dispute to arbitration ---------- hereunder shall present its case to the arbitrator and the other party hereto in written form within twenty (20) days after the appointment of the arbitrator. The other party hereto shall then have twenty (20) days to submit a written response to the arbitrator and the original party who submitted the Dispute to arbitration. After timely receipt of each party's case, the arbitrator shall have twenty (20) days to render his or her decision. Section 7.4 Applicable Law. The arbitrator is relieved from judicial --------------- formalities and, in addition to considering the rules of law, the limitations contained in this Agreement and the customs and practices of the health care industry, shall make his or her award with a view to effectuating the intent of this Agreement. The decision of the arbitrator shall be final and binding upon the parties, and judgment may be entered thereon in a court of competent jurisdiction. Section 7.5 Expenses. Each party shall bear its own cost of -------- arbitration, and the costs of the arbitrator shall be shared equally among each party to a Dispute. Section 7.6 Survival of Article. This Article VII shall survive --------------------- termination of this Agreement. -9- ARTICLE VIII ALLOCATION OF LIABILITY & INDEMNIFICATION ----------------------------------------- Section 8.1 Limitation of Liability. -------------------------- (a) HNL shall not be responsible for any claims, liabilities, expenses or other obligations arising out of or in connection with any of the benefits, coverages, or other terms and conditions of SafeHealth Subscriber Agreements, policies, agreements, or other arrangements issued or entered into by SafeHealth or any of its Affiliates providing Covered Services to SafeHealth Subscribers or the performance or non-performance of any of SafeHealth's obligations under this Agreement. HNL shall not be liable for any breach of any agreement with a Dental Provider arising from or in connection with any act, error or omission by SafeHealth. SafeHealth acknowledges that HNL shall have no responsibility to pay any compensation to any Participating Dental Provider or any other person for any dental services or dental supplies provided to a SafeHealth Subscriber. (b) Except as provided in the Assumption and Indemnity Reinsurance Agreement, SafeHealth shall not be responsible for any claims, liabilities, expenses or other obligations arising out of or in connection with any of the benefits, coverages, or other terms and conditions of the HNL Subscriber Agreements, policies, agreements, or other arrangements issued or entered into by HNL or any of its Affiliates providing Covered Services to HNL Subscribers or the performance or non-performance of any of HNL 's or any of HNL's Affiliate's obligations under this Agreement. SafeHealth shall not be liable for any breach of any agreement with a Dental Providers arising from or in connection with any act, error or omission by HNL or any HNL Affiliate. Section 8.2 Indemnification. Each party shall indemnify and hold --------------- harmless the other party and their respective directors, officers, employees, representatives, and agents against any and all losses, liabilities, damages, demands, claims, actions judgments, causes of action, assessments, costs or expenses, including without limitation, interest, penalties and reasonable attorneys' fees (collectively, "Losses") incurred by a party by reason of or arising out of the performance or non-performance of obligations of the other party under this Agreement or any other act, error or omission. The obligation of SafeHealth to indemnify HNL shall include, without limitation, Losses arising out of SafeGuard's performance or non-performance of the obligations under the Contracts with Participating Dental Providers in accordance with Section 3.02 of this Agreement. ARTICLE IX GENERAL PROVISIONS ------------------ Section 9.1 Compliance with Laws. Each party shall, in the ---------------------- performance of their obligations set forth in this Agreement, comply with all applicable Law and the rules and regulations of all Governmental Authorities with jurisdiction over the parties and each party shall maintain all licenses or certificates necessary or appropriate for the performance of the functions set forth in this Agreement. Each party shall conform its actions under this Agreement to any orders concerning the activities covered by this Agreement by Governmental Authorities having -10- jurisdiction over the parties' business affairs and operations. Each party shall take all actions and make all filing, applications and provide all notices required by applicable Law. Each party shall promptly notify the other party of any complaint, inquiry or lawsuit by any Governmental Authority relating to this Agreement. Section 9.2 Notices. Any notice or other communication required ------- or permitted hereunder shall be in writing and shall be delivered by certified process server, certified or registered mail (postage prepaid and return receipt requested), by a nationally recognized overnight courier service (appropriately marked for overnight delivery) or by facsimile (with request for immediate confirmation of receipt in a manner customary for communications of such respective type). Notices shall be effective upon receipt and shall be addressed as follows: (a) if to SafeHealth to: SafeGuard Health Enterprises, Inc. 95 Enterprise, Suite 100 Aliso Viejo, California 92656 Attn.: James E. Buncher President and Chief Executive Officer Tel: (949) 425-4100 Fax: (949) 425-4101 with a copy to: Ronald I. Brendzel Senior Vice President and General Counsel SafeGuard Health Enterprises, Inc. 95 Enterprise, Suite 100 Aliso Viejo, California 92656 Tel: (949) 425-4110 Fax: (949) 425-4586 and David K. Meyercord Strasburger and Price, LLP 901 Main Street, Ste. 4300 Dallas, Texas 75202-3794 Tel: (214) 651-4525 Fax: (214) 659-4023 -11- (b) if to HNL to: Health Net, Inc. Att: General Counsel 21650 Oxnard Street Woodland Hills, California 91367 Tel: (818) 676-7601 Fax: (818) 676-7503 with a copy to: Kenneth B. Schnoll Sonnenschein Nath & Rosenthal 685 Market Street San Francisco, CA 94105 Tel: (415) 882-0210 Fax: (415) 543-5472 Section 9.3 Headings. The headings of the sections of this -------- Agreement are included for the purposes of convenience only and shall not affect the interpretation of any provision hereof. Section 9.4 Governing Law. This Agreement shall be governed by and -------------- construed in accordance with the Law of the State of California, without giving effect to the principles of conflicts of laws thereof. Section 9.5 Severability. In the event any section or provision of ------------ this Agreement or related documents is found to be void and unenforceable by a court of competent jurisdiction, the remaining sections and provisions of this Agreement or related documents shall nevertheless be binding upon the parties with the same force and effect as though the void or unenforceable part had not been severed or deleted. Section 9.6 Assignability. Except as otherwise expressly provided ------------- in this Agreement, neither party may assign any of its rights or obligations under this Agreement without the prior written consent of the other party. Except as specifically provided in this Agreement, any attempted assignment or delegation of a party's rights, claims, privileges, duties or obligations hereunder shall be null and void. Section 9.7 Successors and Assigns. This Agreement and the rights, ------------------------ privileges, duties and obligations of the parties hereunder, to the extent assignable or delegable, shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assignees. Section 9.8 Waiver. No waiver of or failure by any party to enforce ------ any of the provisions, terms, conditions, or obligations herein shall be construed as a waiver of any subsequent breach of such provision, term, condition, or obligation, or of any other provision, term, condition, or obligation hereunder, whether the same or different in nature. No extension -12- of time for performance of any obligations or acts shall be deemed an extension of the time for performance of any other obligations or acts. Section 9.9 Expenses. Except as may be specifically provided for in -------- this Agreement, all parties shall bear their own expenses incurred in connection with this Agreement and the transactions contemplated herein, including, but not limited to, legal and accounting fees. Section 9.10 Further Assurances. Each party agrees, at its own cost, to do ------------------ such further acts and things and to execute and deliver such additional agreements and instruments as the other may reasonably require to consummate, evidence or confirm the agreements contained herein in the manner contemplated hereby. Section 9.11 Relationship of Parties. The parties to this Agreement are and ----------------------- shall remain independent contractors. Neither party is the employee or agent of the other party, except as set forth herein, and neither party has an express or implied right to bind the other party. The parties do not intend to form a joint venture, partnership, or to be governed by Law relating to any relationship other than that of independent contractors. Section 9.12 No Third Party Rights. This Agreement has been made for the ----------------------- benefit of the parties hereto and respective successors and permitted assigns and nothing in this Agreement is intended to confer any rights or remedies under or by reason of this Agreement on any other person other than the parties to it and their respective successors and permitted assigns. Nothing in this Agreement is intended to relieve or discharge the obligations or liability of any third person to any party to this Agreement. Section 9.13 Exhibits and Schedules. All exhibits and Schedules referred to ---------------------- in this Agreement are incorporated herein by this reference. Section 9.14 Force Majeure. Neither party- hereto shall be liable for any -------------- delay or failure in the performance of any obligation under this Agreement or for any loss or damage (including indirect or consequential damage) to the extent that such nonperformance, delay, loss or damage results from any contingency which is beyond the control of such party, provided such contingency is not caused by the fault or negligence of such party. A contingency for the purposes of this Agreement shall be acts of God, fires, floods, earthquakes, explosions, storms, wars, hostilities, blockades, public disorders, quarantine restrictions, embargoes, strikes or other labor disturbances, and compliance with any law, order or control of, or insistence by any governmental or military authority. Section 9.15 Plurals/Pronouns/Gender. All pronouns and any variations ----------------------- thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as appropriate. Section 9.16 Locative Adverbs. Whenever in this Agreement the locative ----------------- adverbs "herein," "hereof," or "hereunder" are used, the same shall be understood to refer to this Agreement in its entirety and not to any specific article, section, subsection, subpart, paragraph or subparagraph. -13- Section 9.17 Integration. This Agreement and all Exhibits and Schedules ----------- attached hereto constitute the entire agreement between the parties with regard to the subject matter hereof and thereof. This Agreement supersedes all previous agreements between or among the parties. There are no agreements, representations, or warranties between or among the parties with respect to the subject matter hereof other than those set forth in this Agreement or the documents and agreements referred to in this Agreement. Section 9.18 Amendments. No amendment, modification, or supplement to ---------- this Agreement shall be binding on any of the parties unless it is reduced to writing and signed by each of the parties. SafeHealth acknowledges that Contracts permit the implementation of certain amendments unilaterally by HNL without the consent by the Dental Providers who or which are parties to such Contracts. SafeHealth shall cooperate with HNL in effecting such amendments to Contracts as may be required in order to carry out the terms of this Agreement. Section 9.19 Counterparts. This Agreement may be executed ------------ simultaneously in any number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same agreement. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. HEALTH NET LIFE INSURANCE COMPANY /s/ David W. Anderson ---------------------------------------- Name: David W. Anderson Title: President SAFEHEALTH LIFE INSURANCE COMPANY /s/ James E. Buncher ---------------------------------------- Name: James E. Buncher Title: President and Chief Executive Officer /s/ Ronald I. Brendzel ---------------------------------------- Name: Ronald I. Brendzel Title: Senior Vice President and Secretary -14- EX-10.45 4 doc3.txt EXHIBIT 10.45 TO CURRENT REPORT ON FORM 8-K DATED AS OF APRIL 15, 2003 ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT THIS ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT (this "Agreement"), --------- dated as of April 7, 2003, is made by and among HEALTH NET LIFE INSURANCE COMPANY, a California domiciled life and disability insurance company (the "Company"), and SAFEHEALTH LIFE INSURANCE COMPANY, a California domiciled life - -------- and disability insurance company (the "Reinsurer"). The Company and the --------- Reinsurer are referred to herein collectively as the "Parties". ------- WHEREAS, the Company desires to transfer and assign to the Reinsurer all of the Company's right, title and interest in and to the Novated Dental Policies; WHEREAS, the Reinsurer desires to assume all of the Company's duties and obligations in connection with, relating to, or arising at any time out of such Novated Dental Policies upon the terms and conditions set forth herein; WHEREAS, the Company desires to cede, on an indemnity reinsurance basis, to the Reinsurer, the Company's Policy Liabilities in connection with, relating to and arising out of the Non-Novated Dental Policies, upon the terms and conditions set forth herein; WHEREAS, the Reinsurer desires to reinsure on an indemnity reinsurance basis the Company's Policy Liabilities arising under or in connection with the Non-Novated Dental Policies, upon the terms and conditions set forth herein; and WHEREAS, in connection with the foregoing, the Health Net, Inc. and SafeGuard Health Enterprises, Inc. have entered into the Purchase and Sale Agreement dated as of April 7, 2003 (the "Purchase and Sale Agreement") which --------------------------- calls for the execution and delivery of this Agreement as of the Closing of the transactions contemplated thereunder. NOW, THEREFORE, in consideration of the mutual covenants and promises, and upon the terms and conditions hereinafter set forth, the Parties hereto agree as follows. ARTICLE I DEFINITIONS ----------- Capitalized terms used in this Agreement and not otherwise defined shall have the meanings given such terms in the Purchase and Sale Agreement. For purposes of this Agreement, the following terms shall have the meanings specified below. "Claims" shall have the meaning set forth in Section 7.03. ------ "Dental Policies" means all policies or other agreements (including all ---------------- supplements, endorsements, riders and ancillary agreements in connection therewith) with individuals, employers or other group sponsors that obligate the Company to provide, arrange for the provision of, or indemnify for the cost of dental care services and dental supplies as specified therein, which policies or other agreements (i) are in effect as of the Effective Time or (ii) become effective after the Effective Time, including through (A) the reinstatement of lapsed policies pursuant to provisions therein or of applicable law, or (B) the issuance or renewal thereof by the Company after the Effective Time to honor quotes outstanding as of the Effective Time, or to satisfy renewal rights of individuals, employers or other group sponsors under contractual provisions or applicable law, or (C) modifications agreed to by the Reinsurer on behalf of the Company pursuant to the authority granted to the Reinsurer under Section 7.01 of this Agreement, provided, however, Dental Policies shall not -------- ------- include any policy or other agreements (including all supplements, endorsements, riders and ancillary agreements in connection therewith) with individuals, employers or other group sponsors that obligate the Company to provide, arrange for the provision of, or indemnify for the cost of dental care services and dental supplies as a Medicare + Choice Preferred Provider Organization pursuant to Contract Number P01239 by and between the Company and the Centers for Medicare and Medicaid Services. "Dental Services" shall have the meaning set forth in Section 7.07. ---------------- "Dispute" shall have the meaning set forth in Section 11.02. ------- "Disputed Claim" shall have the meaning set forth in Section 7.03. --------------- "Disputed Complaint" shall have the meaning set forth in Section 7.05. ------------------- "Effective Time" means 11:59 p.m. Pacific Time, on the Closing Date. --------------- "Extra-Contractual Liabilities" means any and all liabilities and ------------------------------ obligations of any nature, kind or description (i) for consequential, extra-contractual, tort, bad faith, exemplary, punitive, special or similar damages and (ii) for statutory or regulatory damages, fines, penalties, forfeitures, and similar charges of a penal or disciplinary nature. "GAAP" means generally accepted accounting principles consistently applied ---- throughout the specified period and in a comparable period in the immediately preceding year. "JAMS" shall have the meaning set forth in Section 11.03. ---- "Member Materials" shall have the meaning set forth in Section 3.01. ----------------- "Members" means the individuals (including their covered spouses and ------- covered dependents) entitled to Dental Services pursuant to Dental Policies. "Non-Novated Dental Policies" shall have the meaning set forth in Section ---------------------------- 2.04. "Novated Dental Policies" means those Dental Policies transferred to the ------------------------- Reinsurer by novation as of the Novation Date and under which Dental Policies the Reinsurer shall have become the successor to the Company under the Dental Policies as described in Section 2.03. "Novation Date" shall have the meaning set forth in Section 3.02 hereof. -------------- "Obligations" shall have the meaning set forth in Section 2.01 hereof. ----------- -2- "Policy Liabilities" means the Company's gross liabilities and obligations ------------------- arising under or in connection with the Dental Policies to the extent the same are unpaid or unperformed on or after the Effective Time, before deduction for all other applicable cessions, if any, under the Company's reinsurance programs. In addition, the term "Policy Liabilities" shall include: (a) all Extra-Contractual Liabilities that arise from any act, error or omission after the Effective Time, whether or not intentional, in bad faith or otherwise, by the Reinsurer or any of its affiliates, or any of their respective officers, employees, agents or representatives relating to the Dental Policies, and any attorneys' fees incurred by the Reinsurer or the Company related to such Extra-Contractual Liabilities; (b) all liabilities and obligations for premium taxes arising on account of any premiums with respect to the Dental Policies allocable to coverage after the Effective Time; (c) all liabilities and obligations for returns or refunds of premiums (irrespective of when due) under the Dental Policies; (d) any assessment required by any insurance guaranty, insolvency, comprehensive health association or other similar fund maintained by any jurisdiction relating to the Dental Policies assessed or imposed on the basis of premium for coverage after the Effective Time; (e) all liabilities and obligations for commission payments and other compensation, if any, due and payable with respect to the Dental Policies to or for the benefit of agents and brokers to the extent that such amount accrues after the Effective Time; (f) all liabilities and obligations for payment of any compensation to providers relating to Dental Services provided to Members under the Dental Policies regardless of the "date of service"; and (g) any obligation arising as a result of the Reinsurer 's failure to perform its obligations pursuant to Section 7.07. "SAP" means statutory accounting practices prescribed or permitted by --- applicable insurance regulatory authorities consistently applied throughout the specified period and in the comparable period in the immediately preceding year. "Services" shall have the meaning set forth in Section 7.02. -------- ARTICLE II BUSINESS TRANSFERRED AND REINSURED ---------------------------------- Section 2.01. Assignment of Dental Policies. As of the Effective Time ----------------------------- (i) except as is otherwise provided in Section 5.01 below, the Company hereby transfers and assigns to the Reinsurer all of the Company's right, title and interest in the Dental Policies identified in -3- Schedule 2.01 attached hereto and made a part hereof and delegates to the - -------------- Reinsurer all of the Company's duties and obligations of performance and payment under the Dental Policies arising after the Effective Time, and (ii) the Reinsurer hereby accepts, assumes and agrees to perform all of the Company's duties and obligations, whether direct, indirect, contingent, unliquidated, unmatured or otherwise arising after the Effective Time (collectively, "Obligations"), in connection with, relating to, or arising out of the Dental ----------- Policies. Section 2.02. Novation. As soon as practicable after the Effective -------- Time, the Reinsurer shall use all commercially reasonable efforts to effect the assumption by novation by the Reinsurer of the Dental Policies (each such Dental Policy being referred to herein as a "Novated Dental Policies" and Novated ----------------------- Dental Policies shall include any such subsequently novated Dental Policies). If the Reinsurer does not for any reason assume by novation any Dental Policy, then the Reinsurer shall accept and reinsure, on an indemnity reinsurance basis, 100% of the Policy Liabilities related to such Non-Novated Dental Policies in accordance with the terms and conditions of this Agreement. Section 2.03. Direct Obligations. To the extent that the Reinsurer assumes ------------------ by novation any Dental Policies under applicable law, as of the Novation Date (i) the Reinsurer shall be the successor to the Company under such Novated Dental Policies as if such Novated Dental Policies were direct obligations originally issued by the Reinsurer and the Reinsurer shall be responsible for the performance of all obligations and the payment of all benefits and amounts due under the Novated Dental Policies in accordance with their terms, (ii) the Reinsurer shall be substituted in the place and stead of the Company, and each Member under any such Novated Dental Policy shall disregard the Company as a party thereto and treat the Reinsurer as if it had been originally obligated thereunder except as otherwise provided herein, (iii) the Company shall be released of all liability with respect to such Novated Dental Policies, (iv) the Members under such Novated Dental Policies shall have the right to file claims arising under such Novated Dental Policies directly with the Reinsurer and shall have a direct right of action for indemnification, benefits and services under such Novated Dental Policies against the Reinsurer, and the Reinsurer hereby consents to be subject to any such direct action taken by any such Member, (v) the Reinsurer shall be responsible for all matters relating to administration of the Novated Dental Policies, including but not limited to policy changes, reinstatement standards, premium rate changes, policy renewals, agent commissions and administrative methods and procedures, and (vi) any indemnity reinsurance of such Novated Dental Policies and related liabilities thereunder by the Reinsurer shall cease and instead be replaced by such assumption by novation. Section 2.04. Indemnity Reinsurance. Effective as of the Effective Time, ---------------------- the Company shall cede to the Reinsurer, and the Reinsurer shall assume from the Company on an indemnity reinsurance basis, 100% of the Policy Liabilities under all Dental Policies (including those Dental Policies that are identified in Schedule 2.01 attached hereto and made a part hereof) which the Reinsurer has - -------------- not for any reason (including the lack of any required approval or consent of a party to a Dental Policy) as of the Effective Time assumed by novation (each such Dental Policy being referred to herein as a "Non-Novated Dental Policy"). ------------------------- Notwithstanding the foregoing, the term "Non-Novated Dental Policy" shall not include any Dental Policy from and after the date of its assumption by novation at any time by the Reinsurer. -4- Section 2.05. Policy Liabilities. The Reinsurer accepts, reinsures, and ------------------- assumes the Policy Liabilities subject to any and all defenses, setoffs, and counterclaims to which the Company would be entitled with respect to the Policy Liabilities, it being expressly understood and agreed by the Parties hereto that no such defenses, setoffs, or counterclaims are or shall be waived by the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, and that the Reinsurer is and shall be fully subrogated in and to all such defenses, setoffs, and counterclaims. From and after the Effective Time, as among the Parties, the Reinsurer shall bear and shall have responsibility for paying or performing all Policy Liabilities. The Policy Liabilities ceded under this Agreement shall be subject to any changes required by law or regulation and the same rates, terms, conditions, waivers, interpretations, modifications and alterations as the Non-Novated Dental Policies. ARTICLE III ASSUMPTION CERTIFICATES; OPTION LETTERS --------------------------------------- Section 3.01. Member Materials. The Reinsurer shall prepare and ----------------- deliver to every party to a Dental Policy a Notice of Transfer, Certificate of Assumption, and Notice of Rejection of Assumption substantially in the appropriate forms set forth in Exhibit A attached hereto (collectively, the --------- "Member Materials") and otherwise acceptable to both the Reinsurer and Company, - ------------------ which shall inform each party to a Dental Policy of the proposed transfer and enable such party to accept or reject the assumption and novation. Section 3.02. Mailing. The Member Materials shall be mailed on a date ------- agreed upon by the Reinsurer and the Company, and, to the extent required by applicable law, shall be reviewed by and found acceptable to applicable regulatory authorities prior to mailing. The Reinsurer shall deliver only Member Materials that are in compliance with applicable law, regulation or regulatory authority. No assumption by novation of a Dental Policy shall take effect until the earlier of the acceptance of the assumption by the party to a Dental Policy or 90 days (or such other period, if any, as may be required by applicable law) (the "Novation Date") after Member Materials have been mailed to ------------- the party to such Dental Policy. Section 3.03. Expenses. All expenses incurred by the Parties hereto -------- pursuant to this Article shall be shared equally by the Parties. ARTICLE IV TERM ---- Section 4.01. Term. This Agreement shall remain in force and effect ---- until all Policy Liabilities reinsured and assumed by Reinsurer have been discharged in full, or all Dental Policies are transferred and assumed by the Reinsurer by novation and all obligations of the Reinsurer hereunder have been discharged in full. ARTICLE V CONSIDERATION ------------- Section 5.01. Consideration to the Reinsurer. The Reinsurer shall be ------------------------------- entitled to all premium, premium adjustments and other consideration allocable to coverage after the Effective Time (irrespective of when due) received by the Company or the Reinsurer with respect to the -5- Dental Policies. In the event that the Company receives any premium or other consideration with respect to a Dental Policy allocable to coverage after the Effective Time, the Company shall promptly remit such premiums and other consideration to the Reinsurer along with all pertinent information pertaining thereto including the nature of the payment, source of funds, policy number and period to which it relates. In the event that the Reinsurer receives any premium or other consideration with respect to a contractual liability or contractual obligation arising under a Dental Policy paid or performed by the Company prior to the Effective Time, the Reinsurer shall promptly remit such premiums and other consideration to the Company along with all pertinent information pertaining thereto including the nature of the payment, source of funds, policy number and period to which it relates. Section 5.02. Application of Future Consideration. Any premium, premium -------------------------------------- adjustments and other consideration received and retained by the Reinsurer pursuant to Section 5.01 shall be applied by the Reinsurer to the oldest unpaid obligations or outstanding invoices relating to the period after the Effective Time. Section 5.03. Additional Consideration for Indemnity Reinsurance of ---------------------------------------------------------- Non-Novated Dental Policies. As additional consideration for the assumption by - ---------------------------- Reinsurer on an indemnity reinsurance basis of 100% of the Policy Liabilities under the Non-Novated Dental Policies, the Company shall (i) transfer to Reinsurer at the Effective Time admitted assets having a net admitted asset value determined in accordance with SAP as prescribed or permitted by the California Department of Insurance equal to the Company's net unearned premium reserve and loss and loss adjustment expense (including losses that have been incurred but not reported) reserve, if any, attributable to claims arising under the Non-Novated Dental Policies prior to the Effective Time; and (ii) assign to Reinsurer any amounts due to Company under any reinsurance agreements in effect on the Effective Time between the Company and any reinsurer (other than the Reinsurer) relating to the Policy Liabilities assumed by the Reinsurer under this Agreement. Section 5.04. Additional Consideration for Assumption of Novated Dental ----------------------------------------------------------- Policies. As additional consideration for the assumption by novation by - -------- Reinsurer of the Novated Dental Policies, the Company shall (i) transfer to Reinsurer at the within five (5) Business Days after the end of the calendar month following the Novation Date admitted assets having a net admitted asset value determined in accordance with SAP as prescribed or permitted by the California Department of Insurance equal to the Company's net unearned premium reserve and loss and loss adjustment expense (including losses that have been incurred but not reported) reserve, if any, attributable to claims arising under the Novated Dental Policies prior to the Effective Time; and (ii) assign to Reinsurer any amounts due to Company under any reinsurance agreements in effect on the Effective Time between the Company and any reinsurer (other than the Reinsurer) relating to the Novated Dental Policies assumed by the Reinsurer under this Agreement. ARTICLE VI ACCOUNTING AND SETTLEMENT ------------------------- Section 6.01. Accounting Reports. On or before the last Business Day ------------------- of each month, the Reinsurer shall provide the Company with reports of activities under this Agreement with respect to the Non-Novated Dental Policies for the preceding month showing any amounts due the Company or the Reinsurer, as the case may be, as reimbursement for paid claims, premiums -6- or other amounts due with respect to the Non-Novated Dental Policies and any information required by the Statement of Statutory Accounting Principles, as amended, of the National Association of Insurance Commissioners. On or before the last Business Day of January, April, July and October, the Reinsurer shall provide the Company with quarterly reports or an annual report of such activities as appropriate. Section 6.02. Financial Statement Information. The Reinsurer and the --------------------------------- Company shall each provide the other with the financial, accounting and actuarial information necessary to prepare SAP regulatory, tax and GAAP monthly, quarterly and annual financial statements and returns and satisfy other requirements including reserve and related calculations regarding the Non-Novated Dental Policies in the form reasonably required by the Reinsurer and the Company. The Company and the Reinsurer shall agree to mutually acceptable procedures and time schedules for the transmission and receipt of such information. Section 6.03. Settlements. Within ten (10) Business Days after delivery of ----------- each monthly report, the Reinsurer and the Company shall settle on an estimated basis, all amounts then due under this Agreement for that month. The Reinsurer and the Company shall make a final settlement of all amounts due for each calendar year within twenty (20) Business Days after the delivery of the annual report referred to in Section 6.01 hereof. Section 6.04. Net Payment Basis. Amounts payable under this Agreement by ------------------- the Parties hereto shall be settled against each other, dollar for dollar, and only a net payment shall be due; provided, however, that no balance or amount -------- ------- due by the Parties under any other agreement shall be offset against any obligation arising under this Agreement. Section 6.05. Late Payments. Should any payment due any party be received -------------- by such party more than sixty (60) days after the due date for such payment under this Agreement, interest shall accrue from the date on which such payment was due (taking into account the provisions of 6.06 hereof) until payment is received by the party entitled thereto, at an annual rate equal to the Bank of America Reference Rate quoted for six month periods as reported in The Wall Street Journal on the first Business Day of the month in which such payment first becomes due. Section 6.06. Federal Funds. All settlements in accordance with this -------------- Agreement shall be made by wire transfer of immediately available funds on the due date, or if such day is not a Business Day, on the next day which is a Business Day. Payment may be made by check payable in immediately available funds in the event the party entitled to receive payment has failed to provide wire transfer instructions. Section 6.07. Reports to Regulatory Authorities. During the term of this ----------------------------------- Agreement, the Reinsurer and the Company shall promptly furnish the other copies of any and all filings with, and reports or communications received from, any regulatory authority which relates directly and materially to the Non-Novated Dental Policies, including, without limitation, each annual statement, each quarterly financial report to the regulatory authority of the party's domicile having principal jurisdiction over the party and each report on periodic examination issued by such regulatory authority to the extent it relates to the Non-Novated Dental Policies. -7- ARTICLE VII DENTAL POLICY ADMINISTRATION; REPORTING --------------------------------------- Section 7.01. Administration of Non-Novated Dental Policies. The ------------------------------------------------- Company hereby grants the Reinsurer authority in all matters relating to administration of the Non-Novated Dental Policies to the fullest extent such authority may be granted pursuant to applicable law. In furtherance of the foregoing, the Company hereby nominates, constitutes and appoints the Reinsurer as its attorney-in-fact with respect to the rights, duties, privileges and obligations of the Company in and to the Non-Novated Dental Policies, with full power and authority to act in the name, place and stead of the Company with respect to the Non-Novated Dental Policies. Section 7.02. Administration. The Reinsurer shall, at its expense, provide -------------- the technical and administrative service, assistance and support functions described in Schedule 7.02 attached hereto (the "Services") reasonably necessary ------------- -------- or appropriate for the proper management and administration of the Non-Novated Dental Policies, which shall include, but not be limited to, Services required for the proper administration of the Non-Novated Dental Policies prior to the Effective Time and not performed as of the Effective Time. The Services at all times shall be consistent with the Company's prevailing practices and procedures as of the Effective Time with respect to similar types of policies actually communicated by the Company to Reinsurer and all applicable laws, regulations, and regulatory actions and pronouncements. (As used elsewhere in this Agreement, the terms "prevailing practices and procedures" will refer to the Company's prevailing practices and procedures as of the Effective Time communicated by the Company to the Reinsurer). Section 7.03. Claims Payment Instructions. The Reinsurer at its own cost ----------------------------- shall administer and process all payments to reimburse providers and Members for covered Dental Services under the Non-Novated Dental Policies (the "Claims") in ------ conformance with the Company's prevailing practices and procedures with respect to similar types of policies, including review, investigation, adjustment, settlement, defense and payment of Claims, special investigation and anti-fraud compliance, and preparation of any report required concerning the foregoing Services and will, in connection with such Claims administration, retain, at its sole discretion and cost, any outside investigation firms, adjusters, attorneys or other professionals that the Reinsurer deems necessary in the adjustment of such Claims. If a Claim arising prior to the Effective Time under a Non-Novated Dental Policy is presented that the Reinsurer in good faith disputes, the Reinsurer shall consult with the Company. If, after such consultation, the Reinsurer and the Company disagree as to how to resolve a Claim, the Company shall be entitled to assume, at its own expense, the control of the handling or the defense of such a disputed Claim (a "Disputed Claim"), including employment -------------- of counsel. The Company shall apprise the Reinsurer of and consult with the Reinsurer with respect to the progress of a Disputed Claim. In exercising such control, the Company shall act in good faith in accordance with generally accepted claims practices of similar insurance companies under similar circumstances. Any payment of any portion of a Disputed Claim made by the Company shall be added to the Policy Liabilities and shall be unconditionally binding on the Reinsurer; provided, however, that if the Company receives an -------- ------- offer of settlement or compromise from the other parties to a Disputed Claim for a particular amount or obtains a commitment from such other parties that they would accept a compromise or settlement requiring only the payment of a specific amount, the granting of an appropriate release or similar accommodation, and the Company, after mandatory -8- consultation with and over the objection of the Reinsurer, refuses to consent thereto and elects to continue to dispute or otherwise pursue such Disputed Claim, then the liability of the Reinsurer with respect of such Disputed Claim shall be deemed limited to that amount including expenses which the Company would have been liable if such compromise or settlement had been accepted by the Company. Section 7.04. Communications Relating to Non-Novated Dental Policies. ------------------------------------------------------- On and after the Effective Time, the Company shall forward promptly to the Reinsurer all notices and other written communications it receives relating to the Non-Novated Dental Policies (including all inquiries or complaints from state insurance regulators, agents, brokers and Members and all notices of claims, suits and actions for which it receives service of process). The Company shall be entitled to retain copies of all such materials. Section 7.05. Complaint Handling Procedure. The Parties shall cooperate ------------------------------ with each other in providing information necessary to respond to any inquiries and complaints concerning the Non-Novated Dental Policies. All inquiries and complaints concerning the Non-Novated Dental Policies received by the Company shall be forwarded immediately by facsimile or overnight mail to a contact person designated by the Reinsurer for reply. After consultation with the Company, except as provided below, the Reinsurer shall answer all inquiries and complaints received by it concerning the Non-Novated Dental Policies. If the Reinsurer and the Company disagree as to the appropriate response to an inquiry or complaint, the Company shall be entitled to assume, at its own expense, the control of the handling of the response to such inquiry or complaint (a "Disputed Complaint"), including employment of counsel. The Company shall ------------------- apprise the Reinsurer of and consult with the Reinsurer with respect to the progress of a Disputed Complaint. In exercising such control, the Company shall act in good faith consistent with the Company's prevailing practices and procedures as of the Effective Time with respect to similar inquiries or complaints. Any payment arising out of a Disputed Complaint controlled by the Company, to the extent such payment constitutes an Extra Contractual Liability, shall be added to the Policy Liabilities and shall be unconditionally binding on the Reinsurer; provided, however, that if the Company receives an offer of -------- ------- settlement or compromise from the other parties to a Disputed Complaint for a particular amount or obtains a commitment from such other parties that they would accept a compromise or settlement requiring only the payment of a specific amount, the granting of an appropriate release or similar accommodation, and the Company, after mandatory consultation with and over the objection of the Reinsurer, refuses to consent thereto and elects to continue to dispute or otherwise pursue such Disputed Complaint, then the liability of the Reinsurer with respect of such Disputed Complaint shall be deemed limited to that amount including expenses for which the Company would have been liable if such compromise and settlement had been accepted by the Company. Upon answering such inquiries or complaints, the Reinsurer shall furnish the Company with a copy of the complaint file. The Reinsurer shall be solely responsible for maintaining any complaint files, complaint registers or other reports of any kind, which are required to be maintained under applicable law. Section 7.06. Filings. The Reinsurer shall handle all compliance and ------- regulatory matters relating to the administration of the Non-Novated Dental Policies, including monitoring changes in applicable law, filing and refiling forms and rates, and preparing and filing all reports and other filings required by applicable law. The Reinsurer shall provide to the Company copies of -9- all reports and filings with respect to the Non-Novated Dental Policies required to be made with any Governmental Authority. Section 7.07. Provider Services. In fulfilling its Obligations pursuant to ----------------- Section 2.01, the Reinsurer shall provide, arrange for the provision of, or indemnify for the cost of dental care services and supplies ("Dental Services") --------------- required to satisfy all obligations with respect to the provision of Dental Services to Members and their dependents under the Non-Novated Dental Policies. The Reinsurer shall be responsible for the recruitment, credentialing and management of, and for contracting with, or gaining access to dental care and service providers adequate for the delivery of all Dental Services to Members required by or incidental to the Non-Novated Dental Policies. Section 7.08. Administration of Novated Dental Policies. Except for those ------------------------------------------ services to be provided to the Reinsurer by the Company pursuant to the Transition Services Agreement, administration and servicing of the Novated Dental Policies shall be the sole responsibility of the Reinsurer. Section 7.09. Communications Relating to Novated Dental Policies. On and ---------------------------------------------------- after the Effective Time, the Company shall forward promptly to the Reinsurer all notices and other written communications received by it relating to the Novated Dental Policies (including all inquiries or complaints from state insurance regulators, agents, brokers and insureds and all notices of claims, suits and actions for which it receives service of process). The Company shall be entitled to retain copies of all such materials. Section 7.10. Novation Reports. Within ten (10) Business Days after the end ---------------- of each month after the Effective Time, beginning with the month in which the first novation of an Dental Policy occurs, the Reinsurer shall provide to the Company a report indicating all Dental Policies that have been the subject of a novation by the Reinsurer during the prior month. Section 7.11. Inspection. Each party hereto and its respective authorized ---------- representatives shall have the right, upon prior written notice, at reasonable times during normal business hours, to inspect and review all books, records, accounts, reports, tax returns, files and information of the other party hereto reasonably relating to this Agreement. The Parties shall keep all non-public information received from the other party strictly confidential, and unless otherwise required by applicable Law or Governmental Authority, shall not disclose any of the same without obtaining the prior approval of the party providing the information. The rights of the Parties under this Section 7.11 shall survive termination of this Agreement. ARTICLE VIII REGULATORY APPROVALS; STATEMENT CREDIT -------------------------------------- Section 8.01. Regulatory Approvals. The consummation of this Agreement -------------------- and the transactions contemplated hereby are expressly contingent upon and subject to obtaining any and all such approvals and consents as may be required by applicable law, regulation, or Governmental Authority. No provision in this Agreement shall be deemed to require any party hereto to take any action prohibited by applicable law, regulation, or regulatory authority. The form of any application for any such approvals or consents as may be required by applicable law, -10- regulation, or Governmental Authority shall be approved by the Company and the Reinsurer prior to the filing of any such application. Section 8.02. Statement Credit. The Reinsurer shall at its own expense ---------------- take all actions reasonably necessary to permit the Company to obtain full financial statement credit in all applicable jurisdictions for the reinsurance provided to it by the Reinsurer and the assumptions by novation pursuant to this Agreement, including, if necessary, posting acceptable security. ARTICLE IX INDEMNIFICATION --------------- Section 9.01. Indemnification by the Reinsurer. The Reinsurer shall ---------------------------------- indemnify, defend and hold the Company harmless from and against all Policy Liabilities and all losses, liabilities, claims, damages and expenses (including reasonable attorneys' fees and expenses) that are based upon or arise out of the breach of any obligation of the Reinsurer provided for in this Agreement. Section 9.02. Indemnification by the Company. The Company shall indemnify ------------------------------- the Reinsurer against, and hold them harmless from, all losses, liabilities, claims, damages and expenses (including reasonable attorneys' fees and expenses) that are based upon or arise out of the breach of any obligation of the Company provided for in this Agreement. ARTICLE X INSOLVENCY ---------- Section 10.01. Payments by the Reinsurer. With respect to any ---------------------------- Non-Novated Dental Policy, the Reinsurer hereby agrees that all amounts due under this Agreement with respect to the Non-Novated Dental Policies shall be payable by the Reinsurer to any conservator, liquidator, or statutory successor of the Company on the basis of the claims allowed against the Company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims. Payments by the Reinsurer as set forth in this Section 10.01 shall be made directly to the Company or to its conservator, liquidator, or statutory successor, except where the Non-Novated Dental Policy specifically provides another payee of such reinsurance in the event of the insolvency of the Company. Section 10.02. Claims. It is agreed that in the event of the insolvency of ------ the Company, the liquidator, receiver or other statutory successor of the Company shall give prompt written notice to the Reinsurer of the pendency or submission of a Claim under the Non-Novated Dental Policies reinsured hereunder. During the pendency of such claim, the Reinsurer may investigate such Claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense available to the Company or its receiver. The expense thus incurred by the Reinsurer is chargeable against the Company, subject to any court approval, as a part of the expense of insolvency, liquidation, or rehabilitation to the extent of a proportionate share of the benefit which accrues to the Company solely as a result of the defense undertaken by the Reinsurer. -11- Section 10.03. Novated Dental Contacts. All amounts due a Member under the ----------------------- Novated Dental Policies shall be payable by the Reinsurer on the basis of the liability of the Reinsurer under the Novated Dental Policies, without diminution because of the insolvency of the Company. Any benefits or amounts due to Members with respect to a Novated Dental Policy shall be paid or performed by the Reinsurer in accordance with the Novated Dental Policy. ARTICLE XI ARBITRATION ----------- Section 11.01. Conciliation. If a dispute between any of the Parties ------------ relating to this Agreement is not resolved within ten (10) Business Days from the date that any party has notified another party that such dispute exists, then such dispute shall be submitted on the next Business Day for conciliation to a senior executive officer or his or her designee of each party. If such senior executive officers are unable to resolve the dispute within fifteen (15) Business Days from the date that it is first presented to them, then such dispute shall be referred to binding arbitration. Section 11.02. Arbitration. In the event of any dispute between the Parties ----------- hereto relating to, arising out of, or in connection with any provision of this Agreement (hereinafter a "Dispute"), the Parties to this Agreement and their representatives, designees, successors and assigns agree that any such Dispute shall be settled by binding arbitration to take place in Orange County, California. Section 11.03. Appointment of Arbitrator. Any arbitration hereunder shall -------------------------- be conducted by a single arbitrator chosen from the panel of arbitrators of the Judicial Arbitration & Mediation Services ("JAMS") with experience and expertise in the dental HMO or dental indemnity insurance business. If a JAMS arbitrator with specific experience in the dental HMO or dental indemnity insurance business is not available, the arbitrator must have general experience in the health insurance industry. Within ten (10) days of notice of a Dispute from Company to Reinsurer or notice from Reinsurer to Company, the Company and Reinsurer shall use their best efforts to choose a mutually agreeable arbitrator. If the Company and the Reinsurer cannot agree on an arbitrator, the arbitrator shall promptly be selected by JAMS. Section 11.04. Procedures. The party submitting a Dispute to arbitration ---------- hereunder shall present its case to the arbitrator and the other party hereto in written form within twenty (20) days after the appointment of the arbitrator. The other party hereto shall then have twenty (20) days to submit a written response to the arbitrator and the original party who submitted the Dispute to arbitration. After timely receipt of each party's case, the arbitrator shall have twenty (20) days to render his or her decision. Section 11.05. Applicable Law. The arbitrator is relieved from judicial --------------- formalities and, in addition to considering the rules of law, the limitations contained in this Agreement and the customs and practices of the health care industry, shall make his or her award with a view to effectuating the intent of this Agreement. Section 11.06. Decisions Final. The decision of the arbitrator shall ---------------- be final and binding upon the Parties, and judgment may be entered thereon in a court of competent jurisdiction. -12- Section 11.07. Costs. Each party shall bear its own cost of arbitration, ----- and the costs of the arbitrator shall be shared equally by the Parties. Section 11.08. Equitable Relief. Sections 11.01 and 11.02 shall not apply ----------------- to any claim for equitable relief, including, without limitation, claims for specific performance, a preliminary injunction, or a temporary restraining order. Such claims shall be submitted to a court of competent jurisdiction, and neither party shall be required to post any bond or other security. If a party chooses to pursue equitable relief, such conduct shall not constitute a waiver of, or be deemed inconsistent with, the arbitration provisions set forth in this Article XI. Once the claims for equitable relief are finally decided, any and all remaining claims shall be submitted to arbitration pursuant to Section 11.02 and the arbitrator shall be bound by the findings and rulings of the court on the claims for equitable relief. Section 11.09. Survival of Article. This Article XI shall survive --------------------- termination of this Agreement. ARTICLE XII MISCELLANEOUS ------------- Section 12.01. Notices. Any notice or other communication required or ------- permitted hereunder shall be in writing and shall be delivered by hand by certified process server, certified or registered mail (postage prepaid and return receipt requested), by a nationally recognized overnight courier service (appropriately marked for overnight delivery) or by facsimile (with request for immediate confirmation of receipt in a manner customary for communications of such respective type). Notices shall be effective upon receipt and shall be addressed as follows: If to the Reinsurer: SafeGuard Health Enterprises, Inc. 95 Enterprise, Suite 100 Aliso Viejo, California 92656 Attn.: James E. Buncher President and Chief Executive Officer Tel: (949) 425-4100 Fax: (949) 425-4101 with a copy to: Ronald I. Brendzel Senior Vice President and General Counsel SafeGuard Health Enterprises, Inc. 95 Enterprise, Suite 100 Aliso Viejo, California 92656 Tel: (949) 425-4110 Fax: (949) 425-4586 and -13- David K. Meyercord Strasburger and Price, LLP 901 Main Street, Ste. 4300 Dallas, Texas 75202-3794 Tel: (214) 651-4525 Fax: (214) 659-4023 If to the Company: Health Net, Inc. 21650 Oxnard Street Woodland Hills, California 91367 Attention: General Counsel Facsimile: (818) 676-7503 with a copy to: Sonnenschein Nath & Rosenthal 685 Market Street, 6th Floor San Francisco, California 94105 Attention: Kenneth B. Schnoll Facsimile: (415) 543-5472 All notices and other communications required or permitted under the terms of this Agreement that are addressed as provided in this Section shall (i) if delivered personally or by overnight express, be deemed given upon delivery; (ii) if delivered by facsimile transmission, be deemed given when electronically confirmed; and (iii) if sent by registered or certified mail, be deemed given when received. Any party from time to time may change its address for notice purposes by giving a similar notice specifying a new address, but no such notice shall be deemed to have been given until it is actually received by the party sought to be charged with the contents thereof. Section 12.02. Entire Agreement. This Agreement (including the Exhibits and ---------------- Schedules hereto) and the Transaction Agreements contain the entire agreement and understanding among the Parties with respect to the transactions contemplated hereby, and supersedes all prior agreements and understandings, written or oral, with respect thereto. Section 12.03. Expenses. Except as otherwise expressly provided in this -------- Agreement, whether or not the transactions contemplated hereby are consummated, each of the Parties hereto shall pay its own costs and expenses incident to preparing for, entering into and carrying out this Agreement and the consummation of the transactions contemplated hereby. Section 12.04. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Parties. -14- Section 12.05. No Third Party Beneficiary. Except as otherwise ----------------------------- specifically provided in this Agreement, nothing in this Agreement is intended or shall be construed to give any person, other than the Parties hereto, their successors and permitted assigns, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provisions contained herein, and Reinsurer shall not be directly liable hereunder to any Member under any Non-Novated Dental Policy. Section 12.06. Amendment. This Agreement may only be amended or modified by --------- a written instrument executed on behalf of the Parties hereto and any such amendment shall be subject to receipt of any and all consents, approvals, permits and authorizations required to be obtained from Governmental Authorities. Section 12.07. Assignment; Binding Effect. Neither this Agreement nor any --------------------------- of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by either of the Parties hereto without the prior written consent of the other party, and any such assignment that is attempted without such consent shall be null and void. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the Parties and their respective successors and permitted assigns. Section 12.08. Invalid Provisions. If any provision of this Agreement is ------------------- held to be illegal, invalid, or unenforceable under any present or future law, and if the rights or obligations of the Parties under this Agreement will not be materially and adversely affected thereby, (a) such provision shall be fully severable; (b) this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and (c) the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Section 12.09. Duty of Cooperation. Each party hereto shall cooperate fully ------------------- with the other party hereto in all reasonable respects in order to accomplish the objectives of this Agreement. Section 12.10. Governing Law. This Agreement shall be governed by and -------------- construed in accordance with the laws of the State of California. Section 12.11. Waiver. Any term or condition of this Agreement may be ------ waived in writing at any time by the party that is entitled to the benefit thereof. A waiver on one occasion shall not be deemed to be a waiver of the same or any other breach or nonfulfillment on a future occasion. All remedies, either under the terms of this Agreement, or by law or otherwise afforded, shall be cumulative and not alternative, except as otherwise provided by law. Section 12.12. Errors and Omissions. Inadvertent delays, errors or ---------------------- omissions that occur or are made in connection with the transactions contemplated by this Agreement shall not relieve any party from any liability that would have attached had such delay, error or omission not occurred, provided that such error or omission is rectified by the party making such error or omission as soon as possible after discovery thereof and such error or omission does not prejudice any other party. -15- Section 12.13. Interpretation. For purposes of this Agreement, the terms -------------- "hereof", "herein", "hereto", "hereunder", and derivative or similar words refer ----- ------ ------ --------- to this Agreement (including the exhibits hereto) as a whole unless otherwise indicated. Whenever the words "include", "includes" or "including" are used in ------- -------- --------- this Agreement, they shall be deemed to be followed by the words "without ------- limitation". Whenever the singular is used herein, the same shall include the ---- plural, and whenever the plural is used herein, the same shall include the singular, where appropriate. The headings used in this Agreement have been inserted for convenience and do not constitute matter to be construed or interpreted in connection with this Agreement. Section 12.14. Business Associate. In performing functions, activities, or ------------------ services for, or on behalf of, the Company involving the use or disclosure of Protected Health Information, as that term is defined in 45 CFR 164.501, the Reinsurer shall comply with the Business Associate Addendum set forth in Schedule 12.14 hereto. - --------------- IN WITNESS WHEREOF, the Company and the Reinsurer have each executed this Agreement as of the date first written above. SAFEHEALTH LIFE INSURANCE COMPANY /s/ James E. Buncher ---------------------------------------- James E. Buncher President and Chief Executive Officer /s/ Ronald I. Brendzel ---------------------------------------- Ronald I. Brendzel Senior Vice President and Secretary HEALTH NET LIFE INSURANCE COMPANY /s/ David W. Anderson ---------------------------------------- David W. Anderson President -16- SCHEDULE 2.01 HEALTH NET LIFE INSURANCE COMPANY DENTAL POLICIES The Dental Policies identified by group and individual contract number and name: To be determined as of the Effective Time -1- SCHEDULE 7.02 SERVICES The Reinsurer agrees to perform, consistent with the Company's prevailing practices and procedures and the terms of the Non-Novated Dental Policies, all services reasonably necessary for, and incident to the proper management and administration of, the Non-Novated Dental Policies, including but not limited to the following services: A. All Member services relating to the Non-Novated Dental Policies including the following: 1. Billing and collection of premiums; 2. Process and payment of claims; 3. Handle Member service requests (including adding new Members to group Dental Policies, deleting Members from group Dental Policies), administration of COBRA responsibilities, inquiries and complaints relating to the Non-Novated Dental Policies; 4. Preparation and mailing of premium notices on a timely basis to Members and parties to the Non-Novated Dental Policies; transmission of additional premium notices, lapse notices, reinstatement offers and other notices to Members and parties to Dental Policies; 5. Underwriting and processing of any and all policy changes and reinstatements; 6. Member mailings of any necessary endorsements or other contract documents; 7. Preparation of quarterly financial statement data (within ten Business Days after the end of a calendar quarter) and annual financial statement data (within 35 calendar days after the end of the calendar year), for inclusion in the Company's applicable financial statements; 8. Administration of any agreement providing for the payment of commissions relating to any Non-Novated Dental Policy; 9. Development, as necessary, and maintenance of computer systems required to provide the Services. 10. Recruitment, credentialing and management of, and contracting with sufficient dental providers adequate for the delivery of all Dental Services to Members required by or incidental to the Non-Novated Dental Policies as determined by applicable law. -2- B. All services performed by the Reinsurer's employees providing legal, compliance, actuarial, accounting, treasury, human resources and data processing, including the preparation of financial and other relevant reports. -3- SCHEDULE 12.14 BUSINESS ASSOCIATE ADDENDUM This Business Associate Addendum (the "Addendum") supplements and is made a part of the Assumption and Indemnity Reinsurance Agreement (the "Agreement") by and between Health Net Life Insurance Company (the "Company") and SafeHealth Life Insurance Company (the "Reinsurer"), and is effective as of the effective date of the Agreement. Recitals A. The Company may disclose certain information to the Reinsurer pursuant to the terms of the Agreement, some of which may constitute Protected Health Information, as defined below. B. The parties intend to protect the privacy and provide for the security of Protected Health Information in compliance with the Health Insurance Portability and Accountability Act of 1996, Public law No. 104-191 ("HIPAA") and the regulations promulgated thereunder by the U.S. Department of Health and Human Services (the "HIPAA Regulations") and other applicable laws. C. The purpose of this Addendum is to satisfy certain standards and requirements of HIPAA and the HIPAA Regulations, including, but not limited to, 45 CFR 164.502(e) and 45 CFR 164.504(e). In consideration of the mutual promises below and the exchange of information pursuant to the Agreement and this Addendum, the parties agree as follows: 1. Definitions (a) Business Associate means the Reinsurer to the extent it performs functions, activities, or services for, or on behalf of, the Company pursuant to the Agreement involving the use or disclosure of Protected Health Information. (b) Covered Entity means the Company. (c) "Privacy Rule" means the Standards for Privacy of Individually Identifiable Health Information at 45 CFR part 160 and part 164, subparts A and E. (d) "Protected Health Information" has the same meaning as the term "protected health information" in 45 CFR 164.501, limited to the information created or received by Business Associate from or on behalf of Covered Entity. (e) Capitalized terms used but not otherwise defined in this Addendum have the same meaning as those terms in the Privacy Rule. -4- 2. Obligations and Activities of Business Associate (a) Business Associate shall not use or disclose Protected Health Information other than as permitted or required by this Addendum or as Required By Law. (b) Business Associate shall use appropriate safeguards to prevent use or disclosure of the Protected Health Information other than as provided for by the Agreement and this Addendum. (c) Business Associate agrees to mitigate, to the extent practicable, any harmful effect that is known to Business Associate of a use or disclosure of Protected Health Information by Business Associate in violation of the requirements of this Addendum. (d) Business Associate shall report to Covered Entity any use or disclosure of the Protected Health Information not provided for by this Addendum of which it becomes aware. (e) Business Associate shall ensure that any agent, including a subcontractor, to whom it provides Protected Health Information received from, or created or received by Business Associate on behalf of, Covered Entity agrees to the same restrictions and conditions that apply through this Addendum to Business Associate with respect to such information. (f) Business Associate shall provide access, at the request of Covered Entity, and in the time and manner designated by Covered Entity, to Protected Health Information in a Designated Record Set, to Covered Entity or, as directed by Covered Entity, to an Individual in order to meet the requirements under 45 CFR 164.524 (g) Business Associate agrees to make any amendment(s) to Protected Health Information in a Designated Record Set that the Covered Entity directs or agrees to pursuant to 45 CFR 164.526 at the request of Covered Entity or an Individual, and in the time and manner designated by Covered Entity. (h) Business Associate agrees to make its internal practices, books, and records, including policies and procedures, relating to the use and disclosure of Protected Health Information received from, or created or received by Business Associate on behalf of, Covered Entity available to the Secretary, in a time and manner designated by the Secretary, for purposes of the Secretary determining Covered Entity's compliance with the Privacy Rule. (i) Business Associate agrees to document such disclosures of Protected Health Information and information related to such disclosures as would be required for Covered Entity to respond to a request by an Individual for an accounting of disclosures of Protected Health Information in accordance with 45 CFR 164.528. (j) Business Associate agrees to provide to Covered Entity, in the time and manner designated by Covered Entity, information collected in accordance with Section (2)(i) of this Addendum, to permit Covered Entity to respond to a request by an Individual for an accounting of disclosures of Protected Health Information in accordance with 45 CFR 164.528. 3. Permitted Uses and Disclosures by Business Associate General Use and Disclosure Provisions -5- Except as otherwise limited in this Addendum, Business Associate may use or disclose Protected Health Information to perform functions, activities, or services for, or on behalf of, Covered Entity as specified in the Agreement, provided that such use or disclosure would not violate the Privacy Rule if done by Covered Entity. 4. Specific Use and Disclosure Provisions (a) Except as otherwise limited in this Addendum, Business Associate may use Protected Health Information for the proper management and administration of Business Associate or to carry out the legal responsibilities of Business Associate. (b) Except as otherwise limited in this Addendum, Business Associate may disclose Protected Health Information for the proper management and administration of Business Associate, provided that disclosures are Required By Law, or Business Associate obtains reasonable assurances from the person to whom the information is disclosed that it will remain confidential and used or further disclosed only as Required By Law or for the purpose for which it was disclosed to the person (which purpose shall be consistent with the limitations imposed by this Addendum) and the person notifies the Business Associate of any instances of which it is aware in which the confidentiality of the information has been breached. (c) Except as otherwise limited in this Addendum, Business Associate may use Protected Health Information to provide Data Aggregation services to Covered Entity as permitted by 42 CFR 164.504(e)(2)(i)(B). (d) Business Associate may use Protected Health Information to report violations of law to appropriate Federal and State authorities, consistent with 45 CFR 164.502(j)(1). 5. Obligations of Covered Entity Provisions for Covered Entity To Inform Business Associate of Privacy Practices and Restrictions (a) Covered Entity shall notify Business Associate of any limitation in its notice of privacy practices in accordance with 45 CFR 164.520, to the extent that such limitation may affect Business Associate's use or disclosure of Protected Health Information. (b) Covered Entity shall notify Business Associate of any changes in, or revocation of, permission by an Individual to use or disclose Protected Health Information, to the extent that such changes may affect Business Associate's use or disclosure of Protected Health Information. (c) Covered Entity shall notify Business Associate of any restriction on the use or disclosure of Protected Health Information that Covered Entity has agreed to in accordance with 45 CFR 164.522, to the extent that such restriction may affect Business Associate's use or disclosure of Protected Health Information. (d) Covered Entity shall not request Business Associate to use or disclose Protected Health Information in any manner that would not be permissible under the Privacy Rule if done by Covered Entity, except as permitted by Sections 4(b) and 4(c) of this Addendum. -6- 6. Term and Termination (a) This Addendum shall be effective as of the effective date of the Agreement, and shall terminate when all of the Protected Health Information provided by Covered Entity to Business Associate, or created or received by Business Associate on behalf of Covered Entity, is destroyed or returned to Covered Entity, or, if it is infeasible to return or destroy Protected Health Information, protections are extended to such information, in accordance with the termination provisions in this Section. (b) Upon Covered Entity's knowledge of a material breach of this Addendum by Business Associate, Covered Entity shall either: (i) provide an opportunity for Business Associate to cure the breach or end the violation and terminate this Addendum, and the provision for performance of functions, activities, or services for, or on behalf of Covered Entity under the Agreement, if Business Associate does not cure the breach or end the violation within the time specified by Covered Entity; (ii) immediately terminate this Addendum, and the provision for performance of functions, activities, or services for, or on behalf of Covered Entity under the Agreement, if Business Associate has breached a material term of this Addendum and cure is not possible; or (iii) if neither termination nor cure is feasible, report the violation to the Secretary. (c) Effect of Termination. (i) Except as provided in paragraph (ii) of this section, upon termination of this Addendum, for any reason, Business Associate shall return or destroy all Protected Health Information received from Covered Entity, or created or received by Business Associate on behalf of Covered Entity, and shall retain no copies of the Protected Health Information. This provision shall apply to Protected Health Information that is in the possession of subcontractors or agents of Business Associate. (ii) In the event that Business Associate determines that returning or destroying the Protected Health Information is infeasible, Business Associate shall provide to Covered Entity notification of the conditions that make return or destruction infeasible. Upon mutual agreement that return or destruction of Protected Health Information is infeasible, Business Associate shall extend the protections of this Addendum to such Protected Health Information and limit further uses and disclosures of such Protected Health Information to those purposes that make the return or destruction infeasible, for so long as Business Associate maintains such Protected Health Information. 7. Miscellaneous (a) Regulatory References. A reference in this Addendum to a section in the ---------------------- Privacy Rule means the section as in effect or as amended. (b) Amendment. The Parties agree to take such action as is necessary to --------- amend this Addendum from time to time as is necessary for Covered Entity to comply with the requirements of the Privacy Rule and the HIPAA. (c) Survival. The respective rights and obligations of Business Associate -------- under Section 6(c) of this Addendum shall survive the termination of this Addendum. -7- (d) Interpretation. The provisions of this Addendum shall prevail over any -------------- provisions in the Agreement that may conflict with or appear inconsistent with any provision of this Addendum. Any ambiguity in this Addendum shall be resolved to permit Covered Entity to comply with the Privacy Rule. -8- EXHIBIT A --------- TO ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT MEMBER MATERIALS NOTICE OF TRANSFER (Arizona and California) Dear Policyholder: This notifies you of an agreement reached between Health Net Life Insurance Company ("Health Net") and SafeHealth Life Insurance Company ("SafeHealth") for the transfer of your dental policy by SafeHealth. This assumption will be effective as of 12:01 a.m. Pacific Time, on _______________, 2003. SafeHealth Life Insurance Company is licensed to provide dental insurance products in [STATE]. To introduce you to SafeHealth, attached is a summary of essential information about SafeHealth. Your rights as a policyholder and the terms of your policy will not change as a result of the transfer. Your benefits will not change as a result of the transfer [although Health Net's provider network will be replaced with the provider network of SafeHealth and certain providers in the Health Net provider network may not be available in the SafeHealth provider network]. If you accept the transfer, SafeHealth will provide your coverage. It will have direct responsibility for the payment of all claims and benefits and for all other policy obligations. Health Net will no longer have any obligations to you. You have the following options with regard to the assumption of your policy: Option 1. Accept the transfer of your policy from Health Net to SafeHealth. Option 2. Reject the proposed transfer of your policy from Health Net to SafeHealth. If you choose this option, Health Net will remain your insurer and you will have no rights to claim any payments from SafeHealth[, although SafeHealth will be administering your Health Net dental policy until your insurance terminates, as indicated below]. Health Net and SafeHealth recommend that you choose Option 1. If you wish to choose Option 1, simply do not return the Rejection Form and you will automatically be deemed to have accepted this option upon _________ [date]. You should then attach the [enclosed] Certificate of Assumption [that you will be receiving under separate cover] to your policy. If you wish to choose Option 2, you must complete the enclosed Rejection Form, sign it and return it within _____ days of this Notice. If you do not return the Rejection Form within -9- that time, you will be deemed to have accepted the transfer of your policy. [You should also return the [enclosed] Certificate of Assumption.] In considering whether to accept the assumption, please note that Health Net intends to cease offering dental insurance as promptly as practicable after the transfer and assumption of its dental business to SafeHealth. Rejection of the assumption may ultimately result in termination of your coverage. [Please also note that Health Net has contracted with SafeHealth to administer its dental insurance policies until Health Net is able to withdraw completely from the market. As a result, if you reject the assumption although Health Net would remain legally responsible for its policy obligations to you, SafeHealth will be administering your Health Net dental policy until your insurance terminates.] The enclosed Certificate of Assumption should be attached to your policy unless you choose to reject the assumption of your policy. Your current and future premiums should be paid as indicated by your premium notices. If you have any questions about the assumption of your policy or about SafeHealth, please feel fee to call SafeHealth at (____) ____-_____. Written inquiries may be mailed to: SafeHealth at __________________ [address]. Sincerely, _________________________________ _________________________________ SAFEHEALTH LIFE INSURANCE HEALTH NET LIFE INSURANCE COMPANY COMPANY -10- NOTICE OF TRANSFER [OREGON] Dear Policyholder: Important: Please read this notice carefully. This notice affects your rights under your insurance policy. TRANSFER OF POLICY SafeHealth Life Insurance Company ("SafeHealth") has agreed to replace Health Net Life Insurance Company ("Health Net") as your insurer under [insert policy or certificate name and number], effective as of 12:01 a.m. Pacific Time on _______________, 2003. SafeHealth's principal place of business is ________________. At your request, Health Net Life will furnish to you financial information concerning both companies. This information will include the following: (1) Ratings for the previous year, if available, from two nationally recognized insurance rating services. If a rating of either insurance company changed during the previous year, the ratings for the year preceding will be furnished as well. (2) Balance sheets for the previous year, if available, and as of the date of the most recent quarterly statement. (3) A copy of the Management's Discussion and Analysis that was filed as a supplement to the previous year's annual statement. (4) An explanation of the reason for the transfer. You may obtain additional information concerning SafeHealth from reference materials in your local library or by contacting the Oregon Insurance Division at 350 Winter St. NE, Room 440-1 Salem, Oregon 97301-0220. SafeHealth is authorized to write this coverage in Oregon. [The Insurance Commissioner of Oregon has reviewed the potential effect of the proposed transaction, and has approved the transaction.] YOUR RIGHTS You may choose to consent to or reject the transfer of your policy to SafeHealth. If you want your policy transferred, you may notify us in writing by signing and returning the enclosed pre- addressed, postage-paid card or by writing to us at: [Insert name, address and facsimile number of contact person] Payment of your premium to the assuming company will also constitute acceptance of the transaction. [If premium notices are used: The first premium notice you receive from SafeHealth, however, will provide you with a method that will allow you to pay the premium while reserving the right to reject the transfer.] [If premium notices are NOT used: SafeHealth will provide you with a method by which you may pay the premium while reserving the right to reject the transfer.] If you reject the transfer, you may keep your policy with Health Net or exercise any option under your policy. If we do not receive a written rejection you will, as a matter of law, have consented -11- to the transfer. Before this consent is final, however, you will be provided a second notice of the transfer twelve months from now. After the second notice is provided you will have one month to reply. If you have paid your premium to SafeHealth without reserving your right to reject the transfer, you will not receive a second notice. EFFECT OF TRANSFER If you accept this transfer, SafeHealth will be your insurer. It will have direct responsibility to you for the payment of all claims, benefits and for all other policy obligations. Health Net will no longer have any obligations to you. If you accept this transfer, you should make all premium payments and claims submissions to SafeHealth and direct all questions to SafeHealth. In considering whether to accept the assumption, please note that Health Net intends to cease offering dental insurance as promptly as practicable after the transfer and assumption of its dental business to SafeHealth. Rejection of the assumption may ultimately result in termination of your coverage. [Please also note that Health Net has contracted with SafeHealth to administer its dental insurance policies until Health Net is able to withdraw completely from the market. As a result, if you reject the assumption although Health Net would remain legally responsible for its policy obligations to you, SafeHealth will be administering your Health Net dental policy until your insurance terminates.] Sincerely, _____________ Health Net Life Insurance Company [Address] [Telephone Number] For your convenience, we have enclosed a pre-addressed postage- paid response card. Please take time now to read the enclosed notice and complete and return the response card to us. -12- NOTICE TO GROUP MEMBERS Health Net Life Insurance Company ("Health Net") is presently implementing a plan that is intended to ensure uninterrupted coverage for our customers. As part of the plan, we have entered into an agreement with SafeHealth Life Insurance Company ("SafeHealth"), that will assume Health Net's dental insurance business. SafeHealth will replace Health Net under your dental insurance coverage with Health Net effective ________________, 2003. Your rights as an insured and the terms of your certificate of coverage will not change as a result of the transfer, except as set forth in the enclosed Certificate of Assumption. Your benefits will not change as a result of the transfer. The enclosed Certificate of Assumption should be attached to your certificate of coverage. Assumption of your dental insurance coverage will be effective as of ____________, 2003, at 12:01 a.m. Pacific Time. If you have any questions about the assumption of your contract or about SafeHealth, please feel fee to call SafeHealth at (____) ____-_____. Written inquiries may be mailed to: SafeHealth at [_____________]. Sincerely, _________________________________ _________________________________ SAFEHEALTH LIFE INSURANCE HEALTH NET LIFE INSURANCE COMPANY COMPANY -13- CERTIFICATE OF ASSUMPTION [Individual] You are hereby notified that SafeHealth Life Insurance Company has, effective as of _________, 2003 (the "Effective Time"), assumed all rights, liabilities, and obligations of Health Net Life Insurance Company under your dental insurance policy with Health Net Life Insurance Company. From and after the Effective Time, all references in your policy or certificate to "Health Net Life Insurance Company" are hereby changed to "SafeHealth Life Insurance Company." Except for the substitution of SafeHealth for Health Net as your insurer, your rights as a insured will not be affected by the change in companies, and the terms and conditions of your policy or certificate will not be changed by reason of the assumption. All correspondence and inquiries concerning your policy or certificate, including premium payments, policy or certificate changes, and notices of claims, should be submitted to: SafeHealth Life Insurance Company [address] This Certificate of Assumption, as of the Effective Time, forms a part of and should be attached to the policy or certificate issued to you by Health Net Life Insurance Company. IN WITNESS WHEREOF, SafeHealth Life Insurance Company has caused this Certificate of Assumption to be duly signed and issued. --------------------------------- SafeHealth Life Insurance Company -14- NOTICE OF REJECTION OF ASSUMPTION [Arizona and California] To: HEALTH NET LIFE INSURANCE COMPANY REJECTION --------- I have reviewed the Certificate of Assumption whereby SafeHealth Life Insurance Company would assume all of the rights, liabilities, and obligations of Health Net Life Insurance Company under my dental insurance policy or certificate previously issued by Health Net Life Insurance Company. I have also reviewed the Notice of Transfer describing the transaction. I hereby notify you that I REJECT the proposed assumption of my policy or -------- certificate and substitution of SafeHealth Life Insurance Company thereunder, and I wish to retain my policy or certificate with Health Net Life Insurance Company. I UNDERSTAND THAT HEALTH NET LIFE INSURANCE COMPANY INTENDS TO DISCONTINUE ITS DENTAL INSURANCE BUSINESS AND THAT REJECTION OF THE ASSUMPTION MAY ULTIMATELY RESULT IN TERMINATION OF MY COVERAGE. DATE: - -------------------------------------------------- Policyholder Signature - -------------------------------------------------- Print or Type Name - -------------------------------------------------- ID # from the Health Net Life Insurance Company Identification Card Issued to Policy Holder -15- RESPONSE CARD [Oregon] ___ Yes, I accept the transfer of my policy from Health Net Life Insurance Company to SafeHealth Life Insurance Company. ___ No, I reject the proposed transfer of my policy Health Net Life Insurance Company to SafeHealth Life Insurance Company and wish to retain my policy Health Net Life Insurance Company DATE: - ------------------------------------------------------------------- Policy Holder Signature - -------------------------------------------------- Print or Type Name - -------------------------------------------------- Street Address - -------------------------------------------------- City, State, Zip - -------------------------------------------------- ID # from the Health Net Life Insurance Company Identification Card Issued to Policy Holder -16- CERTIFICATE OF ASSUMPTION [Group] You are hereby notified that SafeHealth Life Insurance Company has, effective as of _____________, 2003 (the "Effective Time"), assumed all rights, liabilities, and obligations of Health Net Life Insurance Company under your dental insurance policy with Health Net Life Insurance Company. From and after the Effective Time, all references in your policy to "Health Net Life Insurance Company" are hereby changed to "SafeHealth Life Insurance Company." All correspondence and inquiries concerning your policy, including premium payments, policy changes, and notices of claims, should be submitted to: SafeHealth Life Insurance Company [address] Except as described in this Certificate of Assumption, your rights as a policy holder will not be affected by the change in companies, and the terms and conditions of your policy will not be changed by reason of the assumption. This Certificate of Assumption, as of the Effective Time, forms a part of and should be attached to the dental insurance policy issued to you by Health Net Life Insurance Company. Copies of this Certificate of Assumption must be distributed to covered group members under the policy for attachment to their certificates of coverage. IN WITNESS WHEREOF, Health Net Life Insurance Company and SafeHealth Life Insurance Company have caused this Certificate of Assumption to be duly signed and issued. - --------------------------------- --------------------------------- Health Net Life Insurance Company SafeHealth Life Insurance Company -17- EX-10.46 5 doc4.txt EXHIBIT 10.46 TO CURRENT REPORT ON FORM 8-K DATED AS OF APRIL 7, 2003 --------------------------------------------------------------------- STRATEGIC RELATIONSHIP AGREEMENT This STRATEGIC RELATIONSHIP AGREEMENT ("Agreement") is made and entered into this 7th day of April, 2003, by and between Health Net, Inc., a Delaware corporation ("Health Net") and SafeGuard Health Enterprises, Inc., a Delaware corporation ("SafeGuard"). RECITALS -------- WHEREAS, Health Net, through its Subsidiaries, is authorized to offer the Health Net Products (as defined herein) for sale in the Territory (as defined herein); WHEREAS, SafeGuard desires to make the Health Net Products available for sale by the SafeGuard Marketing Force (as defined herein) in the Territory; WHEREAS, Health Net is willing to make the Health Net Products available for sale in the Territory by the SafeGuard Marketing Force; WHEREAS, SafeGuard through its Subsidiaries is authorized to offer the SafeGuard Dental Products (as defined herein) for sale in the Territory; WHEREAS, SafeGuard is willing to make the Health Net Branded Products (as defined herein) available for sale by the Health Net Marketing Force (as defined herein) in the Territory; and WHEREAS, pursuant to the Purchase and Sale Agreement by and between Health Net and SafeGuard dated April 7, 2003, Health Net and SafeGuard agreed to enter into a strategic relationship agreement at the Closing to promote and facilitate the sale of Health Net Branded Products through the Health Net Marketing Force and the sale of Health Net Products through the SafeGuard Marketing Force. NOW THEREFORE, in consideration of the mutual agreements contained herein, the sufficiency of which is hereby acknowledged, and in consideration of the performance by the parties of their obligations under this Agreement, the parties agree as follows: ARTICLE I DEFINITIONS ----------- Capitalized terms used in this Agreement and not otherwise defined shall have the meanings given such terms in the Purchase and Sale Agreement. For purposes of this Agreement, the following terms shall have the meanings specified below (definitions are applicable to both the singular and the plural form of each term defined herein). "Ancillary SafeGuard Products" means dental HMO products, dental PPO and ------------------------------ dental indemnity products developed by SafeGuard with benefit designs and rate structures that differentiate such products from the SafeGuard Dental Products offered generally by SafeGuard -1- in the Territory and which shall be sold exclusively by the Health Net Marketing Force only to Health Net Clients. "Benchmark Products" means those SafeGuard Dental Products that are ------------------- determined by the parties to be materially similar to the Health Net Branded Products as of the Effective Date. "Branding" shall have the meaning set forth in Section 2.7. -------- "Change of Control" means the acquisition, in a single transaction or in a ------------------- series of related transactions, by a person, an entity or a group of persons or entities acting in concert of fifty-one percent (51%) or more of the voting securities of a party, or fifty-one percent (51%) or more of the aggregate value of the assets of a party. "Contractholder" means an employer or individual in the Territory who or -------------- which executes an enrollment agreement with respect to any Product subject to this Agreement. "Dispute" shall have the meaning set forth in Section 9.1. ------- "Eligible Employee" means an employee who is eligible to enroll in a group ------------------ Product issued to a Contractholder. "Effective Date" means the Closing Date of the Purchase and Sale Agreement --------------- by and between Health Net and SafeGuard dated as of April 7, 2003. "Health Net Branded Products" means SafeGuard dental HMO Products, ------------------------------ SafeGuard dental PPO Products or SafeGuard dental indemnity Products selected by Health Net to market through the Health Net Marketing Force in the Territory after the Effective Date with the Branding of Health Net and issued, underwritten and administered by either SafeGuard Health Plans, Inc. or SafeHealth Insurance Company. "Health Net Clients" shall have the meaning set forth in Section 2.1. -------------------- "Health Net Dental Products" means the dental HMO Products offered in the ----------------------------- Territory as of the Effective Date by Health Net Dental, Inc., the dental PPO Product offered in Oregon by Health Net Health Plan of Oregon, Inc., the dental indemnity Product offered in Arizona by Health Net of Arizona, Inc. and the dental PPO and dental indemnity Products offered in the Territory as of the Effective Date by Health Net Life Insurance Company. "Health Net Indemnities" shall have the meaning set forth in Section 8.1. ------------------------ "Health Net Marketing Force" means (i) employees of Health Net or its ----------------------------- Subsidiaries who are licensed in one or more states within the Territory to sell Products in any state within the Territory; (ii) any agents under contract with any Health Net Subsidiary who or which are licensed in one or more states within the Territory and authorized to sell Products on behalf of any Health Net Subsidiary in any of the states within the Territory; and (iii) any independent brokers who or which are licensed in one or more states within the Territory to sell Products and who or which are authorized to represent specific purchasers of Products. -2- "Health Net Mark-Up" except as otherwise set forth in Section 5.5, means -------------------- the dollar amount equal to [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] of the Net Price for Health Net Branded dental HMO Products and [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] of the Net Price for the Health Net Branded dental PPO and dental indemnity Products. "Health Net Products" means Medical Products, life insurance, vision and --------------------- behavior health HMO, PPO and indemnity products offered by Health Net Subsidiaries in the Territory. "HMO" means a commercial contract for health care services provided by --- Health Net Subsidiaries to Contractholders in the Territory utilizing a network of providers who or which are under direct or indirect contract with a Health Net Subsidiary to provide health care services. "HMO" includes HMO plans with a "point-of-service" feature that permits Enrollees to seek medical services from providers outside the network of providers who or which are under direct or indirect contract with a Health Net Subsidiary to provide health care services. "JAMS" shall have the meaning set forth in Section 9.2. ---- "Medical Products" means (i) PPO and indemnity health insurance contracts ----------------- covering the medical costs or services of Subscribers and (ii) medical HMO contacts. "Most Favored Nation Price" means the Net Price plus the Health Net ---------------------------- Mark-Up. "Net Price" means the amount equal to the estimated health care costs per ---------- Subscriber established by SafeGuard for Health Net Branded Products multiplied by an administrative expense factor of [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] for dental HMO Products and [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] for dental PPO and dental indemnity Products. "Pooled Net Price" means the amount equal to the pooled estimated health ------------------ care costs determined by SafeGuard for each Health Net Branded Product plan design multiplied by an administrative expense factor of [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] for dental HMO Products and [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] for dental PPO and dental indemnity Products. "Producer" means an insurance agent, broker or employee of either SafeGuard -------- or Health Net or any of their Subsidiaries authorized to market and sell the Products of a party in any state within the Territory. "Product" means any Health Net Product, Health Net Branded Product, ------- SafeGuard Dental Product or Ancillary Product offered for sale or sold pursuant to this Agreement. "SafeGuard Clients" shall have the meaning set forth in Section 2.4. ------------------ "SafeGuard Dental Products" means the dental HMO products offered in the --------------------------- Territory by SafeGuard Health Plans, Inc., and the dental PPO and dental indemnity products offered in the Territory by SafeHealth Life Insurance Company. -3- "SafeGuard Indemnities" shall have the meaning set forth in Section 8.2. ---------------------- "SafeGuard Subcapitation Amount" means the dollar amount arrived at by -------------------------------- multiplying the total number of Subscribers covered under Health Net Branded Products issued on or after the Effective Date by the Net Price of their respective Health Net Branded Products. The number of Subscribers used to calculate the SafeGuard Subcapitation Amount shall be subject to adjustment based on SafeGuard's standard retroactivity adjustment policy as of the adjustment date. "Supplemental Subcapitation Amount" means that dollar amount calculated in ----------------------------------- the manner described in Section 5.5. "Subscriber" means the persons including, but not limited to, Eligible ---------- Employees, who meet the eligibility requirements for a Product and who have enrolled in such Product. "Territory" means Arizona, Oregon and California for dental PPO and dental --------- indemnity Products and California for dental HMO Products. "Term" means that period of time commencing on the Effective Date and ---- ending on the termination date of this Agreement. ARTICLE II MARKETING AND SALES ------------------- Section 2.1 Marketing and Sale of the Health Net Branded Products to Health Net Clients. Subject to the terms, conditions and limitations of this Agreement, Health Net shall have the right to utilize the Health Net Marketing Force to offer Health Net Branded Products to existing and prospective individual, small group [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION], mid-market group [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION], large group and government clients of Health Net in the Territory (jointly referred to herein as "Health Net Clients") when the Health Net Marketing Force has or is offering to sell a Medical Product to such Health Net Clients. Section 2.2 Development of Ancillary Dental Products. SafeGuard and Health Net shall develop jointly Ancillary SafeGuard Products that Health Net reasonably determines would provide a marketing opportunity for the Health Net Marketing Force in the Territory. Any Ancillary SafeGuard Products developed jointly by Health Net and SafeGuard shall be offered exclusively by the Health Net Marketing Force only as Health Net Branded Products to Health Net Clients in the Territory. Section 2.3 Exclusive Agreement. (a) Except with Health Net's prior written consent and except as provided in this Section 2.3(a) and Section 7.3(f), during the Term SafeGuard shall not enter into any agreement substantially similar to this Agreement with any entity other than Health Net for the purpose of offering Medical Products for sale to SafeGuard Clients in the Territory, provided, however, that nothing -------- ------- contained in this Agreement shall limit SafeGuard's right to market SafeGuard Dental -4- Products or any other products not subject to this Agreement directly to SafeGuard Clients through the SafeGuard Marketing Force and provided further -------- ------- that the provisions of this Section 2.3(a) shall have no further force or effect if Health Net or a Health Net Subsidiary acquires ownership, merges or consolidates with an entity that offers or operates a dental HMO or dental insurance business in the Territory, or ownership of Health Net is acquired by an entity that offers or operates a dental HMO or a dental insurance business in the Territory and the dental HMO and dental insurance business of the combined entities accounts for more than [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] percent of the annual gross revenues of the combined entities. (b) Except with SafeGuard's prior written consent and except as provided in this Section 2.3(b) and Section 7.3(f), during the Term Health Net shall not enter into any agreement substantially similar to this Agreement with any entity other than SafeGuard for the purpose of offering any dental HMO, dental PPO or dental indemnity insurance products for sale to Health Net Clients in the Territory, provided, however, nothing contained in this Agreement shall limit -------- ------- Health Net's right to market Health Net Products or any other products not subject to this Agreement directly to Health Net Clients through the Health Net Marketing Force and provided further that the provisions of this Section 2.3(b) -------- ------- shall have no further force or effect if SafeGuard or a SafeGuard Subsidiary acquires ownership, merges or consolidates with an entity that offers or operates a health insurance business that provides Medical Products in the Territory, or ownership of SafeGuard is acquired by an entity that offers or operates a health insurance business that provides Medical Products in the Territory and the health insurance business of the combined entities accounts for more than [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] of the annual gross revenues of the combined entities. (c) Health Net shall have the option to expand the exclusive strategic relationship described in this Agreement to additional states in which SafeGuard is appropriately licensed to offer the Health Net Branded Products, provided that SafeGuard has no prior commitments in such additional states that would conflict with the obligations of SafeGuard under this Agreement. SafeGuard shall provide notice to Health Net of its intent to enter into an exclusive strategic relationship in any state outside the Territory that would be substantially similar to its relationship with Health Net described in this Agreement. Health Net shall have twenty (20) days from the date of the SafeGuard notice to exercise its option to expand its exclusive strategic relationship with SafeGuard into the states identified in the SafeGuard notice, provided, however, -------- ------- Health Net shall not have the option to exercise its option to expand this strategic relationship in either Texas or Florida unless Health Net has at least [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] Subscribers enrolled in its Medical Products in the relevant state at the time Health Net exercises its option to expand this strategic relationship to such state. Section 2.4 Marketing and Sale of Health Net Products by SafeGuard. Subject to the terms and conditions of this Agreement, the SafeGuard Marketing Force shall have the right to market Health Net Products to existing and prospective individual and group accounts of SafeGuard Dental Products or SafeGuard vision products in the Territory ("SafeGuard Clients"). Section 2.5 Identification of Health Net Branded Products. Subject to the requirements and limitations of Section 2.7 of this Agreement and all applicable Law, the Health -5- Net Branded Products shall be marketed under the collective designation "Health Net Dental." Each Health Net Branded Product shall be assigned a specific trade name, to be agreed to by the parties. Notwithstanding the foregoing, the Health Net Branded Products shall be marketed in a way that clearly indicates that the benefits provided under Health Net Branded Products are obligations of SafeGuard Health Plans, Inc. or SafeHealth Life Insurance Company, as appropriate, and does not suggest that such benefits are obligations of Health Net or any Health Net Subsidiary. Section 2.6 Marketing Materials. Each party shall bear the cost of its own marketing and promotional efforts, including but not limited to, the development and production of any marketing and collateral materials used to promote or market their respective Products. Any marketing and collateral materials developed by a party to promote or market Products pursuant to this Agreement shall be approved by the other party prior to use. Section 2.7 Branding. Neither party shall make use of the other party's trade marks, service marks, trade names or logos, including domain names, electric or written content or other materials, descriptions or representations of any kind that mentions the other party or its Affiliates, or refers to any Products or services of the other party (collectively referred to as "Branding") without obtaining the prior written consent of such other party. The parties shall use commercially reasonable efforts to provide the other party with such consent to utilize their respective Branding where reasonably necessary for the other party to perform its duties and exercise its rights under this Agreement and any such consent granted to utilize a party's Branding shall constitute a non-exclusive, revocable license that is limited to use of the Branding of the party in the Territory consistent with this Agreement. Section 2.8 Training. Health Net and SafeGuard shall develop jointly programs or prepare materials to train all necessary Health Net and SafeGuard personnel and the respective Marketing Forces of the parties regarding the marketing and administration of the Products. ARTICLE III UNDERWRITING, RATES AND ADMINISTRATION -------------------------------------- Section 3.1 Authority Regarding Products. (a) Except as provided below and in Article V, nothing in this Agreement confers or is intended to confer on a party any authority with respect to the Products of the other party, including but not limited to (i) underwriting criteria; (ii) pricing; (ii) participation requirements; (iii) minimum employer contributions; (iv) approval of applications; or (v) the authority to issue policies, contracts or any other documents conferring coverage under a Product of the other party. Except as otherwise provided herein, each party reserves the right, in its sole discretion, to amend, change or abolish coverage forms, premium rates or fees, underwriting guidelines, eligibility criteria and other internal rules and regulations with respect to its own Products. (b) Subject to any limitations imposed by applicable Law, the respective Marketing Forces of the parties shall be permitted to obligate the other party to provide coverage to their respective Clients under the Products offered for sale pursuant to this Agreement if such Clients -6- meet the eligibility and underwriting criteria established by the party providing the Product. In the event a Client does not meet the eligibility and underwriting criteria established by the party providing the Product, the Marketing Force of the other party shall not have the authority to obligate the party providing the Product to provide coverage without the prior consent of the party providing the Product. Except as provided in this Section 3.1(b), each party retains the exclusive right, exercisable without permission from the other party, to accept or reject any application or enrollment request, or to cancel the coverage with respect to their respective Products. Notwithstanding the foregoing, neither party shall impose any limitations or criteria with respect to a Product offered for sale pursuant to this Agreement that is more restrictive than the limitations and criteria applicable generally to the Products offered for sale by the party in the Territory. Section 3.2 Product Administration. (a) Except as specifically provided herein, each party shall be responsible for the design and implementation of all administrative services and procedures with respect to its respective Products, including without limitation, enrollment, applications, setting the Net Price, underwriting, reporting, coverage determinations, claims, grievances, correspondence and communication with eligible and covered persons, employers, Contractholders, Subscribers, providers and Governmental Authorities, compliance, record keeping, eligibility verification, and providing any notices required by applicable Law, provided, -------- however, the parties shall attempt to coordinate enrollment, underwriting and - ------- the application process to the extent possible and permitted by Law under the circumstances. (b) To the extent permitted by applicable Law, the parties may elect to coordinate the provision of one or more administrative service to minimize duplication of resources and to promote greater profitability of the Products. The fees payable for such services, if any, shall be separately negotiated by the parties. Section 3.3 Enrollment. Health Net shall enroll Health Net Clients in the Health Net Branded Products sold by the Health Net Marketing Force when such Health Net Branded Products are sold to a Health Net Client together with any Health Net Medical Product. In the event the Health Net Marketing Force sells any Health Net Branded Product to a Health Net Client without contemporaneously selling such Health Net Client a Health Net Medical Product, SafeGuard shall be responsible for enrolling the Eligible Employees in such Health Net Branded Products. Health Net and SafeGuard shall cooperate and coordinate in conducting employee on-site enrollment meetings. Section 3.4 Enrollment Materials. Each party shall be responsible for the preparation and distribution of Product booklets, certificates, provider directories, identification cards, and all other materials relating to the party's respective Products. All enrollment agreements, forms and other materials, including Subscriber handbooks and identification cards, used for Contractholders and Subscribers shall be either Health Net's or SafeGuard's existing approved forms, as appropriate, modified as necessary to reflect the terms of this Agreement and the administrative requirements of Health Net and SafeGuard, respectively. All such materials shall specify the Subsidiary of Health Net that is the underwriter of the Health Net Products, and the -7- Subsidiary of SafeGuard that is the underwriter of SafeGuard Products, including but not limited to, the Health Net Branded Products. Neither party shall use enrollment materials using the name of the other party, without the other party's written approval. Section 3.5 Enrollment Reports. Health Net and SafeGuard shall prepare periodic and timely reports showing all Products sold, renewed or terminated pursuant to this Agreement, and other enrollment information required by either party to perform its duties with respect to such Products. Such reports shall be made by each party on a periodic and timely basis within five (5) Business Days following the end of the month in which the transactions or other matters occurred, and shall be transmitted by electronic transmission in a form reasonably acceptable to the receiving party. Health Net and SafeGuard shall each prepare periodic reconciliations of the enrollment information in their possession. Section 3.6 Books and Records. Each party shall keep and maintain true and complete records of all transactions pursuant to this Agreement. Each party shall permit the other party reasonable access during normal business hours to its records related to its rights and obligations under this Agreement for inspection and copying by the other party or its authorized representatives, or by a legally authorized and properly identified Governmental Authority. Each party shall furnish the other party, upon its written request, all reasonably required information in the party's possession regarding any and all matters, transactions or activities pertaining to the Products of the other party including information required for financial reporting purposes, at such times and in such formats as mutually agreed upon by the parties. ARTICLE IV MANAGED CARE SERVICES AND PRODUCTS ---------------------------------- Section 4.1 Network Management. (a) Except as otherwise provided in the Network Access Agreement by and between Health Net Life Insurance Company and SafeHealth Life Insurance Company dated April 7, 2003, (i) all terms and conditions of provider contracts, including all compensation arrangements and/or negotiated fees, shall be the sole responsibility of the party contracting with the providers, and (ii) provider network recruitment and management, credentialing protocols, quality assurance, utilization management, case management, and other managed care services with respect to each party's Products shall be designed, managed and performed by the party providing the Product with which the services are to be associated. Each party may recommend to the other additions to or deletions from such party's provider networks, provided, however, that the decision to -------- ------- include or exclude any provider shall be the decision solely of the party responsible for making the network of providers available. (b) Neither party shall be required to disclose to the other party its proprietary information, including without limitation, information with respect to utilization review, case management, procedure specific protocols, physician and provider profiling, credentialing criteria, software systems or any other information which that party, in its sole discretion, designates as proprietary. If a party elects to disclose any such proprietary information, such information shall be deemed Confidential Information subject to the limitations of Section 10.16. -8- ARTICLE V PRODUCT PRICING, COMPENSATION AND EXPENSES ------------------------------------------ Section 5.1 Determination of Benchmark Products. Promptly after the Effective Date, SafeGuard and Health Net shall compare the Health Net Dental Products to the SafeGuard Dental Products and determine which Health Net Dental Products are materially similar to comparable SafeGuard Dental Products, and any such SafeGuard Dental Products determined to be materially similar to the Health Net Dental Products and selected by Health Net to be a Health Net Branded Product shall be considered "Benchmark Products." If, as of the Effective Date, there is no Health Net Dental Product materially similar to an existing SafeGuard Dental Product, at the request of Health Net, SafeGuard shall develop a Health Net Branded Product substantially similar to such SafeGuard Dental Product. Health Net Branded dental HMO products created by SafeGuard at the request of Health Net to match the SafeGuard Dental Products shall have features identical to the features of the "Health Net Advantage" suite of products. As SafeGuard develops new Dental Products, Health Net shall have the option to request SafeGuard to develop an identical Health Net Branded Product. A SafeGuard Product for which a Health Net Branded Product is created by SafeGuard at the request of Health Net pursuant to this Section 5.1 shall be considered a Benchmark Product. Section 5.2 Pricing of Benchmark Products. During the Term, SafeGuard shall not sell any Benchmark Product in the Territory for a price less than the Net Price of the comparable Health Net Branded Products plus the Health Net Mark-Up. Section 5.3 Pricing of Health Net Branded Products. The Health Net Marketing Force shall be permitted to offer the Health Net Branded Products to individual, small group [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] and mid-market group [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] Health Net Clients at prices to be determined by Health Net in its sole discretion. Section 5.4 Pricing of Large Group and Government Clients. In those circumstances where the Health Net Marketing Force has or is providing a quote to a Large Group or Government account on one or more Health Net Medical Products within the Territory, the Health Net Marketing Force shall be permitted to offer the Health Net Branded Products to such Large Group or Government account at rates that are competitive in the relevant market within the Territory and based upon the health care costs of each Large Group or Government account offered the Health Net Branded Product. The Net Price for such groups shall be established by SafeGuard and based on the estimated health care costs of the Subscribers covered under the Health Net Branded Products issued to the group multiplied by an administrative expense factor of [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] for dental HMO Products and an administrative expense factor of [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] for dental PPO and dental indemnity insurance Products. Section 5.5 Replacement of Health Net Dental Products. (a) Health Net shall use commercially reasonably efforts to replace any Health Net Dental Product with a Health Net Branded Product for any Health Net Client that also purchased -9- prior to the Effective Date one or more Health Net Medical Products. Health Net shall receive an adjusted Health Net Mark-Up and SafeGuard shall receive a Supplemental Subcapitation Amount equal to the Supplemental Subcapitation percentages set forth below multiplied by the Pooled Net Price for those Health Net Subscribers set forth in Schedule 5.5 (i) who are covered by both a Health ------------ Net Dental Product and a Health Net Medical Product prior to the Effective Date, (ii) who are covered under both such Products on the Effective Date, and (iii) whose Health Net Dental Product is replaced by a Health Net Branded Product after the Effective Date as follows: [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] (b) For those Health Net Subscribers set forth on Schedule 5.5 whose ------------ Health Net Dental Products are not converted to a Health Net Branded Product after the Effective Date, all revenue attributable to the Health Net Dental Product less Producer commissions shall be paid to SafeGuard as a Supplemental Subcapitation Amount. (c) Health Net shall use commercially reasonable efforts to replace the Health Net Dental Products with Health Net Branded Products for any Subscriber of Health Net Health Plans of Oregon, Inc. who or which also purchased a Health Net Medical Product prior the Effective Date. Health Net shall use commercially reasonable efforts to effect such replacement upon the first renewal date of the Health Net Dental Products following the Effective Date, but in no event later than December 31, 2004. The Health Net Marketing Force shall be authorized to sell the Health Net Branded Products to such Subscribers of Health Net Health Plan of Oregon, Inc. at prices to be determined by Health Net in its sole discretion. Any Subscriber of Health Net Health Plans of Oregon, Inc. who or which purchased only a Health Net Dental Product shall be offered a SafeGuard Dental Product upon the first renewal date of such Health Net Dental Products. (d) Health Net shall use commercially reasonable efforts to replace the Health Net Dental Products with Health Net Branded Products for any Subscriber of Health Net of Arizona, Inc. or Health Net Life Insurance Company residing in Arizona upon the first renewal date of the Health Net Dental Products following the Effective Date. The Health Net Marketing Force shall be authorized to sell the Health Net Branded Products to such Arizona Subscribers at prices to be determined by Health Net in its sole discretion. (e) Any Health Net Dental Product purchased prior to the Effective Date by a Subscriber of Health Net of California, Inc. in conjunction with a "Seniority Plus" plan shall be considered a Health Net Branded Product as of the Effective Date and SafeGuard shall be entitled to receive the SafeGuard Subcapitation Amount with respect to such Health Net Dental Products commencing as of the Effective Date. Section 5.6 Stand Alone Presentation of Benchmark Products. In the event a member of the SafeGuard Marketing Force presents a price quote to a prospective account only for one or more Benchmark Product and a member of the Health Net Marketing Force also presents a price quote to the same account for both a Medical Product and one or more Health Net Branded Products which match the Benchmark Products quoted by the SafeGuard Marketing Force, -10- Health Net shall be permitted to sell the Health Net Branded Products which match the Benchmark Products offered by SafeGuard to the account for the lowest price SafeGuard offered such Benchmark Products to the account. If SafeGuard lowers the price of the Benchmark Products offered to an account described in this Section 5.6, SafeGuard shall promptly notify Health Net of such price reduction and adjust the Net Price of the comparable Health Net Branded Products offered to the account by the Health Net Marketing Force to match the reduced price of the Benchmark Products offered to the account by SafeGuard. Section 5.7 Health Net Sales of Health Net Branded Products. Health Net shall receive the Health Net Mark-Up on any Health Net Branded Products purchased by Health Net Subscribers as a result of the efforts of the Health Net Marketing Force subsequent to the Effective Date, provided, however, Health Net shall not be entitled to the Health Net Mark-Up (i) for any Health Net Subscribers who are also SafeGuard Subscribers; (ii) if the Health Net Marketing Force sells a Medical Product to an account who or which is a Contractholder under a SafeGuard Dental Product; or (iii) if SafeGuard sells a Health Net Medical Product together with a SafeGuard Dental Product or a SafeGuard vision product to a new SafeGuard Client after the Effective Date. Section 5.8 Compensation to SafeGuard for Sale of Health Net Products. If a member of the SafeGuard Marketing Force sells a SafeGuard Subscriber a Health Net Product after the Effective Date, Health Net shall pay SafeGuard [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] of the collected first year premium (net of Producer commission) for any such Health Net Product not later than the tenth (10th) calendar day of the month of eligibility for the Subscribers. The SafeGuard Marketing Force shall offer Health Net Products to SafeGuard Subscribers only at the price authorized by Health Net. ARTICLE VI BILLING AND COLLECTION OF PREMIUMS; PAYMENT OF COMMISSIONS ---------------------------------------------------------- Section 6.1 Billing and Collection of Premiums. (a) Health Net shall bill and collect premium and contract fees for all Health Net Branded Products sold by the Health Net Marketing Force to a Health Net Client. Health Net shall bill and collect all premium and contract fees attributable to Health Net Products sold to SafeGuard Clients by the SafeGuard Marketing Force. (b) Health Net shall notify SafeGuard if Health Net determines that an individual or group who or which purchased a Health Net Branded Product is ineligible for any reason including, but not limited to, failure to pay premiums. Any adjustments to the eligible Subscribers and the resulting SafeGuard Subcapitation Amount shall be subject to the standard retroactivity adjustment policy of SafeGuard at the time of the adjustment. Section 6.2 Commissions. (a) Health Net shall make payment of all commissions (i) owing to members of the Health Net Marketing Force to the extent that such commissions become due as a result of the sale of Health Net Medical Products or Health Net Branded Products pursuant to this Agreement, -11- and (ii) owing to SafeGuard to the extent such commissions become due as a result of the sale of Health Net Medical Products to SafeGuard Clients by a member of the SafeGuard Marketing Force. SafeGuard shall make payment of all commissions to members of the SafeGuard Marketing Force to the extent such commissions become due as a result of the sale of Health Net Medical Products to SafeGuard Clients. (b) Each party shall be responsible for ensuring that each member of its respective Marketing Force is appropriately licensed and appointed, as necessary, to sell the Products and to receive commissions. The parties shall not authorize any person or entity to solicit sales of Products pursuant to this Agreement in any state unless such person or entity is properly licensed in that state. All payments of commissions to members of the marketing forces of the respective parties shall comply with applicable Law. Section 6.3 Subcapitation Payments to SafeGuard. The SafeGuard Subcapitation Amount plus any Supplemental Subcapitation Amount shall be the sole compensation payable by Health Net to SafeGuard in connection with the Health Net Branded Products sold by the Health Net Marketing Force pursuant to this Agreement. The SafeGuard Subcapitation Amount shall be paid to SafeGuard no later than the tenth (10th) calendar day of the month of eligibility for the Subscribers under the Health Net Branded Products sold pursuant to this Agreement. Section 6.4 Accounting and Reporting. Each party shall prepare and supply the other party with any accounting reports and reports of activities with respect to the Products and sales activities pursuant to this Agreement reasonably requested by the other party. ARTICLE VII TERM AND TERMINATION -------------------- Section 7.1 Term. This Agreement shall become effective on the Effective Date and shall continue in effect for sixty (60) months unless terminated pursuant to the terms of this Article VII. Unless this Agreement has been terminated pursuant to the terms of this Article VII, Health Net shall have the option to extend this Agreement on the same terms and conditions for an additional sixty (60) months by providing written notice to SafeGuard no less than one hundred and eighty (180) days prior to the expiration of the initial sixty (60) months. Section 7.2 Termination on Mutual Consent. This Agreement may be terminated at any time by mutual agreement of the parties hereto in writing. Section 7.3 Termination for Cause. Either party may terminate this Agreement for cause by providing the other party written notice of its intention to terminate upon the occurrence of any of the following: (a) If a party fails to remit any amounts due under this Agreement within twenty-five (25) days of the date such amount is due and payable. (b) If a party breaches a material term, covenant or condition of this Agreement and fails to cure such breach within thirty (30) days of receiving written notice of such breach from the non-breaching party. The written notice of such breach shall make specific reference to the -12- action causing breach. If the breaching party fails to cure its breach to the reasonable satisfaction of the non-breaching party during the thirty (30) day cure period, this Agreement shall terminate at the option of the non-breaching party. In the event such cure cannot reasonably be completed within such thirty (30) day period, then commencement of such cure within such thirty (30) days and its diligent prosecution to completion shall, subject to the party's other rights to terminate the Agreement, extend the period to cure the breach for an additional period reasonably necessary to complete the cure. (c) If a party shall engage in fraudulent, illegal or grossly negligent conduct with respect to its duties and obligations under this Agreement, the other party shall have the right to terminate this Agreement, upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non-defaulting party by reason of the defaulting party's conduct. (d) If a party shall become unable to perform its obligations under their respective Products because of financial impairment or loss of authority to act under Law, or by action of any Governmental Authority, the other party shall have the right to terminate this Agreement immediately. (e) In the event of a Change of Control of one party, the other party shall have the right to terminate this Agreement effective as of the effective date of the Change of Control. (f) If the parties fail to reach the membership acquisition targets for a state other than California set forth in Schedule 7.3, either party shall have ------------ the right to enter into an agreement with a third party substantially similar to this Agreement with respect to such state and the exclusivity provisions of Section 2.3 (a) and (b) with respect to such state shall have no further force and effect. If the parties fail to reach the membership acquisition target for California specified in Schedule 7.3, either party shall have the right to ------------- terminate this Agreement in its entirety upon ninety (90) days written notice to the other party. Section 7.4 Post-Termination Rights and Responsibilities. Termination of this Agreement shall not terminate rights and obligations of the parties which by their nature extend beyond the term. Termination of this Agreement for any reason shall not release any party from any liability which has already accrued to another party at the time of termination. In the event this Agreement is terminated, the parties shall continue to perform all customary and necessary services regarding their respective Products in accordance with the provisions of this Agreement until all such Products have been completely canceled, transitioned, nonrenewed, or otherwise terminated. ARTICLE VIII INDEMNIFICATION --------------- Section 8.1 Indemnification by SafeGuard. SafeGuard shall defend, indemnify and hold harmless Health Net and its directors, officers, employees, shareholders, and Affiliates ("Health Net Indemnities") from and against any and all loss, claim, damage, liability, or action in respect hereof which is caused by or results from the malfeasance, negligence, action or -13- inaction of SafeGuard of its duties and obligations under this Agreement. If any claim, demand, action, suit, or proceeding is made or brought against any of the Health Net Indemnities with respect to matters that are the subject of this indemnity, SafeGuard shall assume the defense thereof with counsel reasonably satisfactory to the Health Net Indemnities and shall pay all costs of such defense. Section 8.2 Indemnification by Health Net. Health Net shall defend, indemnify and hold harmless SafeGuard and its directors, officers, employees, shareholders, and Affiliates ("SafeGuard Indemnities") from and against any and all loss, claim, damage, liability, or action in respect hereof which is caused by or results from the malfeasance, negligence, action or inaction of Health Net of its duties and obligations under this Agreement. If any claim, demand, action, suit, or proceeding is made or brought against any of the SafeGuard Indemnities with respect to matters that are the subject of this indemnity, Health Net shall assume the defense thereof with counsel reasonably satisfactory to the SafeGuard Indemnities and shall pay all costs of such defense. Section 8.3 Liability under SafeGuard's Products. Health Net is not a guarantor, insurer, or reinsurer of, or joint venturer with, SafeGuard and Health Net shall have no risk of loss for, nor provide any indemnification to SafeGuard, any Contractholder or Subscriber, any provider or any other person with respect to any SafeGuard Product. SafeGuard shall indemnify Health Net for all liabilities, losses, suits, damages, costs and expenses (including reasonable fees of Health Net's attorneys, and other expenses of litigation), net of recoveries from third parties, arising in connection with a SafeGuard Product, including action or failure to act by SafeGuard, or its employees or agents. Section 8.4 Liability under Health Net Products. SafeGuard is not a guarantor, insurer, or reinsurer of, or joint venturer with, Health Net and SafeGuard shall have no risk of loss, nor provide any indemnification to Health Net, any Contractholder or Subscriber, any provider or any other person with respect to a Health Net Product. Health Net shall indemnify SafeGuard for all liabilities, losses, suits, damages, costs and expenses (including reasonable fees of SafeGuard's attorneys, and other expenses of litigation), net of recoveries from third parties, arising in connection with a Health Net Product, including action or failure to act by Health Net, or its employees or agents. Section 8.5 Survival of Article. This Article VIII shall survive the termination of this Agreement. ARTICLE IX ARBITRATION ----------- Section 9.1 Arbitration. In the event of any dispute between the parties hereto relating to, arising out of, or in connection with any provision of this Agreement (hereinafter a "Dispute"), the parties to this Agreement and their representatives, designees, successors and assigns agree that any such Dispute shall be settled by binding arbitration to take place in Orange County, California; provided, however, that nothing herein shall preclude the parties from -14- seeking equitable judicial relief pending arbitration, including but not limited to injunctive or other provisional relief. Section 9.2 Selection of Arbitrator. Any arbitration hereunder shall be conducted by a single arbitrator chosen from the panel of arbitrators of the Judicial Arbitration & Mediation Services ("JAMS") with experience and expertise in the dental HMO or dental indemnity insurance business. If a JAMS arbitrator with specific experience in the dental HMO or dental indemnity insurance business is not available, the arbitrator must have general experience in the health insurance industry. Within ten (10) days of notice of a Dispute from Health Net to SafeGuard or notice from SafeGuard to Health Net, SafeGuard and Health Net shall use their best efforts to choose a mutually agreeable arbitrator. If Health Net and SafeGuard cannot agree on an arbitrator, the arbitrator shall promptly be selected by JAMS. Section 9.3 Procedures. The party submitting a Dispute to arbitration hereunder shall present its case to the arbitrator and the other party hereto in written form within twenty (20) days after the appointment of the arbitrator. The other party hereto shall then have twenty (20) days to submit a written response to the arbitrator and the original party who submitted the Dispute to arbitration. After timely receipt of each party's case, the arbitrator shall have twenty (20) days to render his or her decision. Section 9.4 Applicable Law. The arbitrator is relieved from judicial formalities and, in addition to considering the rules of law, the limitations contained in this Agreement and the customs and practices of the health care industry, shall make his or her award with a view to effectuating the intent of this Agreement. The decision of the arbitrator shall be final and binding upon the parties, and judgment may be entered thereon in a court of competent jurisdiction. Section 9.5 Expenses. Each party shall bear its own cost of arbitration, and the costs of the arbitrator shall be shared equally among each party to a Dispute. Section 9.6 Survival of Article. This Article IX shall survive termination of this Agreement. ARTICLE X MISCELLANEOUS ------------- Section 10.1 Misunderstandings and Oversights. If any delay, omission, error or failure to perform any act required by this Agreement is unintentional and caused by misunderstanding or oversight, the parties shall adjust the situation to what it would have been had the misunderstanding or oversight not occurred. The party that first discovers such oversight or incorrect act as a result of the misunderstanding will notify the other party in writing promptly upon discovery of the misunderstanding or oversight. The parties shall act to correct the error, omission or oversight within thirty (30) days of notification of the problem. This Section 10.1 shall not be construed as a waiver by either party of its right to enforce strictly the terms of this Agreement. -15- Section 10.2 Performance by Affiliates. The parties acknowledge that certain obligations required to be performed may, by their nature, require specific legal authority to perform or will be more effectively performed by the parties' Affiliates. The parties will, to the extent required in order for their respective Affiliates to perform the obligations of the respective parties under this Agreement, cause their respective Affiliates to perform such obligations hereunder as if such Affiliates were themselves parties hereto. In connection with the performance of such obligations, the parties' respective Affiliates shall be subject to the terms and conditions of this Agreement as if such Affiliates were themselves parties hereto. Section 10.3 Regulatory Approval. Performance of the obligations of either party under this Agreement shall be subject to the receipt of any necessary regulatory approvals under the applicable Law and practices of Governmental Authorities in the Territory. Health Net and SafeGuard shall cooperate in attempting to obtain expeditiously any necessary regulatory approvals from Governmental Authorities. Each party will bear its own expenses in obtaining such approvals. Section 10.4 Compliance with Laws. Each party shall, in the performance of their obligations set forth in this Agreement, comply with all applicable Law and the rules and regulations of all Governmental Authorities with jurisdiction over the parties and each party shall maintain all licenses or certificates necessary or appropriate for the performance of the functions set forth in this Agreement. Each party shall conform its actions under this Agreement to any orders concerning the activities covered by this Agreement by Governmental Authorities having jurisdiction over the parties' Products, business affairs and operations. Each party shall take all actions and make all filing, applications and provide all notices required by applicable Law to maintain their respective Products in compliance in all material respects with existing and future applicable Law. Each party shall promptly notify the other party of any complaint, inquiry or lawsuit by any Governmental Authority relating to the Products or to this Agreement. Section 10.5 Audits. Each party shall have the right, upon reasonable notice to the other party, and at the requesting party's expense, to audit the books and records of the other party relating to this Agreement during regular business hours at the premises of the audited party where such records are normally maintained, including but not limited to, verifying that SafeGuard is providing Health Net Clients the Most Favored Nation Price. The audited party shall reasonably cooperate in any such audit. Section 10.6 Headings and Schedules. Headings used herein are not part of this Agreement. Any Schedules or Exhibits attached hereto are incorporated by this reference and made a part of this Agreement. Section 10.7 Force Majeure. No party hereto shall be liable for any delay or failure in the performance of any obligation under this Agreement or for any loss or damage (including indirect or consequential damage) to the extent that such nonperformance, delay, loss or damage results from any contingency which is beyond the control of such party, provided such contingency is not caused by the fault or negligence of such party. A contingency for purposes of this Agreement shall be acts of God, fires, floods, earthquakes, explosions, storms, wars, hostilities, acts of terrorism, blockades, public disorders, quarantines, restrictions, embargoes, -16- strikes or other labor disturbances, and compliance with any Law, order or control of, or insistence of any Governmental Authority or military authority. Section 10.8 Successors and Assigns; Binding Effect. This Agreement shall not be assigned by Health Net or SafeGuard without the prior written approval of the other party. The provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective permitted successors and assigns. Section 10.9 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same agreement. Section 10.10 Entire Agreement; Amendment. This Agreement constitutes the entire agreement between the parties with respect to the strategic relationship of the parties, and supersedes any previous written or oral agreements. This Agreement shall be amended only by written agreement signed by a duly authorized officer of each of Health Net and SafeGuard, and any change to this Agreement shall be null and void unless made by such written agreement; provided, however, that where, under insurance, health or other applicable Law, the approval of any such amendment to this Agreement by one or more Governmental Authority is required, the amendment shall not take effect unless and until all such necessary approvals have been obtained and received by both Health Net and SafeGuard. In the event that any such approval is required, Health Net and SafeGuard shall each take all necessary actions in order to obtain such approval. Section 10.11 Waivers. The waiver by either of the parties of the other party's prompt and complete performance, or breach or violation, of any provisions of this Agreement and related documents shall not operate or be construed as a waiver of any subsequent breach or violation, and the waiver by any of the parties to exercise any right or remedy which it may possess hereunder shall not operate or be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. Section 10.12 Governing Law. This Agreement shall be governed by and construed in accordance with the Law of the state of California, without giving effect to the principles of conflicts of laws thereof. Section 10.13 Severability. In the event any section or provision of this Agreement or related documents is found to be void and unenforceable by a court of competent jurisdiction, the remaining sections and provisions of this Agreement or related documents shall nevertheless be binding upon the parties with the same force and effect as though the void or unenforceable part had not been severed or deleted. Section 10.14 Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered by certified process server, certified or registered mail (postage prepaid and return receipt requested), by a nationally recognized overnight courier service (appropriately marked for overnight delivery) or by facsimile (with request for immediate confirmation of receipt in a manner customary for communications of such respective type). Notices shall be effective upon receipt and shall be addressed as follows: -17- (a) if to SafeGuard to: SafeGuard Health Enterprises, Inc. 95 Enterprise, Suite 100 Aliso Viejo, California 92656 Attn.: James E. Buncher President and Chief Executive Officer Tel: (949) 425-4100 Fax: (949) 425-4101 with a copy to: Ronald I. Brendzel Senior Vice President and General Counsel SafeGuard Health Enterprises, Inc. 95 Enterprise, Suite 100 Aliso Viejo, California 92656 Tel: (949) 425-4110 Fax: (949) 425-4586 and David K. Meyercord Strasburger and Price, LLP 901 Main Street, Ste. 4300 Dallas, Texas 75202-3794 Tel: (214) 651-4525 Fax: (214) 659-4023 (b) if to Health Net to: Health Net, Inc. Attn: General Counsel 21650 Oxnard Street Woodland Hills, California 91367 Tel: (818) 676-7601 Fax: (818) 676-7503 with a copy to: Kenneth B. Schnoll Sonnenschein Nath & Rosenthal 685 Market Street San Francisco, CA 94105 Tel: (415) 882-0210 Fax: (415) 543-5472 -18- Section 10.15 Notice of Legal Proceedings. If either party receives a notice of the commencement of any legal proceedings involving the other party's Products or actions pursuant to this Agreement, any communication from any Governmental Authority, or any person identifying a complaint by a Contractholder or Subscriber (other than a routine inquiry not involving a communication from a Governmental Authority or the suggestion of any legal action), the party receiving such notice shall immediately advise the other party of such notice and shall thereafter forward promptly to the other party any correspondence or information pertaining to any such legal proceeding or communication. Section 10.16 Confidentiality. (a) Neither Health Net nor SafeGuard shall disclose any proprietary or confidential information of the other party to a third party without the express written consent of the other party to this Agreement. For purposes of this Agreement, "proprietary and confidential" information will include, without limitation, all internal business practices and business records, information concerning products and pricing, contracts, computer hardware and software or business methods in any form whatsoever, peer review, quality assurance and grievance procedures, any aspect of utilization review programs, provider fee schedules, reimbursement schedules or discounts, and advertising or marketing information, but not including information otherwise available to the public. Neither party shall use any proprietary and confidential information of the other party for its own benefit. Upon termination of this Agreement, each party will immediately return to the other party any confidential information, except confidential information necessary for the continued administration of any Product. (b) The parties shall maintain the confidentiality of any personal information, including health information, pertaining to Subscribers including, without limitation, files, records, reports, and other information prepared and maintained in connection with this Agreement, in accordance with all applicable Law. (c) Each party shall obtain any necessary consent or authorization from Subscribers with respect to the release to the other party of any non-public personal information, including health information, relating to such Subscribers, by means of general or specific releases, as appropriate. Each party shall notify the other if it becomes aware that proper releases have not been obtained. (d) To the extent that either of the parties performs functions, activities, or services for, or on behalf of, the other party to this Agreement involving the use or disclosure of Protected Health Information, as that term is defined in 45 CFR 164.501, the parties shall comply with the Business Associate Addendum set forth in Schedule 10.16 hereto. --------------- Section 10.17 Press Releases. No public statement or press release regarding the existence of this Agreement shall be made by either party without obtaining the prior written consent of the other party, except as required by applicable Law. Section 10.18 Relationship of Parties. The parties to this Agreement are and shall remain independent contractors. Neither party is the employee or agent of the other party, except -19- as set forth herein, and neither party has an express or implied right to bind the other party. The parties do not intend to form a joint venture, partnership, or to be governed by Law relating to any relationship other than that of independent contractors. Neither party is authorized to modify, alter or waive the terms of any Product issued by the other party. Section 10.19 No Third Party Rights. This Agreement has been made for the benefit of the parties hereto and respective successors and permitted assigns and nothing in this Agreement is intended to confer any rights or remedies under or by reason of this Agreement on any other person other than the parties to it and their respective successors and permitted assigns. Nothing in this Agreement is intended to relieve or discharge the obligations or liability of any third person to any party to this Agreement. Section 10.20 Expenses. Except as otherwise provided herein, each party shall be responsible for the expenses it incurs in connection with this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. HEALTH NET, INC. By: /s/ B. Curtis Westen ------------------------------------- Name: B. Curtis Westen Title: Senior Vice President, General Counsel and Secretary SAFEGUARD HEALTH ENTERPRISES, INC. By: /s/ James E. Buncher ------------------------------------- Name: James E. Buncher Title: President and Chief Executive Officer By: /s/ Stephen J. Baker ------------------------------------- Name: Stephen J. Baker Title: Executive Vice President and Chief Operating Officer -20- SCHEDULE 5.5 REPLACEMENT OF HEALTH NET DENTAL PRODUCTS To be determined as of the Effective Date -21- SCHEDULE 7.3 MEMBERSHIP ACQUISITION TARGETS STATE NET NEW MEMBERS PER YEAR - ----- ---------------------------- CALIFORNIA [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] OREGON [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] ARIZONA [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] TEXAS (If applicable) [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] FLORIDA (If applicable) [SAFEGUARD-HEALTH NET PROPRIETARY INFORMATION] -22- SCHEDULE 10.16 BUSINESS ASSOCIATE ADDENDUM This Business Associate Addendum (the "Addendum") supplements and is made a part of the Strategic Relationship Agreement by and between Health Net, Inc. and SafeGuard Health Enterprises, Inc. (the "Agreement"), and is effective as of the Effective Date of the Agreement. RECITALS A. The parties may disclose certain information to each other pursuant to the terms of the Agreement, some of which may constitute Protected Health Information, as defined below. B. The parties intend to protect the privacy and provide for the security of Protected Health Information in compliance with the Health Insurance Portability and Accountability Act of 1996, Public law No. 104-191 ("HIPAA") and the regulations promulgated thereunder by the U.S. Department of Health and Human Services (the "HIPAA Regulations") and other applicable laws. C. The purpose of this Addendum is to satisfy certain standards and requirements of HIPAA and the HIPAA Regulations, including, but not limited to, 45 CFR 164.502(e) and 45 CFR 164.504(e). In consideration of the mutual promises below and the exchange of information pursuant to the Agreement and this Addendum, the parties agree as follows: 1. Definitions (a) "Business Associate" means the party performing functions, activities, or services for, or on behalf of, a Covered Entity pursuant to the Agreement involving the use or disclosure of Protected Health Information. (b) "Covered Entity" means the party for whom, or on whose behalf, functions, activities, or services are performed pursuant to the Agreement involving the use or disclosure of Protected Health Information. (c) "Privacy Rule" means the Standards for Privacy of Individually Identifiable Health Information at 45 CFR part 160 and part 164, subparts A and E. (d) "Protected Health Information" has the same meaning as the term "protected health information" in 45 CFR 164.501, limited to the information created or received by Business Associate from or on behalf of Covered Entity. (e) Capitalized terms used but not otherwise defined in this Addendum have the same meaning as those terms in the Privacy Rule. -23- 2. Obligations and Activities of Business Associate (a) Business Associate shall not use or disclose Protected Health Information other than as permitted or required by this Addendum or as Required By Law. (b) Business Associate shall use appropriate safeguards to prevent use or disclosure of the Protected Health Information other than as provided for by the Agreement and this Addendum. (c) Business Associate agrees to mitigate, to the extent practicable, any harmful effect that is known to Business Associate of a use or disclosure of Protected Health Information by Business Associate in violation of the requirements of this Addendum. (d) Business Associate shall report to Covered Entity any use or disclosure of the Protected Health Information not provided for by this Addendum of which it becomes aware. (e) Business Associate shall ensure that any agent, including a subcontractor, to whom it provides Protected Health Information received from, or created or received by Business Associate on behalf of, Covered Entity agrees to the same restrictions and conditions that apply through this Addendum to Business Associate with respect to such information. (f) Business Associate shall provide access, at the request of Covered Entity, and in the time and manner designated by Covered Entity, to Protected Health Information in a Designated Record Set, to Covered Entity or, as directed by Covered Entity, to an Individual in order to meet the requirements under 45 CFR 164.524 (g) Business Associate agrees to make any amendment(s) to Protected Health Information in a Designated Record Set that the Covered Entity directs or agrees to pursuant to 45 CFR 164.526 at the request of Covered Entity or an Individual, and in the time and manner designated by Covered Entity. (h) Business Associate agrees to make its internal practices, books, and records, including policies and procedures, relating to the use and disclosure of Protected Health Information received from, or created or received by Business Associate on behalf of, Covered Entity available to the Secretary, in a time and manner designated by the Secretary, for purposes of the Secretary determining Covered Entity's compliance with the Privacy Rule. (i) Business Associate agrees to document such disclosures of Protected Health Information and information related to such disclosures as would be required for Covered Entity to respond to a request by an Individual for an accounting of disclosures of Protected Health Information in accordance with 45 CFR 164.528. (j) Business Associate agrees to provide to Covered Entity, in the time and manner designated by Covered Entity, information collected in accordance with Section (2)(i) of this Addendum, to permit Covered Entity to respond to a request by an Individual for an accounting of disclosures of Protected Health Information in accordance with 45 CFR 164.528. 3. Permitted Uses and Disclosures by Business Associate General Use and Disclosure Provisions -24- Except as otherwise limited in this Addendum, Business Associate may use or disclose Protected Health Information to perform functions, activities, or services for, or on behalf of, Covered Entity as specified in the Agreement, provided that such use or disclosure would not violate the Privacy Rule if done by Covered Entity. 4. Specific Use and Disclosure Provisions (a) Except as otherwise limited in this Addendum, Business Associate may use Protected Health Information for the proper management and administration of Business Associate or to carry out the legal responsibilities of Business Associate. (b) Except as otherwise limited in this Addendum, Business Associate may disclose Protected Health Information for the proper management and administration of Business Associate, provided that disclosures are Required By Law, or Business Associate obtains reasonable assurances from the person to whom the information is disclosed that it will remain confidential and used or further disclosed only as Required By Law or for the purpose for which it was disclosed to the person (which purpose shall be consistent with the limitations imposed by this Addendum) and the person notifies the Business Associate of any instances of which it is aware in which the confidentiality of the information has been breached. (c) Except as otherwise limited in this Addendum, Business Associate may use Protected Health Information to provide Data Aggregation services to Covered Entity as permitted by 42 CFR 164.504(e)(2)(i)(B). (d) Business Associate may use Protected Health Information to report violations of law to appropriate Federal and State authorities, consistent with 45 CFR 164.502(j)(1). 5. Obligations of Covered Entity Provisions for Covered Entity To Inform Business Associate of Privacy Practices and Restrictions (a) Covered Entity shall notify Business Associate of any limitation in its notice of privacy practices in accordance with 45 CFR 164.520, to the extent that such limitation may affect Business Associate's use or disclosure of Protected Health Information. (b) Covered Entity shall notify Business Associate of any changes in, or revocation of, permission by an Individual to use or disclose Protected Health Information, to the extent that such changes may affect Business Associate's use or disclosure of Protected Health Information. (c) Covered Entity shall notify Business Associate of any restriction on the use or disclosure of Protected Health Information that Covered Entity has agreed to in accordance with 45 CFR 164.522, to the extent that such restriction may affect Business Associate's use or disclosure of Protected Health Information. (d) Covered Entity shall not request Business Associate to use or disclose Protected Health Information in any manner that would not be permissible under the Privacy Rule if done by Covered Entity, except as permitted by Sections 4(b) and 4(c) of this Addendum. -25- 6. Term and Termination (a) This Addendum shall be effective as of the Effective Date of the Agreement, and shall terminate when all of the Protected Health Information provided by Covered Entity to Business Associate, or created or received by Business Associate on behalf of Covered Entity, is destroyed or returned to Covered Entity, or, if it is infeasible to return or destroy Protected Health Information, protections are extended to such information, in accordance with the termination provisions in this Section. (b) Upon Covered Entity's knowledge of a material breach of this Addendum by Business Associate, Covered Entity shall either: (i) provide an opportunity for Business Associate to cure the breach or end the violation and terminate this Addendum, and the provision for performance of functions, activities, or services for, or on behalf of Covered Entity under the Agreement, if Business Associate does not cure the breach or end the violation within the time specified by Covered Entity; (ii) immediately terminate this Addendum, and the provision for performance of functions, activities, or services for, or on behalf of Covered Entity under the Agreement, if Business Associate has breached a material term of this Addendum and cure is not possible; or (iii) if neither termination nor cure is feasible, report the violation to the Secretary. (c) Effect of Termination. (i) Except as provided in paragraph (ii) of this section, upon termination of this Addendum, for any reason, Business Associate shall return or destroy all Protected Health Information received from Covered Entity, or created or received by Business Associate on behalf of Covered Entity, and shall retain no copies of the Protected Health Information. This provision shall apply to Protected Health Information that is in the possession of subcontractors or agents of Business Associate. (ii) In the event that Business Associate determines that returning or destroying the Protected Health Information is infeasible, Business Associate shall provide to Covered Entity notification of the conditions that make return or destruction infeasible. Upon mutual agreement that return or destruction of Protected Health Information is infeasible, Business Associate shall extend the protections of this Addendum to such Protected Health Information and limit further uses and disclosures of such Protected Health Information to those purposes that make the return or destruction infeasible, for so long as Business Associate maintains such Protected Health Information. 7. Miscellaneous (a) Regulatory References. A reference in this Addendum to a section in the ---------------------- Privacy Rule means the section as in effect or as amended. (b) Amendment. The Parties agree to take such action as is necessary to --------- amend this Addendum from time to time as is necessary for Covered Entity to comply with the requirements of the Privacy Rule and the HIPAA. (c) Survival. The respective rights and obligations of Business Associate -------- under Section 6(c) of this Addendum shall survive the termination of this Addendum. -26- (d) Interpretation. The provisions of this Addendum shall prevail over any -------------- provisions in the Agreement that may conflict with or appear inconsistent with any provision of this Addendum. Any ambiguity in this Addendum shall be resolved to permit Covered Entity to comply with the Privacy Rule. -27- EX-10.47 6 doc5.txt EXHIBIT 10.47 TO CURRENT REPORT ON FORM 8-K DATED AS OF APRIL 7, 2003 --------------------------------------------------------------------- April 7, 2003 Health Net, Inc. 21650 Oxnard Street Woodland Hills, California 91367 Health Net Vision, Inc. 21650 Oxnard Street Woodland Hills, California 91367 Health Net Life Insurance Company 21650 Oxnard Street Woodland Hills, California 91367 RE: LETTER OF INTENT Gentlemen: This letter of intent (the "LOI") is made and entered into as of April 7, 2003 by and among SafeGuard Health Enterprises, Inc. ("ENT") and its wholly-owned subsidiaries, SafeGuard Health Plans, Inc., a California corporation and a California Specialized Health Care Service Plan, ("SafeGuard-California"), and SafeHealth Life Insurance Company, a California corporation and a California domiciled Life, Health and Disability Insurance Company, ("SafeHealth"), and Health Net, Inc. ("HNI") and its wholly-owned subsidiaries, Health Net Vision, Inc., a California corporation and a California Specialized Health Care Service Plan ("HNV") and Health Net Life Insurance Company, a Life, Health and Disability Insurance Company, ("HNL"), whereby the parties agree as set forth below. HNI, HNV and HNL are sometimes collectively referred to herein as "HNT," while ENT, SafeGuard-California and SafeHealth are sometimes collectively referred to as "SFGD." 1. INTRODUCTION AND DESCRIPTION OF THE TRANSACTION. As further described below, at the closing, (i) ENT would acquire from HNI all the issued and outstanding capital stock of HNV through a Stock Purchase Agreement (the "Stock Agreement") and as part of such Stock Agreement, ENT would also acquire, among other things, all the HNV provider contracts, agent and broker contracts, the commercial membership group and individual contracts, with the understanding that HNT employees, groups and individuals that have also purchased HNT medical products will be transitioned to the HNT vision strategic partner upon renewal of such contracts or earlier, and not including the group contracts for Medi-Cal and other similar type government sponsored contracts (the "Government Sponsored Contracts"), provided however, that prior to closing, HNI shall cause to be removed from HNV all such Government Sponsored Contracts; (ii) SafeHealth would acquire from HNL all of the California commercial vision business underwritten and/or controlled by HNL including but not limited to, all the group, individual, preferred provider, and agent contracts relating to the California commercial vision -1- business of HNL, through an Assumption and Indemnity Reinsurance Agreement; and (iii) ENT would cause HNV and/or SafeHealth, as may be applicable, to enter into an Administrative Services Agreement (the "ASA") upon closing of the Transaction to provide for the transition of the vision business maintained by Health Net of Arizona, Inc. ("HNT-AZ"), through December 31, 2004, for which SFGD will charge HNT fifteen percent (15%) of the claims paid by HNV or SafeHealth, as applicable, related to the HNT-AZ vision business, which fees shall be due ten (10) calendar days after receipt of a billing from HNV or SafeHealth, and HNL shall have the option to extend the ASA for an additional one (1) year period for a rate to be charged by HNV or SafeHealth to adequately compensate HNV or SafeHealth for the services provided under the ASA, (collectively the "Transaction"). 2. TRANSACTION DOCUMENTS. The Transaction will be set forth in definitive agreements to be prepared, negotiated and executed by the parties, including but not limited to a Stock Purchase Agreement or such similar document ("SPA"), an Assumption and Indemnity Reinsurance Agreement ("Reinsurance Agreement"), a Network Access Agreement, as may be required, and an ASA, and such other documents mutually determined to be necessary by the parties to carry out the intent of this LOI, (the "Definitive Agreements"). The Definitive Agreements are subject to approval by each party's Board of Directors and completion of due diligence. 3. TRANSACTION. A. ENT would acquire from HNI one hundred percent (100%) of the issued and outstanding capital stock (the "Stock") of HNV through the SPA. The assets of HNV shall include its license to conduct business as a Specialized Vision Health Care Service Plan in the state of California pursuant to the Knox-Keene Health Care Service Plan Act of 1975, as amended, and shall also include, but not be limited to, the Tangible Net Equity requirements of HNV as of the closing as required by Title 28, Section 1300.76 of the California Code of Regulations, ("Minimum TNE Requirement"), all the HNV provider contracts, agent and broker contracts, the commercial membership group and individual contracts, and shall not include the group contracts for Medi-Cal and other similar type government sponsored contracts (the "Government Sponsored Contracts"), the Health Net Employees, groups and individuals that have also purchased HNT medical products who will be transitioned to the HNT vision strategic partner upon renewal of such contracts or earlier, provided however, that prior to closing, HNI shall cause to be removed from HNV all such Government Sponsored Contracts. B. SafeHealth would acquire from HNL at closing, through the Reinsurance Agreement, one hundred percent (100%) of HNL's California commercial vision business in existence at the time of closing and susceptible to transfer, including all of the vision group, individual, preferred provider, and agent contracts of HNL, provided that, if any such asset is not susceptible to transfer, the parties will negotiate in good faith to provide an appropriate alternative arrangement that results in the same or a substantially similar economic result to the parties. -2- C. ENT would cause HNV and/or SafeHealth, as may be applicable, to enter into the ASA upon closing of the Transaction to provide for the transition of the vision business maintained by HNT-AZ through December 31, 2004, for which SFGD will charge HNT fifteen percent (15%) of the claims paid by HNV or SafeHealth, as applicable, related to the HNT-AZ vision business, which fees shall be due ten (10) calendar days after receipt of a billing from HNV or SafeHealth, and HNL shall have the option to extend the ASA for an additional one (1) year period for a rate to be charged by HNV or SafeHealth to adequately compensate HNV or SafeHealth for the services provided under the ASA. 4. PURCHASE PRICE. A. The purchase price for the Transaction will be an amount equal to (i) three million dollars ($3,000,000) plus; (ii) an amount equal to the amount of Tangible Net Equity of HNV in excess of the Minimum TNE Requirement (the "Excess Amount"). and (iii) fifty percent (50%) of the Pearle Vision Network rental payment received by HNV after closing for the services provided by HNV to Pearle Vision Network, to be paid by HNV to HNT by the fifteenth (15th) day of the month following the month that HNV receives such payment from Pearle Vision Network, for the month of service starting the month following the closing of the Transaction through the month of service for December 2004. ENT will pay to HNT in cash or by wire transfer at the closing all components of the Purchase Price except those related to item (iii) above and the Minimum TNE Requirement related solely to HNV's Medi-Cal business. The Minimum TNE Requirement related solely to HNV's Medi-Cal business will be paid to HNT on the last day of the full quarter following the closing. B. From and after the execution of Definitive Agreements representing the Transaction and prior to closing, or in connection with the Request for Material Modification to be filed by HNV for the sale of HNV to ENT, HNV shall request from the California Department of Managed Health Care (the "Department"), permission to withdraw, and withdraw, from HNV at closing, or before, as the case may be, the Excess Amount. In the event that the Department does not approve HNV's request to withdraw all, or any portion of the Excess Amount, ENT shall, at the closing, and in addition to the $3,000,000 described in subsection 4.A (i) above, pay to HNI the Excess Amount, or that portion thereof that the Department has not permitted HNV to withdraw. 5. CLOSING. Closing shall occur as of the last day of the calendar month in which a) all required regulatory approvals of the Transaction have been received by the parties hereto; and b) the earlier of the following shall have occurred: (i) December 31, 2003; (ii) the transaction between ENT and HNI for the purchase and sale of Health Net Dental, Inc., (the "HND Transaction") pursuant to the Purchase and Sale Agreement dated as of March 31, 2003, (the "PAS Agreement") shall have terminated; or (iii) the HND Transaction closes. 6. VISION SEVERANCE CREDIT. Upon the Closing of the Transaction, the Vision Severance Credit as defined in EXHIBIT E of the PAS Agreement shall be eliminated and the parties agree to take all such necessary action and execute and deliver such additional documents to effect the purpose of this provision. -3- 7. TRANSITION AGREEMENTS. The parties agree to cooperate in preparing one (1) or more transition agreements which agreements will provide for the provision of certain services such services as accounting or information technology services provided by HNI relating to the transfer of the vision business to ENT, and such other documents that may be necessary in connection with this Transaction. 8. EMPLOYEES. The parties hereto agree that they will consult with each other concerning open positions that may exist within HNV and provide and receive input with respect to filling such open positions. HNT will provide ENT with a list of open positions within HNV upon execution of this LOI and the parties agree to review such open positions to determine if they should be filled. 9. NO NEGOTIATION WITH OTHERS. HNT agrees that upon execution of this LOI, and for so long as it remains in effect, it will no longer solicit or entertain offers or enter into any agreements for any transaction that is comparable to the Transaction, and also will not furnish information to any person or entity for such purpose for the period through May 15, 2003, during which period the parties will use their good faith efforts to develop and execute the Definitive Agreements setting forth the terms of the Transaction described herein. Notwithstanding the foregoing, ENT acknowledges that it is the intent of HNT to enter into a strategic relationship agreement with another party to sell HNT private labeled vision products in California, Oregon and Arizona and that as result of such strategic relationship agreement HNT will continue to offer and sell vision products in such states. 10. SOLICITATION OF EMPLOYEES. A. In the event that the Transaction is not consummated, SFGD shall not, at anytime on or before May 15, 2005, initiate or maintain contact (except for those contacts made in the ordinary course of business) with any officer, director or employee of HNV or HNI regarding HNV's or HNI's business, operation, prospects or finances or solicit for employment or employ any employees of HNV or HNI or its other affiliates, except with the express permission of HNI; provided however, application of this provision to employees of HNI, or any HNI affiliates other than HNV, is limited to employees of such companies engaged in the due diligence process for the Transaction. B. In the event that the Transaction is not consummated, HNI shall not, at any time on or before May 15, 2005, initiate or maintain contact (except for those contacts made in the ordinary course of business) with any officer, director or employee of, ENT, SafeGuard-California or SafeHealth that was engaged in the due diligence process for the Transaction, regarding ENT's, SafeGuard-California's or SafeHealth's business, operation, prospects or finances or solicit for employment or employ any officer, director or employee of, ENT, SafeGuard-California or SafeHealth that was engaged in the due diligence process for the Transactions, except with the express permission of ENT. 11. DEFINITIVE AGREEMENTS. The parties agree to cooperate and use good faith efforts to prepare and execute the Definitive Agreements that shall contain such additional terms, -4- conditions, covenants and indemnities as are typical of transactions such as the Transactions, by not later than May 15, 2003, and consummate the Transaction as soon as possible thereafter. HNI and ENT agree that the initial drafts of the Definitive Agreements shall be the responsibility of HNI to prepare. 12. REGULATORY APPROVALS. Consummation of the Transaction will be subject to appropriate regulatory approvals or consents and the parties agree to cooperate with one another in securing all such regulatory approvals or consents. 13. EXPENSES. HNI and ENT each agree to bear all their own expenses with respect to the Transactions. HNI agrees to be responsible for all business brokerage fees that may be due to Shattuck Hammond Partners, LLC in connection with the Transactions. 14. CONFIDENTIALITY. The parties shall keep confidential the terms and conditions of this LOI, the discussions between the parties, and the Transaction, until the Definitive Agreements are executed at which time HNI and ENT will jointly issue a press release, agreed to in advance by both HNI and ENT, announcing the execution of the Agreements, provided however, that upon the execution of this LOI the parties will jointly issue a press release, agreed to in advance by both HNI and ENT, announcing the execution of this LOI. HNI and ENT agree that neither party shall issue any press release, other than as set forth herein, relating to the Transaction, without the consent of the other party being obtained in advance in writing. Nothing herein shall prevent the disclosure of any such information where the disclosure is required by law or judicial process, including any applicable securities disclosure requirements. 15. DUE DILIGENCE. ENT shall define and communicate to HNI any additional due diligence requirements. All due diligence shall be completed not later than May 15, 2003. The termination of this LOI and of the negotiations for the proposed Transaction for whatever reason shall not result in any obligation or liability of any party hereto, other than as set forth in Section 15 hereof. 16. MERGER. In the event ENT decides to merge, simultaneously with the closing of the Transaction or shortly thereafter, HNV with SafeGuard-California, HNI agrees to cooperate with SFGD in taking such reasonable actions necessary to be taken by HNI to assist SFGD in accomplishing such a merger, should any such actions be necessary. 17. BINDING PROVISIONS. Except for the agreements and provisions of Sections 3, 4, 9, 10, 13 and 14 hereof, which shall constitute binding agreements among the parties hereto, nothing in this Agreement creates a binding obligation of any of the parties and the parties will not have a binding agreement for the Transaction unless and until all applicable parties execute the Definitive Agreements. 18. ASSIGNMENT. SFGD may assign its right to consummate the Transactions to one or more of its affiliates provided that such affiliate is reasonably acceptable to HNI. HNI shall not unreasonably withhold its consent to any such assignment. -5- 19. COUNTERPARTS. This LOI may be executed in two (2) or more counterparts, each of which will be deemed an original, but all of which together will constitute one (1) and the same instrument. 20. TERMINATION. This LOI will terminate if the Definitive Agreements are not executed by May 15, 2003 or such later date as may be approved in writing by the parties hereto. If this LOI is satisfactory, please so indicate by signing below and returning a copy to ENT. Very truly yours, SAFEGUARD HEALTH ENTERPRISES, INC. 95 Enterprise, Suite 100 Aliso Viejo, CA 92656-2605 By: /s/ James E. Buncher ---------------------------------- JAMES E. BUNCHER President and Chief Executive Officer SAFEGUARD HEALTH PLANS, INC. 95 Enterprise, Suite 100 Aliso Viejo, CA 92656-2605 By: /s/ James E. Buncher ---------------------------------- JAMES E. BUNCHER President and Chief Executive Officer SAFEHEALTH LIFE INSURANCE COMPANY 95 Enterprise, Suite 100 Aliso Viejo, CA 92656-2605 By: /s/ James E. Buncher ---------------------------------- JAMES E. BUNCHER President and Chief Executive Officer -6- Agreed to and Accepted: Dated: April 7, 2003 HEALTH NET, INC. 21650 Oxnard Street Woodland Hills, CA 91367 By: /s/ B. Curtis Westen ---------------------------------- Name: B. Curtis Westen ---------------------------------- Title: General Counsel ---------------------------------- Dated: April 7, 2003 HEALTH NET VISION, INC. 21650 Oxnard Street Woodland Hills, CA 91367 By: /s/ David W. Anderson ---------------------------------- Name: David W. Anderson ---------------------------------- Title: President ---------------------------------- Dated: April 7, 2003 HEALTH NET LIFE INSURANCE COMPANY 21650 Oxnard Street Woodland Hills, CA 91367 By: /s/ David W. Anderson ---------------------------------- Name: David W. Anderson ---------------------------------- Title: President ---------------------------------- -7- EX-99.1 7 doc6.txt EXHIBIT 99.1 TO CURRENT REPORT ON FORM 8-K DATED AS OF APRIL 7, 2003 -------------------------------------------------------------------- PRESS RELEASE Contacts: For SafeGuard Health Enterprises, Inc. For Health Net, Inc.: James E. Buncher Lisa Haines President and Chief Executive Officer VP, Corporate Communications (949) 425-4300 (818) 676-7912 SAFEGUARD HEALTH ENTERPRISES, INC. AND HEALTH NET, INC. ANNOUNCE STRATEGIC RELATIONSHIP INCLUDES SALE OF HEALTH NET DENTAL AND VISION TO SAFEGUARD ORANGE COUNTY, CALIFORNIA (APRIL 7, 2003) - SafeGuard Health Enterprises, Inc. (OTC Bulletin Board: SFGD) and Health Net, Inc. (NYSE: HNT) today jointly announced a strategic relationship focused on the expansion of market share, and the delivery of competitive dental benefit products that will be sold in conjunction with Health Net medical plans. This relationship includes the sale of the Health Net Dental subsidiary to SafeGuard. In addition, SafeGuard and Health Net have entered into a Letter of Intent, under which SafeGuard will acquire Health Net's vision subsidiary and its California commercial membership. Specific terms of the transactions were not disclosed. Closing is expected in the fourth quarter of 2003 subject to regulatory approval. The Health Net Dental and Vision brand will be retained by Health Net, Inc., which will continue to market dental products sold by Health Net medical sales representatives. These dental products will be underwritten and administered by SafeGuard. As a result of these transactions, SafeGuard will become one of the largest managed dental and vision carriers in California, with more than 900,000 California members and more than 1.4 million members nationwide, and annual revenues exceeding $150 million. "We are excited about the strategic dental relationship with Health Net and the ability to continue building on its quality brand," said James E. Buncher, president and chief executive officer of SafeGuard Health Enterprises, Inc. "The power of our combined networks, market share and administrative capabilities will allow us to better meet the needs of our combined customers. The fact that Health Net has chosen SafeGuard for this relationship is a clear indication that our emphasis on service, financial stability and innovation has paid off. The acquisition of Health Net's vision subsidiary brings SafeGuard the capability to administer vision benefit products. For many years, SafeGuard has sold vision products in California through its insurance -1- subsidiary that were administered by a third party. Combining this administrative capability with our experience in selling vision products positions us to significantly grow our vision business." "Health Net's customer focus underlies our goal of offering innovative dental solutions and the best value in quality specialty health care services," said Dave W. Anderson, president of Health Net Dental and Vision. "This strategic relationship accomplishes both. SafeGuard complements Health Net's growth strategy, and we feel they are well positioned to make this transition seamless to our employer groups, brokers, providers and members. We have been very impressed with SafeGuard's operations and service delivery, which are vital to ensuring that Health Net members will continue to receive the high level of service they have come to expect. The integration of the two companies' provider networks and synergies of their organizations should result in improved customer service and expanded access to care." SafeGuard and Health Net management expect these transitions to be seamless to all existing and future members, employer groups, brokers and providers. Existing contracts and benefit plans administered through Health Net Dental and Vision or SafeGuard will remain unchanged. As the process moves forward, the companies will notify their customers of upcoming administrative changes well in advance. Employers or brokers with questions should contact their respective SafeGuard or Health Net Dental and Vision representatives. Members should call their respective customer service centers. ABOUT SAFEGUARD HEALTH ENTERPRISES, INC. SafeGuard Health Enterprises, Inc. is committed to the dental and vision business, with nearly 30 years experience. The Company serves dental HMO, PPO and indemnity, and ASO members in California, Florida and Texas and is licensed to offer dental PPO and indemnity benefits in 17 additional states. SafeGuard currently has more than 825,000 members. For more information, visit SafeGuard's Web site at www.safeguard.net. ----------------- ABOUT HEALTH NET DENTAL AND VISION Health Net Dental and Vision offers dental HMO, dental Preferred Provider Organization (PPO) and indemnity dental and vision benefit plans for groups and individuals. PPO and Indemnity products sold and administered by Health Net Dental and Vision are underwritten by affiliate Health Net Life Insurance Company. These companies are subsidiaries of Health Net, Inc., one of the nation's largest publicly traded managed health care companies. For more information, please visit the Health Net Dental and Vision web site at www.dv.healthnet.com or Health Net, Inc. at www.health.net. - -------------------- -------------- SafeGuard and Health Net note that statements contained in this news release that are not based on historical facts are forward-looking statements, and as such, are subject to uncertainties and risks that could cause actual results to differ materially from those projected or implied by such statements. These risks, contingencies and uncertainties, many of which are beyond SafeGuard's and/or Health Net's control, include those risk factors that are set forth in the SafeGuard's and Health Net's Annual Report on Form 10-K for the year ended December 31, 2002, on file with the U.S. Securities and Exchange Commission. -2- -----END PRIVACY-ENHANCED MESSAGE-----