-----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, E4orN3G5PhmauCy9jplo0CZ9xJDgsmCH5jxr0mszhE7/FnabJat4Wzno/MSgpZC+ Algnl9FHSsJhAdDvZEJcLQ== 0001015402-03-002637.txt : 20030702 0001015402-03-002637.hdr.sgml : 20030702 20030702145932 ACCESSION NUMBER: 0001015402-03-002637 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030630 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20030702 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: 03771450 BUSINESS ADDRESS: STREET 1: 95 ENTERPRISE T CITY: ALISO VIEJO STATE: CA ZIP: 92656-2601 BUSINESS PHONE: 9494254110 8-K 1 doc1.txt ================================================================================ 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 JUNE 30, 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 JUNE 30, 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 Vision, Inc. ("HNV") (the ''HNV Stock''), a California domiciled vision health maintenance organization ("Vision 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. The assets of HNV subject to the PAS Agreement do not include HNV's current government-sponsored contracts or the HNI employees, groups and individuals who or which also purchased HNI medical products. As of March 31, 2003, there were approximately 103,000 members currently being provided Vision HMO benefits by HNV, which are subject to the PAS Agreement. ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT 2) An Assumption and Indemnity Reinsurance Agreement (the "Reinsurance Agreement") between Health Net Life Insurance Company ("HNLIC") and SafeHealth Life Insurance Company ("SafeHealth"), a subsidiary of Registrant, under which SafeHealth will reinsure and assume certain vision indemnity and vision preferred provider organization ("PPO") contracts of HNLIC which are being sold to SafeHealth as part of this transaction. The Reinsurance Agreement provides for the transfer from HNLIC to SafeHealth of substantially all of the vision indemnity and vision PPO business of HNLIC in California. The Reinsurance Agreement is subject to certain closing conditions, the filing of certain insurance policy forms with the Department of Insurance in California, no material adverse change in either party, and the closing of the PAS Agreement, but does not require any other regulatory approval. As of March 31, 2003, there were approximately 15,000 members currently being provided vision indemnity and PPO benefits by HNLIC. NETWORK ACCESS AGREEMENT 3) A Network Access Agreement ("Network Agreement") which provides access to the HNLIC panel of vision PPO providers to the extent that such vision PPO provider contracts can not be assigned for any reason by HNLIC to SafeHealth. There are no closing conditions with respect to the Network Agreement other than the closing of the PAS Agreement. ADMINISTRATIVE SERVICES AGREEMENT 4) An Administrative Services Agreement ("Administrative Agreement") between HNLIC, SafeHealth and Health Net of Arizona, Inc. ("HNT-AZ") wherein SafeHealth will provide certain insurance related administrative services to HNT-AZ such as the processing of vision claims and related administrative services for benefits made available to clients under the applicable benefits agreements issued by 2 HNT-AZ and HNLIC (the "Claims Services"). In exchange for Claims Services, HNT-AZ and HNLIC, as applicable, will pay SafeHealth fifteen percent (15%) of all claims paid by SafeHealth pursuant to the Administrative Agreement. HNLIC also has the option to extend the Administrative Agreement for an additional one (1) year for which SafeHealth will receive a fee equal to twenty percent (20%) of all claims paid by SafeHealth pursuant to the Administrative Agreement. There are no closing conditions with respect to the Administrative Agreement other than the closing of the PAS Agreement transaction. Collectively, the PAS Agreement, the Reinsurance Agreement, the Network Agreement and the Administrative Agreement described above are referred to as the "Vision Transactions." CLOSING The Registrant anticipates the Vision Transactions will be completed by the end of 2003, but there can be no assurance that the Vision Transactions will be completed. Assuming the Vision Transactions are completed, after the close of the Vision Transactions, the Registrant plans to cause the merger of HNV 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 Vision Transactions close, the Registrant will pay HNI for the HNV Stock and the Vision Transactions the total consideration of: (i) three million dollars ($3,000,000) in cash; and (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 as of the closing date; 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 Transactions through the month of service for December 2004. SUMMARY OF THE ACQUISITION HNV, a subsidiary of HNI, operates a Vision HMO in the state of California, is licensed as a Specialized Knox-Keene Health Care Service Plan by the Department, and offers Vision HMO plans in the state of California for both individuals and employer groups. HNV has established a network of approximately 2,900 licensed optometrists, ophthalmologists and opticians in the state of California who have contracted with HNV to provide Vision HMO services to enrollees. HNLIC has established a vision PPO network of approximately 3,300 licensed optometrists, ophthalmologists and opticians in California to provide vision PPO services to HNLIC enrollees. HND and HNLIC, collectively, currently provide vision benefits to approximately 118,000 members. 3 QUALIFICATION OF THIS CURRENT REPORT ON FORM 8-K TO THE VARIOUS AGREEMENTS REFERRED TO HEREIN The description of the Vision Transactions contained in this filing is qualified in its entirety by reference to the provisions of the Purchase and Sale Agreement dated as of June 30, 2003, without exhibits, filed as Exhibit 10.48 to this Current Report on Form 8-K (1), the Assumption and Indemnity Reinsurance Agreement dated as of June 30, 2003 filed as Exhibit 10.49 to this Current Report on From 8-K, the Network Access Agreement dated as of June 30, 2003, filed as Exhibit 10.50 to this Current Report on From 8-K, and the Administrative Services Agreement dated as of June 30, 2003, filed as Exhibit 10.51 to this Current Report on Form 8-K. A copy of the Press Release, dated July 1, 2003 issued by the Registrant in connection with the Vision Transactions, is filed as Exhibit 99.1 to this Current Report on Form 8-K. _____________________________ (1) Registrant agrees to furnish a supplemental copy of schedules and exhibits to the SEC upon request. * * * (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.) 4 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (A) EXHIBITS EXHIBIT NO. DESCRIPTION ------------ ----------- 10.48 Purchase and Sale Agreement dated as of June 30, 2003, without exhibits, filed herewith (1). 10.49 Assumption and Indemnity Reinsurance Agreement dated as of June 30, 2003, filed herewith. 10.50 Network Access Agreement dated as of June 30, 2003, filed herewith. 10.51 Administrative Services Agreement dated as of June 30, 2003, filed herewith. 99.1 Press Release, dated July 2, 2003 regarding the Vision Transactions, filed herewith. _______________________________ (1) Registrant agrees to furnish a supplemental copy of schedules and exhibits to the SEC upon request. * * * (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.) 5 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: July 1, 2003 By: /s/ Dennis L. Gates ---------------------- DENNIS L. GATES Senior Vice President and Chief Financial Officer Date: July 1, 2003 By: /s/ Ronald I. Brendzel ------------------------- RONALD I. BRENDZEL Senior Vice President and Secretary 6 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION ------------ ----------- 10.48 Purchase and Sale Agreement dated as of June 30, 2003, without exhibits, filed herewith (1). 10.49 Assumption and Indemnity Reinsurance Agreement dated as of June 30, 2003, filed herewith. 10.50 Network Access Agreement dated as of June 30, 2003, filed herewith. 10.51 Administrative Services Agreement dated as of June 30, 2003, filed herewith. 99.1 Press Release, dated July 2, 2003 regarding the Vision Transactions, filed herewith. ____________________________________ (1) Registrant agrees to furnish a supplemental copy of schedules and exhibits to the SEC upon request. 7 EX-10.48 3 doc2.txt EXHIBIT 10.48 TO CURRENT REPORT ON FORM 8-K DATED AS OF JUNE 30, 2003 --------------------------------------------------------------------- - -------------------------------------------------------------------------------- PURCHASE AND SALE AGREEMENT BY AND BETWEEN SAFEGUARD HEALTH ENTERPRISES, INC. PURCHASER AND HEALTH NET, INC. SELLER HEALTH NET VISION, INC. DATED AS OF JUNE 30, 2003 - --------------------------------------------------------------------------------
TABLE OF CONTENTS ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.1 Certain Definitions. . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.2 Other Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE II THE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.2 Purchase and Sale of the Shares. . . . . . . . . . . . . . . . . . . 8 Section 2.3 Assumption and Indemnity Reinsurance Agreement . . . . . . . . . . . 8 Section 2.4 HNL Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.5 Non-Assignable Contracts.. . . . . . . . . . . . . . . . . . . . . . 8 Section 2.6 Replacement of Vision HMO Contracts of Joint Health Net Subscribers. 9 Section 2.7 Transfer of Government Sponsored.. . . . . . . . . . . . . . . . . . 10 Section 2.8 Replacement of Employee Vision Contacts and Policies.. . . . . . . . 10 Section 2.9 Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.10 Administrative Services Agreement. . . . . . . . . . . . . . . . . . 12 Section 2.11 Transition Services Agreement. . . . . . . . . . . . . . . . . . . . 12 Section 2.12 Network Access Agreement . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.13 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.14 Distribution of Excess Tangible Net Equity . . . . . . . . . . . . . 13 Section 2.15 Purchase Price Allocation. . . . . . . . . . . . . . . . . . . . . . 13 Section 2.16 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.17 Adjustment to Purchase Price.. . . . . . . . . . . . . . . . . . . . 13 Section 2.18 Deliveries at the Closing by Seller. . . . . . . . . . . . . . . . . 15 Section 2.19 Deliveries at the Closing by Purchaser . . . . . . . . . . . . . . . 15 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER. . . . . . . . . . . . . . . . . . 16 Section 3.1 Organization of Seller . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.2 Authorization, Validity and Enforceability . . . . . . . . . . . . . 16 Section 3.3 No Violation or Breach . . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.4 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . 17 Section 3.5 Organization and Qualification of the Company. . . . . . . . . . . . 17 Section 3.6 Organization and Qualification of HNL. . . . . . . . . . . . . . . . 17 Section 3.7 Capitalization of the Company. . . . . . . . . . . . . . . . . . . . 17 Section 3.8 Title to the Shares. . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 3.9 Options or Other Rights. . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.10 Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.11 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . 19 Section 3.12 Permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.13 Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.14 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.15 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 3.16 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 3.17 Employee Benefit Matters.. . . . . . . . . . . . . . . . . . . . . . 23 Section 3.18 No Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 3.19 Title to and Condition of Properties . . . . . . . . . . . . . . . . 23 Section 3.20 Real Property Leases . . . . . . . . . . . . . . . . . . . . . . . . 24 -i- Section 3.21 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 3.22 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . 24 Section 3.23 Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 3.24 Transactions With Affiliates . . . . . . . . . . . . . . . . . . . . 24 Section 3.25 Improper Payments. . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER. . . . . . . . . . . . . . . . . 24 Section 4.1 Organization of Purchaser. . . . . . . . . . . . . . . . . . . . . . 24 Section 4.2 Authorization, Validity and Enforceability . . . . . . . . . . . . . 25 Section 4.3 No Violation or Breach . . . . . . . . . . . . . . . . . . . . . . . 25 Section 4.4 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . 25 Section 4.5 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 4.6 Certain Governmental Consents. . . . . . . . . . . . . . . . . . . . 26 Section 4.7 Investment Representation. . . . . . . . . . . . . . . . . . . . . . 26 Section 4.8 No Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 4.9 Investigation by Purchaser . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE V COVENANTS OF PURCHASER AND SELLER . . . . . . . . . . . . . . . . . . . . . . 27 Section 5.1 Conduct of Business. . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 5.2 Consents and Approvals.. . . . . . . . . . . . . . . . . . . . . . . 29 Section 5.3 Cooperation and Further Assurances . . . . . . . . . . . . . . . . . 29 Section 5.4 Access to Information. . . . . . . . . . . . . . . . . . . . . . . . 30 Section 5.5 Notice of Litigation and Requests. . . . . . . . . . . . . . . . . . 30 Section 5.6 Notice of Changes and Defaults . . . . . . . . . . . . . . . . . . . 30 Section 5.7 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 5.8 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 5.9 Distribution of Excess Tangible Net Equity . . . . . . . . . . . . . 32 Section 5.10 Transfer of HNL Contracts. . . . . . . . . . . . . . . . . . . . . . 32 Section 5.11 Replacement of Seller Employee Vision Contracts and Policies.. . . . 32 Section 5.12 Replacement of Vision HMO Contracts of Joint Health Net Subscribers. 32 Section 5.13 Transfer of Government Sponsored.. . . . . . . . . . . . . . . . . . 32 Section 5.14 Reinsurance Agreement. . . . . . . . . . . . . . . . . . . . . . . . 32 Section 5.15 Administrative Services Agreement. . . . . . . . . . . . . . . . . . 32 Section 5.16 Transition Service Agreement . . . . . . . . . . . . . . . . . . . . 32 Section 5.17 Network Access Agreement . . . . . . . . . . . . . . . . . . . . . . 33 Section 5.18 Termination of Contracts . . . . . . . . . . . . . . . . . . . . . . 33 Section 5.19 Employment Matters; Severance. . . . . . . . . . . . . . . . . . . . 33 Section 5.20 Name Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.21 Interaffiliate Accounts. . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.22 Non-Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE VI CONDITIONS TO PURCHASER'S OBLIGATIONS. . . . . . . . . . . . . . . . . . . . 34 Section 6.1 Representations, Warranties and Covenants. . . . . . . . . . . . . . 35 Section 6.2 No Proceeding or Litigation. . . . . . . . . . . . . . . . . . . . . 35 Section 6.3 Corporate Action . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 6.4 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . 35 Section 6.5 Transfer of Government Sponsored Contacts. . . . . . . . . . . . . . 35 Section 6.6 Resignation of Officers and Directors. . . . . . . . . . . . . . . . 35 -ii- Section 6.7 Transfer of HNL Contracts. . . . . . . . . . . . . . . . . . . . . . 35 Section 6.8 Administrative Services Agreement. . . . . . . . . . . . . . . . . . 35 Section 6.9 Transfer of Books and Records. . . . . . . . . . . . . . . . . . . . 35 Section 6.10 Reinsurance Agreement. . . . . . . . . . . . . . . . . . . . . . . . 36 Section 6.11 Network Access Agreement . . . . . . . . . . . . . . . . . . . . . . 36 Section 6.12 Transition Services Agreement. . . . . . . . . . . . . . . . . . . . 36 ARTICLE VII CONDITIONS TO SELLER'S OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . 36 Section 7.1 Representations, Warranties and Covenants. . . . . . . . . . . . . . 36 Section 7.2 No Proceeding or Litigation. . . . . . . . . . . . . . . . . . . . . 36 Section 7.3 Corporate Action . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 7.4 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . 36 Section 7.5 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 7.6 Administrative Services Agreement. . . . . . . . . . . . . . . . . . 37 Section 7.7 Reinsurance Agreement. . . . . . . . . . . . . . . . . . . . . . . . 37 Section 7.8 Network Access Agreement . . . . . . . . . . . . . . . . . . . . . . 37 Section 7.9 Transition Services Agreement. . . . . . . . . . . . . . . . . . . . 37 ARTICLE VIII SURVIVAL, INDEMNIFICATION AND ARBITRATION. . . . . . . . . . . . . . . . . 37 Section 8.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 8.2 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 8.3 Treatment of Indemnity Payments. . . . . . . . . . . . . . . . . . . 38 Section 8.4 Mitigation of Loss . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 8.5 Subrogation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 8.6 Tax Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 8.7 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 8.8 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE IX TAX MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.1 Seller Indemnification . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.2 Purchaser and the Company Indemnification. . . . . . . . . . . . . . 40 Section 9.3 Preparation of Tax Returns . . . . . . . . . . . . . . . . . . . . . 40 Section 9.4 Refunds or Credits . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 9.5 [Section 338(h)(10) Election.. . . . . . . . . . . . . . . . . . . . 41 Section 9.6 Mutual Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.7 Contests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 9.8 Survival of Obligations. . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE X TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 10.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 10.2 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE XI MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 11.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 11.2 Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 11.3 Entire Agreement; Waivers and Amendments . . . . . . . . . . . . . . 45 Section 11.4 Assignment; Binding Effect . . . . . . . . . . . . . . . . . . . . . 45 Section 11.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 -iii- Section 11.6 Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 11.7 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 11.8 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 11.9 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 11.10 No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . 46 SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 EXHIBIT A REINSURANCE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 49 EXHIBIT B ADMINISTRATIVE SERVICES AGREEMENT. . . . . . . . . . . . . . . . . . . . 50 EXHIBIT C NETWORK ACCESS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 51 EXHIBIT D HEALTH NET SEVERANCE POLICY . . . . . . . . . . . . . . . . . . . . . . . 52
-iv- PURCHASE AND SALE AGREEMENT This PURCHASE AND SALE AGREEMENT is made and entered into as of June 30, 2003, by and between SafeGuard Health Enterprises, Inc., a Delaware corporation, or its Designee ("Purchaser") and Health Net, Inc., a Delaware corporation ("Seller"). RECITALS -------- WHEREAS, Seller is the beneficial and record owner of 486,380 shares of common stock, no par value per share (the "Shares"), of Health Net Vision, 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 vision HMO coverage for both commercial and government members in California and administers vision PPO and vision indemnity products underwritten by Health Net Life Insurance Company, a wholly-owned subsidiary of Seller ("HNL"); 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 commercial vision PPO and vision indemnity insurance business underwritten and/or controlled by HNL, including all the group and individual vision insurance policies and certificates, vision provider agreements and producer contracts comprising the Vision Business Assets; WHEREAS, Seller and Purchaser agree that those commercial vision PPO and vision 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 an Administrative Service Agreement effective upon the Closing to provide for the transition of the Arizona vision business maintained by Health Net of Arizona, Inc. and HNL through December 31, 2004 (the "Administrative Service Agreement"); WHEREAS, Purchaser and Seller desire to enter into a Network Access Agreement to provide Purchaser with access to California vision providers of HNL and a Transition Services Agreement to provide Purchaser with transition services necessary to operate the Vision Business; WHEREAS, the transactions contemplated by this Agreement, the Reinsurance Agreement, the Administrative Services 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 Vision Business, including lists of commercial vision PPO and commercial vision indemnity insureds of HNL in California, claims files, information files and data related to the commercial vision PPO and commercial vision indemnity insurance underwritten by HNL in California, communications, inventory of current forms, business and corporate 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 information and report that are required by Purchaser to operate the Vision 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. "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. -2- "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. "Government Sponsored Contracts" means any arrangement or contract under -------------------------------- which the Company or HNL is obligated to provide vision benefits pursuant to a government sponsored vision program, including but not limited to, Medi-Cal. "Joint Health Net Subscribers" means those California commercial ------------------------------- Subscribers who are enrolled in both (i) a pre-paid vision HMO product provided ---- by the Company or a vision PPO or vision indemnity product provided by HNL, and (ii) a Medical Product provided by any Affiliate of Seller. "Knowledge of Seller" means the actual knowledge of David W. Anderson, --------------------- Roupen Berberian, 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, Ronald I. Brendzel and Stephen J. Baker. "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, solely with respect to the HNL Vision Business, 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 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 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)" -3- does not include (i) agreements with vision service providers, or purchasers of vision coverage entered into by the Company or HNL 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, and (ii) the Purchase and Sale Agreement by and between the Seller and Purchaser dated April 7, 2003 with respect to the sale by Seller to Purchaser of, among other things, Health Net Dental, Inc. (the "HND Transaction") and all Transaction Documents (as defined in the HND Transaction) relating to the HND Transaction. "Medical Product" means (i) PPO and indemnity health insurance contracts ---------------- covering the medical costs or services of Subscribers and (ii) medical HMO contracts. "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 Vision 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 Vision Business or Company operate; (ii) the United States economy or local economy in which Seller, the HNL Vision 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 Vision Business or the - ------- Company resulting from (A) the execution of this Agreement, (B) the transactions contemplated hereby, including but not limited to, the removal from Company prior to the Closing of any contracts or policies obligating the Company to provide vision benefits in connection with any Government Sponsored Contracts, the removal from the Company or termination of any contracts or policies obligating the Company to provide vision benefits to employees of Seller or any Affiliate of Seller, and the replacement commencing prior to the Closing of the vision benefits provided by the Company and HNL to Joint Health Net Subscribers with vision benefits provided by the strategic partner of -4- Seller, and (C) any facts or circumstances primarily related to Purchaser, or changes in the business, financial conditions or operations of Seller, the HNL Vision 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. "Subscriber" means the person who has enrolled in a Medical Product, a ---------- pre-paid vision HMO product, a vision PPO or vision indemnity insurance product. "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." "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 Administrative Services 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 Administrative Services Agreement, the Transition Services Agreement and the Network Access Agreement. "Vision Business" means (i) the pre-paid vision HMO coverage provided by ---------------- the Company to commercial members in California, and (ii) the commercial vision PPO and commercial vision indemnity insurance policies and certificates underwritten by HNL and providing coverage to insureds in California, provided, -------- however, Purchaser acknowledges and agrees that commencing prior to the Closing, - ------- the contracts or policies providing vision benefits to Joint Health Net Subscribers may be replaced with vision contracts or policies provided by a strategic partner of Seller. Notwithstanding the foregoing, the Vision Business shall not include any contracts or policies of either the Company or HNL (A) obligating the Company or HNL to provide vision benefits in connection with any Government Sponsored Contracts; and (B) any contracts or policies obligating the Company or HNL to provide vision benefits to employees of Seller or any Affiliate of Seller. "Vision Business Assets" means (i) the Vision Business, (ii) the Books and ----------------------- Records, and (iii) the HNL Contracts. -5- "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 Tax Reimbursement 9.5(c) Allocation 9.5(b) Balance Sheet Accountants 2.17 Closing 2.16 Closing Date 2.16 Company Recitals Competitor 5.22 Dispute 8.8 Employees 3.16 Employee Plans 3.17 Excess Tangible Net Equity 2.14 Final Balance Sheet 2.17 Financial Statements 3.10 HND Transaction 2.16 HNL Recitals HNL Contracts 2.4 HNL Financial Information 3.10(e) Indemnifiable Loss 8.3 Indemnified Party 8.2(d) Indemnifying Party 8.2(d) -6- Indemnitee 8.3 Indemnity Payment 8.3 JAMS 8.8(a) Multi-Business Company 5.22 Network Access Agreement 2.12 Optional Termination Date 10.1 Permit(s) 3.12 Proposed Adjustment Notice 2.17 Purchase Price 2.13 Purchaser Preamble Reinsurance Agreement Recitals Retained Employees 5.19 SafeHealth Recitals Securities Act 4.7 Seller Preamble Seller Entity 5.22 Shares Recitals Software 3.23 Survival Period 8.1 Transactions Recitals Transition Services Agreement 2.11 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 Vision Business Assets and the -7- 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 California providers of vision services and vision supplies, California producers and other contracts or agreements set forth on Schedule 2.4 which ------------ contracts represent the vision provider and producer agreements of HNL relating to the Vision Business in California (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 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. -8- Section 2.6 Replacement of Vision Benefits of Joint Health Net Subscribers. (a) Seller shall offer to replace, with vision benefits offered by Seller's strategic partner, the pre-paid vision HMO contracts of the Company and the vision PPO and vision indemnity insurance policies of HNL which as of the date hereof provide vision benefits to Joint Health Net Subscribers. The Joint Health Net Subscribers are set forth on Schedule 2.6. The offers to replace ------------ such contracts and policies shall commence prior to Closing and shall occur no later than the first renewal date after Closing of each such Company pre-paid vision HMO contract or HNL vision PPO and vision indemnity insurance policy. Purchaser shall provide Seller with information reasonably required by Seller to offer the Joint Health Net Subscribers replacement vision benefits provided by Seller's strategic partner, including but not limited to, group experience data and monthly eligibility reports showing all individuals eligible to obtain covered vision services under the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers. Notwithstanding the foregoing, in the event a Joint Health Net Subscriber chooses to remain enrolled after the Closing in any pre-paid vision HMO product provided by the Company, after the Closing the Company shall have the right set the rate for such pre-paid vision HMO products and change the product design of such pre-paid vision HMO products. (b) Purchaser shall provide or cause the Company to provide all necessary or appropriate administrative services relating to the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers until such contracts are cancelled, nonrenewed or otherwise replaced by vision benefits provided by Seller's strategic partner. (c) Purchaser shall cause the Company to bill and collect any premium or contract fees attributable to the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers until the earlier of (i) the date such pre-paid vision HMO contracts, vision PPO and vision indemnity policies are cancelled, nonrenewed or otherwise replaced with vision benefits provided by Seller's strategic partner, or (ii) the date sixty (60) days after the date that Seller provides written notice to Purchaser of Seller's intent to assume responsibility to bill and collect premium or contract fees attributable to the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers. Any billing and collection activities of the Company with respect to the Joint Health Net Subscribers shall be conducted in the name of "Health Net" and in a manner consistent with applicable Law. If Seller assumes responsibility to bill and collect premium or contract fees attributable to the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers, the transition of such billing and collection responsibility from Purchaser and Company to Seller shall occur in no more than four installments. (d) As consideration for Company billing and collecting all premium and contract fees attributable to the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers, the Company shall be entitled to retain any premium or contract fees collected by the Company and attributable to the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers. -9- (e) In the event that Seller assumes responsibility to bill and collect premium or contract fees attributable to the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers, Seller shall provide Purchaser no later than the fifth (5TH) day of each month a monthly eligibility report showing all individuals eligible to obtain covered vision services under the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers. Seller shall remit to the Company any premium or contract fees attributable to the individuals reported to Purchaser by Seller as eligible to receive covered vision services under the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health New Subscribers no later than the fifth (5th) day of each month. In the event Seller pays Purchaser premium or contract fees for individuals who were not eligible to receive covered vision services under the Company prepaid vision HMO contracts or the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers, Seller shall receive from Purchaser up to a two month retrospective credit or refund of premium or contracts fees paid by Seller to Purchaser for such individuals. (f) As consideration for Seller billing and collecting all premium and contract fees attributable to the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers pursuant to subdivision (e), Purchaser shall pay Seller a service fee equal to fifteen percent (15%) of such premium and contract fees. Seller shall be authorized to deduct the service fee from the premium and contract fees payable to Purchaser for the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to the Joint Health Net Subscribers and remit to Purchaser only the net amount of such premium and contract fees. (g) During the period that the Company bills and collects any premium or contract fees attributable to the Company pre-paid vision HMO contracts and the HNL vision PPO and vision indemnity insurance policies issued to Joint Health Net Subscribers pursuant to subsection (c) above, Purchaser and its employees and agents shall not, without the prior written approval of Seller, contact any Joint Health Net Subscriber set forth on Schedule 2.6 or respond to ------------ any proposal to provide vision benefits to any Joint Health Net Subscriber for the purpose of selling or attempting to sell any vision product or service, and Purchaser shall not permit any of its Affiliates or their respective employees, representatives or agents to contact any Joint Health Net Subscriber for the purpose of selling or attempting to sell any vision product or service without obtaining the prior written consent of Seller, provided, however, that Purchaser -------- ------- and its Affiliates, employees and agents may communicate directly with Joint Health Net Subscribers solely for the purpose of performing their respective obligations under this Agreement. Section 2.7 Transfer of Government Sponsored. At or prior to the Closing, subject to receipt of any necessary regulatory approvals therefor, Seller shall cause the Government Sponsored Contracts to be removed or transferred from the Company. Section 2.8 Replacement of Employee Vision Benefits. (a) At a time determined at the sole discretion of Seller, Seller shall have the right to replace the pre-paid vision HMO contracts of the Company providing vision benefits to employees of Seller or any Affiliate of Seller with vision benefits provided by Seller's strategic partner. Purchaser shall provide Seller with information, including but not limited to, group -10- experience data, reasonably required by Seller to replace the pre-paid vision HMO contracts of the Company providing vision benefits to employees of Seller or any Affiliate of Seller with vision benefits provided by Seller's strategic partner. (b) Purchaser shall cause the Company to bill and collect from Seller or any Affiliate of Seller any premium or contract fees attributable to the Company pre-paid vision HMO contracts issued to the employees of Seller or any Affiliate of Seller until the earlier of (i) the date such pre-paid vision HMO contracts are cancelled, nonrenewed or otherwise replaced with vision benefits provided by Seller's strategic partner, or (ii) the date sixty (60) days after the date that Seller provides written notice to Purchaser of Seller's intent to assume responsibility to bill and collect premium or contract fees attributable to the Company pre-paid vision HMO contracts issued to employees of Seller or any Affiliate of Seller. Any billing and collection activities of the Company with respect to the employees of Seller or any Affiliate of Seller shall be conducted in the name of "Health Net" and in a manner consistent with applicable Law. (c) As consideration for Company billing and collecting all premium and contract fees attributable to the Company pre-paid vision HMO contracts issued to employees of Seller or any Affiliate of Seller, the Company shall be entitled to retain any premium or contract fees collected by the Company and attributable to the Company pre-paid vision HMO contracts issued to employees of Seller or any Affiliate of Seller. (d) In the event that Seller assumes responsibility to bill and collect premium or contract fees attributable to the Company pre-paid vision HMO contracts issued to employees of Seller or any Affiliate of Seller, Seller shall provide Purchaser no later than the fifth (5TH) day of each month a monthly eligibility report showing all individuals eligible to obtain covered vision services under the pre-paid vision HMO contracts issued by the Company to employees of Seller or any Affiliate of Seller. No later than the fifth (5TH) day of each month, Seller shall remit to the Company any premium or contract fees attributable to the individuals reported to Purchaser by Seller as eligible to receive covered vision services under the pre-paid vision HMO contracts issued by the Company to employees of Seller or any Affiliate of Seller. In the event Seller pays Purchaser premium or contract fees for individuals who were not eligible to receive covered vision services under the prepaid vision HMO contracts issued by the Company to employees of Seller or any Affiliate of Seller, Seller shall receive from Purchaser up to a two month retrospective credit or refund of premium or contracts fees paid by Seller to Purchaser for such individuals. As consideration for Seller billing and collecting all premium and contract fees attributable to the Company pre-paid vision HMO contracts issued to employees of Seller or any Affiliate of Seller, Purchaser shall pay Seller a service fee equal to fifteen percent (15%) of such premium and contract fees. Seller shall be authorized to deduct the service fee from the premium and contract fees payable to Purchaser for the Company pre-paid vision HMO contracts issued to employees of Seller or any Affiliate of Seller and remit to Purchaser only the net amount of such premium and contract fees. (e) Purchaser shall provide or cause the Company to provide all necessary or appropriate administrative services relating to the pre-paid vision HMO contracts of the Company providing vision benefits to the employees of Seller or any Affiliate of Seller until such contracts are cancelled, nonrenewed or otherwise replaced by vision benefits provided by Seller's strategic partner. -11- Section 2.9 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 2.9 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. After the Closing Date, Purchaser shall allow Seller and its representatives reasonable access to, and the right at Seller's written request and at its own expense to make and retain copies of any Books and Records transferred to Purchaser. Section 2.10 Administrative Services Agreement. On the date hereof, Seller and Purchaser or its Designee shall enter into the Administrative Services Agreement, substantially in the form attached hereto as Exhibit B, effective as --------- of the Closing Date, under which Purchaser shall provide through December 31, 2004 the administrative services necessary or appropriate for the transition of the vision business maintained by Health Net of Arizona, Inc. to Seller's strategic partner. Section 2.11 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 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 Vision 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 2.12 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 California providers of vision service and vision supplies under contract with HNL to provide such services and supplies in the event such contracts by their terms cannot be assigned by HNL to Purchaser. Section 2.13 Purchase Price. As consideration for the Transactions, Purchaser shall pay to Seller on the Closing Date, an amount equal to (i) three million US Dollars ($3,000,000) 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"). As additional consideration for the Transactions, Purchaser shall pay to Seller by the fifteenth (15th) day of the month following receipt by Company, fifty percent (50%) of network rental payments for the month of service commencing the month following the Closing through the month of service for December 2004 received by the Company pursuant to the Vision -12- Service Agreement by and between the Company and Pearle VisionCare, Inc. dated as of October 31, 2002. At Closing, Seller shall deliver to Purchaser the Closing Balance Sheet. The Purchase Price shall be subject to adjustment as provided in Section 2.17. Section 2.14 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." Except for that portion of the Excess Tangible Net Equity related solely to the Government Sponsored Contracts of the Company set forth in Schedule 2.14, Seller shall cause the Company to dividend or -------------- otherwise distribute to Seller prior to Closing, that portion of the Excess Tangible Net Equity authorized by the Department. If the Government Sponsored Contracts are removed from the Company prior to Closing, that portion of the Excess Tangible Net Equity related solely to the Government Sponsored Contracts of the Company and set forth in Schedule 2.14 shall be paid by Purchaser to ------------- Seller on the last calendar day of the first full calendar quarter following the Closing Date. Section 2.15 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 2.15. 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 2.15. -------------- Section 2.16 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 the last day of the calendar month in which (A) all necessary approvals from Governmental Authorities have been obtained by the parties hereto; (B) and the earlier of the following have occurred: (i) December 31, 2003; (ii) the Purchase and Sale Agreement dated as of April 7, 2003 between Purchaser and Seller for the purchase and sale of Health Net Dental, Inc. (the "HND Transaction") shall have terminated; or (iii) the HND Transaction closes (the "Closing Date"). Section 2.17 Adjustment to Purchase Price. (a) Not more than one hundred and eighty (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. -13- (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 Accountants, 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 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 2.17, (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 -14- 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 2.18 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 Administrative Services Agreement, duly executed by Health Net of Arizona, Inc.; (i) the Network Access Agreement, duly executed by HNL; and (j) the Transition Services Agreement duly executed by Seller. Section 2.19 Deliveries at the Closing by Purchaser. At the Closing, Purchaser shall deliver or cause to be delivered to Seller: (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 Administrative Services Agreement, duly executed by Purchaser or its Designee; -15- (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 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 and 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 Seller or its Affiliates are parties have been duly executed and delivered by Seller, or its 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 Affiliate, enforceable against Seller, or its Affiliate that is party to the Transaction Documents, 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 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 Vision Business, or the Company, or result in the creation or imposition of any Lien upon the property of Seller, the Company or the Vision 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 Vision 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 Vision 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. -16- 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. Except as set forth in Schedule 3.6 hereto, 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 Vision Business Assets owned by it and to conduct its Vision 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. Section 3.7 Capitalization of the Company. As of the date hereof, the Company's authorized capital stock consists of 500,000 shares of common stock, no par value per share, of which 486,380 shares 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. -17- 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 December 31, 2002 and the unaudited statutory financial statements for the first quarter of calendar year 2003 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 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 for commercial vision business and Government Sponsored Contracts of the Company dated as of December 31, 2002 are attached as Schedule 3.10(c). Except as reflected in the aged accounts ----------------- receivable reports 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 end ------------------- financial information for the HNL Vision Business (the "HNL Financial Information"). The HNL Financial Information, -18- at the time such HNL Financial Information was prepared, presents fairly, in all material respects, the unaudited results of operation of the HNL Vision 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 Vision 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 Vision 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 Vision Business Assets of HNL worth in excess of $50,000 in the aggregate; (e) the Company and HNL, solely with respect to HNL's Vision Business, have not made any material change in its accounting systems, policies or practices; (f) the Company and HNL, solely with respect to HNL's Vision 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 Vision Business, and HNL, solely with respect to HNL's Vision 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 Vision 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 -19- (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 Vision 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 Vision Business in California. 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 operation of the Vision Business under the regulations of the California Department of Insurance, 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 Vision 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 Vision 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 Vision 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 Vision Business of HNL. -20- 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 producer agreement that contains pricing terms materially different from the vision provider agreements referred to in Section 3.15(b) or the producer agreements referred to in Section 3.15(h). (b) Vision Provider Contracts. Seller has made available to Purchaser -------------------------- copies of all representative forms of contracts with providers of vision service and vision supplies in California 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 2,751 contracts with vision providers in California and HNL was party to approximately 3,704 contracts with vision providers in California. Attached hereto as Schedule 3.15(b) is a list of all California vision providers ---------------- who or which were a party to a vision provider contract with the Company or HNL as of December 31, 2002. (c) 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 Vision Business were a party as of December 31, 2002. As of December 31, 2002, the Company was a party to approximately 23 employer group agreements with 200 or more Subscribers, and HNL in connection with the Vision Business was party to approximately 9 employer group agreements with 200 or more Subscribers. (d) 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 Vision Business were a party as of December 31, 2002. As of December 31, 2002, the Company was a party to approximately 6,524 individual Subscriber agreements, and HNL in connection with the Vision Business was a party to approximately 5 individual Subscriber agreements. (e) Management Contracts. Schedule 3.15(e) lists all management --------------------- ----------------- services agreements, marketing, administrative services and third-party administrator contracts to which the Company or HNL in connection with its Vision Business were a party as of December 31, 2002. Copies of all such contracts have been made available to Purchaser. (f) ASO Contracts. As of December 31, 2002, neither the Company nor -------------- HNL was a party to any ASO contracts. -21- (g) Commission Agreements. Schedule 3.15(g) lists all the contracts ---------------------- ----------------- with other entities to which the Company or HNL in connection with its Vision Business were a party and by which the Company or HNL in connection with its Vision Business received commission or fee income as of December 31, 2002. Copies of all such contracts have been made available to Purchaser. (h) Producer Agreements. Seller has made available to Purchaser copies ------------------- of all representative forms of contracts with California producers with whom or which the Company or HNL in connection with the Vision Business were a party as of December 31, 2002. As of December 31, 2002, the Company paid commission in connection with the sale of vision HMO products to approximately 469 California producers, and HNL paid commission to approximately 168 California producers in connection with the sale of vision PPO and vision indemnity insurance products. Attached hereto as Schedule 3.15(h) is a list as of December 31, 2002 of all ----------------- California producers who or which were paid a commission by the Company in connection with the sale of its vision HMO products. (i) Network Lease Agreements. Schedule 3.15(i) lists all Network Lease ------------------------ ---------------- Agreements to which the Company was a party as of December 31, 2002 and under which the Company obtained as of such date access to providers of vision services and vision supplies in California. Copies of all such Network Lease Agreements have been made available to Purchaser. 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 Dental, Inc., an Affiliate of the Company, on the date hereof that support or service the Vision 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 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. -22- (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 temporary employees 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 vision services or vision supplies to Subscribers in connection with the Vision 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. 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 Vision Business Assets owned by it and such Vision Business Assets are used by HNL in the conduct of the Vision 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 is reasonably likely to 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 Vision 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. -23- 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 Vision 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. Section 3.24 Transactions With Affiliates. Except as disclosed on Schedule 3.24, to the Knowledge of Seller, other than vision benefits provided - -------------- by the Company or HNL to employees of Seller or its Affiliates, 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 Vision 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 Vision 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 -24- 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 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 -25- 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 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 -26- 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 2.17, 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, 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 for the transactions contemplated hereby, including but not limited to, the removal from Company prior to the Closing of any contracts or policies obligating the Company to provide vision benefits in connection with any Government Sponsored Contracts, the removal from the Company or termination of any contracts or policies obligating the Company to provide vision benefits to employees of Seller or any Affiliate of Seller, and the replacement commencing prior to the Closing of the vision benefits provided by the Company and HNL to Joint Health Net Subscribers with vision benefits provided by the strategic partner of Seller, and 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 Vision Business in the ordinary course and substantially in the same manner as heretofore carried on; -27- (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 Vision 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 Vision 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 Vision 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 Dental, 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 Dental, 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; (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 therefor, 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 Vision 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 Vision Business; -28- (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 vision HMO, vision PPO or vision indemnity contracts of the Company or HNL involving 1,000 or more Subscribers; (n) not modify, amend or renew any group vision HMO, vision PPO or vision 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 Vision 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 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. 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 -29- 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 Vision Business, and to personnel of Seller having knowledge of the Company or the Vision 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 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 Vision 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 -30- 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 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 -31- 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 therefor, except for that portion of the Excess Tangible Net Equity related solely to the Government Sponsored Contracts of the Company set forth in Schedule 2.14, Seller ------------- shall cause the Company to dividend or otherwise distribute to Seller that portion of the Excess Tangible Net Equity authorized by the Department. If the Government Sponsored Contracts are removed from the Company prior to Closing, that portion of the Excess Tangible Net Equity related solely to the Government Sponsored Contracts of the Company and set forth in Schedule 2.14 shall be paid ------------- by Purchaser to Seller on the last calendar day of the first full calendar quarter following the Closing Date. Section 5.10 Transfer of HNL Contracts. At the Closing, subject to receipt of necessary regulatory approvals therefor, 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 Replacement of Vision Benefits of Joint Health Net Subscribers. Purchaser and Seller shall comply with the provisions of Section 2.6 relating to the pre-paid vision HMO contracts of the Company and the vision PPO and vision indemnity insurance policies of HNL providing vision benefits to Joint Health Net Subscribers. Section 5.12 Replacement of Seller Employee Vision Contracts and Policies. Purchaser and Seller shall comply with the provisions of Section 2.8 relating to the pre-paid vision HMO contracts of the Company and the vision PPO and vision indemnity insurance policies of HNL providing vision benefits to employees of Seller or any Affiliate of Seller. Section 5.13 Transfer of Government Sponsored Contracts. At or prior to the Closing, subject to receipt of any necessary regulatory approvals therefor, Seller shall cause the Government Sponsored Contracts to be removed or transferred from the Company. Section 5.14 Reinsurance Agreement. Seller and Purchaser shall cause their respective Affiliates to enter into, effective as of the Closing Date, the Reinsurance Agreement. Section 5.15 Administrative Services Agreement. Seller and Purchaser or its Designee shall enter into, effective as of the Closing Date, the Administrative Service Agreement. Section 5.16 Transition Service Agreement. Seller and Purchaser shall negotiate in good faith and enter into on or after the Closing, the Transition Service Agreement. -32- Section 5.17 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 5.18 Termination of Contracts. Except for any (i) inter-Affiliate contracts necessary to administer the Vision Business on or after the Closing Date, and (ii) any contract under which the Company is obligated to provide, arrange for the provision of, or indemnify for the costs of vision services and supplies of the employees of Seller and its Affiliates, 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 5.18. Section 5.19 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 5.19 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. Any Employee not terminated or transferred by Seller prior to the Closing Date may be terminated by Purchaser, at its option, after the Closing Date utilizing the criteria applied by Purchaser for such terminations as of the date hereof. Any Employee terminated by Purchaser after Closing pursuant to this Section 5.19 shall be provided severance (i) according to Seller's severance policy set forth as Exhibit D hereto, if such Employee is terminated by Purchaser at Closing or ---------- within the six (6) month period immediately 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 or Health Net Dental, Inc. (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. -33- Section 5.20 Name Change. 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 Vision," "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. After one hundred and twenty (120) days after the Closing Date, 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 5.21 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. Section 5.22 Non-Competition. Except as provided below, during the sixty (60) months immediately following the Closing Date, neither Seller nor any of its Affiliates (a "Seller Entity") shall, without the prior written consent of Purchaser, directly or indirectly acquire a majority interest (whether by merger, consolidation, purchase of stock or assets, or otherwise) of any Competitor (as defined below). 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 commercial vision HMO, commercial vision PPO or commercial vision indemnity insurance business in California. Notwithstanding the foregoing, the restrictions contained in this Section 5.22 shall not prohibit the acquisition by a Seller Entity of ownership of an entity that offers or operates a commercial vision HMO, commercial vision PPO or commercial vision indemnity insurance business in California 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 commercial vision HMO, commercial vision PPO and commercial - -------- vision 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. 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: -34- 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. 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 Transfer of Government Sponsored Contacts. Seller shall have caused the Government Sponsored Contracts to be removed from the Company. Section 6.6 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 6.7 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 6.8 Administrative Services Agreement. Purchaser, or its Designee, and Health Net of Arizona, Inc. shall have entered into the Administrative Services Agreement. Section 6.9 Transfer of Books and Records. HNL and Seller shall transfer to Purchaser or its Designee the Books and Records. -35- Section 6.10 Reinsurance Agreement. HNL and SafeHealth shall have entered into the Reinsurance Agreement. Section 6.11 Network Access Agreement. Seller and Purchaser shall have entered into the Network Access Agreement. Section 6.12 Transition Services Agreement. Seller and Purchaser shall have entered into the Transition Services Agreement. 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. -36- Section 7.5 Purchase Price. Seller shall have received the Purchase Price in the manner specified in Section 2.13. Section 7.6 Administrative Services Agreement. Purchaser, or its Designee, and Health Net of Arizona, Inc. shall have entered into the Administrative Services Agreement. Section 7.7 Reinsurance Agreement. HNL and SafeHealth shall have entered into the Reinsurance Agreement. 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"). 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. -37- (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 $100,000 and such liability shall 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 $2,000,000. (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 -38- 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 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. (a) 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. (b) 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 vision HMO or vision indemnity insurance business. If a JAMS arbitrator with specific experience in the vision HMO or vision 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. (c) 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 -39- 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. (d) 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 Vision 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 -40- 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. 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 -41- reasonably practicable of any audit adjustment or proposed audit adjustment by any taxing authority that affects or may affect the Allocation. (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 (the "Additional Tax Reimbursement"). (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, and (iii) the amount of any additional taxes, both state and federal, owed by Seller as a result of the receipt of the Additional Tax Reimbursement. 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 9.5(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 -42- 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. 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 thirty (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 September 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 December 31, 2003. 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 5.7 (Confidentiality), Section 8.8 (Arbitration) and 11.2 (Fees and Expenses), and this Article X shall survive any such termination. -43- 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 -44- 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 contingency is not caused by the fault or negligence of such party. A contingency for purposes -45- 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. 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 HEALTH NET, INC. Seller By: /s/ B. Curtin Westen ----------------------- Name: B. Curtis Westen Title: Senior Vice President, General Counsel and Secretary -46- 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 2.6 Joint Health Net Subscribers 2.14 Excess Tangible Net Equity Related to Government Sponsored Contracts 2.15 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(b) Vision Provider Contracts 3.15(e) Management Contracts 3.15(g) Commission Agreements 3.15(h) Producer Agreements -47- 3.15(i) Network Lease Agreements 3.16(a) Employees 3.16(b) Employer Contracts 3.16(c) Employer Loans and Guarantees 3.16(d) Consultant List 3.16(e) Leased Employers and Temporary Employees 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 5.19 Employee Benefit Plans (Purchaser) -48- EXHIBIT A REINSURANCE AGREEMENT --------------------- -49- EXHIBIT B ADMINISTRATIVE SERVICES AGREEMENT --------------------------------- -50- EXHIBIT C NETWORK ACCESS AGREEMENT ------------------------ -51- EXHIBIT D HEALTH NET SEVERANCE POLICY --------------------------- EX-10.49 4 doc3.txt EXHIBIT 10.49 TO CURRENT REPORT ON FORM 8-K DATED AS OF JUNE 30, 2003 --------------------------------------------------------------------- ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT THIS ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT (this "Agreement"), dated as of June 30, 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 Vision 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 Vision 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 Vision 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 Vision 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 June 30, 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. ------ "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 Vision Services pursuant to Vision Policies. "Non-Novated Vision Policies" shall have the meaning set forth in Section ----------------------------- 2.04. "Novated Vision Policies" means those Vision Policies transferred to the ------------------------- Reinsurer by novation as of the Novation Date and under which Vision Policies the Reinsurer shall have become the successor to the Company under the Vision 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. ----------- "Policy Liabilities" means the Company's gross liabilities and obligations ------------------- arising under or in connection with the Vision 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 Vision 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 Vision 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 Vision Policies; -2- (d) any assessment required by any insurance guaranty, insolvency, comprehensive health association or other similar fund maintained by any jurisdiction relating to the Vision 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 Vision 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 Vision Services provided to Members under the Vision 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. -------- "Vision 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 resident or with their principal place of business in California that obligate the Company to provide, arrange for the provision of, or indemnify for the cost of vision care services and vision 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, Vision 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 vision care services and vision supplies pursuant to any Government Sponsored Contracts, or 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 vision care services and vision supplies to employees of the Company or any Affiliate of the Company. "Vision Services" shall have the meaning set forth in Section 7.07. ---------------- -3- ARTICLE II BUSINESS TRANSFERRED AND REINSURED ---------------------------------- Section 2.01. Assignment of Vision 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 Vision Policies identified in 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 Vision 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 Vision 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 Vision Policies (each such Vision Policy being referred to herein as a "Novated Vision Policy" and --------------------- Novated Vision Policies shall include any such subsequently novated Vision Policies). If the Reinsurer does not for any reason assume by novation any Vision Policy, then the Reinsurer shall accept and reinsure, on an indemnity reinsurance basis, 100% of the Policy Liabilities related to such Non-Novated Vision 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 Vision Policies under applicable Law, as of the Novation Date (i) the Reinsurer shall be the successor to the Company under such Novated Vision Policies as if such Novated Vision 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 Vision 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 Vision 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 Vision Policies, (iv) the Members under such Novated Vision Policies shall have the right to file claims arising under such Novated Vision Policies directly with the Reinsurer and shall have a direct right of action for indemnification, benefits and services under such Novated Vision 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 Vision 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 Vision 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 Vision Policies (including those Vision Policies that are identified in Schedule 2.01 attached hereto and made a part hereof) -------------- -4- which the Reinsurer has not for any reason (including the lack of any required approval or consent of a party to a Vision Policy) as of the Effective Time assumed by novation (each such Vision Policy being referred to herein as a "Non-Novated Vision Policy"). Notwithstanding the foregoing, the term --------------------------- "Non-Novated Vision Policy" shall not include any Vision Policy from and after the date of its assumption by novation at any time by the Reinsurer. 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 Vision Policies. ARTICLE III ASSUMPTION CERTIFICATES; OPTION LETTERS --------------------------------------- Section 3.01. Member Materials. The Reinsurer shall prepare and ----------------- deliver to every party to a Vision 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 Vision 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 Vision Policy shall take effect until the earlier of the acceptance of the assumption by the party to a Vision 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 Vision 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 Vision Policies are transferred and assumed by the Reinsurer by novation and all obligations of the Reinsurer hereunder have been discharged in full. -5- 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 Vision Policies. In the event that the Company receives any premium or other consideration with respect to a Vision 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 Vision 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 Vision Policies. As additional consideration for the assumption by ------------------------- Reinsurer on an indemnity reinsurance basis of 100% of the Policy Liabilities under the Non-Novated Vision 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, 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 Vision 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 Vision --------------------------------------------------------- Policies. As additional consideration for the assumption by novation by - -------- Reinsurer of the Novated Vision Policies, the Company shall (i) transfer to Reinsurer 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, loss, and loss adjustment expense (including losses that have been incurred but not reported) reserve, if any, attributable to claims arising under the Novated Vision 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 Vision Policies assumed by the Reinsurer under this Agreement. -6- 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 Vision 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 or other amounts due with respect to the Non-Novated Vision 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 Vision 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. -7- 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 Vision 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 Vision Policies. ARTICLE VII VISION POLICY ADMINISTRATION; REPORTING --------------------------------------- Section 7.01. Administration of Non-Novated Vision Policies. The ------------------------------------------------- Company hereby grants the Reinsurer authority in all matters relating to administration of the Non-Novated Vision 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 Vision Policies, with full power and authority to act in the name, place and stead of the Company with respect to the Non-Novated Vision Policies. Without limiting the foregoing, the Reinsurer shall provide reasonable advance notice to the Company of its intent to cancel specific Non-Novated Vision Policies for non-payment of premium. Unless the Company objects to the proposed cancellations within five calendar days of receipt of the notice from the Reinsurer, the Reinsurer shall have the right to cancel the referenced Non-Novated Vision Policies on behalf of the Company for non-payment of premium in a manner consistent with applicable Law. If the Company objects to the proposed cancellation of any Non-Novated Vision Policy for non-payment of premium, the Company shall indemnify the Reinsurer for any unpaid premium with respect to any such policy until such policy is cancelled. 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 Vision Policies, which shall include, but not be limited to, Services required for the proper administration of the Non-Novated Vision 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 Law, 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 Vision Services under the Non-Novated Vision 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 -8- foregoing Vision 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 Vision 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 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 Vision 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 Vision 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 Vision Policies. All inquiries and complaints concerning the Non-Novated Vision 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 Vision 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 -9- 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 Vision 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 all reports and filings with respect to the Non-Novated Vision 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 vision care services and supplies ("Vision ------ Services") required to satisfy all obligations with respect to the provision of - -------- Vision Services to Members and their dependents under the Non-Novated Vision Policies. The Reinsurer shall be responsible for the recruitment, credentialing and management of, and for contracting with, or gaining access to vision care and service providers adequate for the delivery of all Vision Services to Members required by or incidental to the Non-Novated Vision Policies. Section 7.08. Administration of Novated Vision 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 Vision Policies shall be the sole responsibility of the Reinsurer. Section 7.09. Communications Relating to Novated Vision 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 Vision 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 Vision Policy occurs, the Reinsurer shall provide to the Company a report indicating all Vision 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, -10- 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, 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 Vision Policy, the Reinsurer hereby agrees that all amounts due under this Agreement with respect to the Non-Novated Vision 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 -11- made directly to the Company or to its conservator, liquidator, or statutory successor, except where the Non-Novated Vision 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 Vision 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. Section 10.03. Novated Vision Policies. All amounts due a Member under ----------------------- the Novated Vision Policies shall be payable by the Reinsurer on the basis of the liability of the Reinsurer under the Novated Vision Policies, without diminution because of the insolvency of the Company. Any benefits or amounts due to Members with respect to a Novated Vision Policy shall be paid or performed by the Reinsurer in accordance with the Novated Vision 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 vision HMO or vision indemnity insurance business. If a JAMS arbitrator with specific experience in the vision HMO or vision 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. -12- 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. 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 -13- 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 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 -14- the Parties with respect to the transactions contemplated hereby, and supersedes all prior agreements and understandings, written or oral, with respect thereto. 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. 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 Vision 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 Law of the State of California. -15- 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. 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 By: /s/ James E. Buncher ----------------------------------------- James E. Buncher President and Chief Executive Officer HEALTH NET LIFE INSURANCE COMPANY By: /s/ Douglas King ----------------------------------------- Douglas King President -16- SCHEDULE 2.01 HEALTH NET LIFE INSURANCE COMPANY VISION POLICIES The Vision Policies identified by group and individual contract number and name: To be determined as of the Effective Time -17- SCHEDULE 7.02 SERVICES 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 Vision Policies, all services reasonably necessary for, and incident to the proper management and administration of, the Non-Novated Vision Policies, including but not limited to the following services: A. All Member services relating to the Non-Novated Vision Policies including the following: 1. Billing and collection of premiums for Non-Novated Vision Policies that are not issued to an individual, employer or other group sponsor together with a medical product of the Company or any Affiliate of the Company; 2. Setting renewal rates in a manner consistent with the rates and rating plans filed by the Company with applicable Governmental Authorities; 3. Process and payment of claims; 4. Handle Member service requests (including adding new Members to group Vision Policies, deleting Members from group Vision Policies), administration of COBRA responsibilities, inquiries and complaints relating to the Non-Novated Vision Policies; 5. Preparation and mailing of premium notices on a timely basis to Members and parties to the Non-Novated Vision Policies; transmission of additional premium notices, lapse notices, reinstatement offers and other notices to Members and parties to Vision Policies; 6. Underwriting and processing of any and all policy changes and reinstatements; 7. Member mailings of any necessary endorsements or other contract documents; 8. 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; 9. Administration of any agreement providing for the payment of commissions relating to any Non-Novated Vision Policy; 10. Development, as necessary, and maintenance of computer systems required to provide the Services. -18- 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. -19- 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. -20- 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. -21- 3. Permitted Uses and Disclosures by Business Associate General Use and Disclosure Provisions 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. -22- (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. 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. -23- (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. (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. -24- EXHIBIT A --------- TO ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT MEMBER MATERIALS NOTICE OF TRANSFER (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 vision policy from Health Net to SafeHealth. This assumption will be effective as of 12:01 a.m. Pacific Time, on _______________, 2003. SafeHealth Life Insurance Company is licensed to provide vision insurance products in California. 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 vision 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. -25- 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 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 vision insurance as promptly as practicable after the transfer of its vision 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 vision 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 vision 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 (800) 962-9633. Written inquiries may be mailed to: SafeHealth at 95 Enterprise, Suite 100, Aliso Viejo, California 92656-2605. Sincerely, _________________________________ _________________________________ SAFEHEALTH LIFE INSURANCE HEALTH NET LIFE INSURANCE COMPANY COMPANY -26- 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 vision insurance business. SafeHealth will replace Health Net under your vision 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 vision 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 (800) 962-9633. Written inquiries may be mailed to: SafeHealth at 95 Enterprise, Suite 100, Aliso Viejo, California 92656-2605. Sincerely, _________________________________ _________________________________ SAFEHEALTH LIFE INSURANCE HEALTH NET LIFE INSURANCE COMPANY COMPANY -27- 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 vision 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 95 Enterprise, Suite 100 Aliso Viejo, California 92656-2605 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 -28- NOTICE OF REJECTION OF ASSUMPTION [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 vision 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 VISION 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 -29- 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 vision 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 95 Enterprise, Suite 100 Aliso Viejo, California 92656-2605 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 vision 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 -30- EX-10.50 5 doc4.txt EXHIBIT 10.50 TO CURRENT REPORT ON FORM 8-K DATED AS OF JUNE 30, 2003 --------------------------------------------------------------------- NETWORK ACCESS AGREEMENT This NETWORK ACCESS AGREEMENT (the "Agreement") is made and entered into this 30th day of June, 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 vision care and vision services to provide quality vision care services in a timely and efficient manner consistent with good vision practices at contracted rates; WHEREAS, pursuant to the Purchase and Sale Agreement by and between Health Net, Inc. and SafeGuard Health Enterprises, Inc. dated June 30, 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 Vision Providers (as defined herein) under contract with HNL to provide vision services or vision supplies to HNL Subscribers (as defined herein) in California 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 Vision Providers with vision 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 Vision 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 June 30, 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 Vision Provider for the -------- provision of Covered Services to HNL Subscribers in force as of the Effective Date. "Covered Services" means those vision services and vision supplies that are ---------------- described in a Subscriber Agreement. "Dispute" shall have the meaning set forth in Section 7.01. ------- "Effective Date" means the Closing Date of the Purchase and Sale Agreement --------------- by and between Health Net, Inc. and SafeGuard Health Enterprises, Inc. dated June 30, 2003. "HNL Subscriber" means the person who resides in California and 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 Vision Policies (as defined in the Assumption and Indemnity Reinsurance Agreement) shall be considered HNL Subscribers and Non-Novated Vision 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. ------ "NCQA Credentialing Standards" shall have the meaning set forth in Section ----------------------------- 3.04. "Network List" shall have the meaning set forth in Section 2.04. ------------- "Non-Novated Vision 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 Vision Policies" shall have the meaning set forth in the ------------------------- Assumption and Indemnity Reinsurance Agreement. "Participating Vision Provider" means any Vision Provider who or which has ------------------------------ not consented to the assignment by HNL of their Contract to SafeHealth, but who or which has otherwise consented to provide vision services or vision supplies to SafeHealth Subscribers in California on the same terms and conditions as contained in the Contract with such Vision -2- Provider and who or which SafeHealth determines meets the credentialing and contracting criteria established by SafeHealth. "SafeHealth Subscriber" means the person who resides in California and 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 Vision Policies (as defined in the Assumption and Indemnity Reinsurance Agreement) shall be considered SafeHealth Subscribers and Novated Vision Policies shall be considered SafeHealth Subscriber Agreements. "Strategic Vision Partner" shell have the meaning set forth in Section -------------------------- 3.09. "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. "Vision Provider" means a vision service provider, or a vision supply ---------------- provider who or which as of the Effective Date is party to a Contract with HNL to provide vision services or vision supplies to HNL Subscribers who reside in California. 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 Vision Providers who or which allow such access under their Contracts for the purpose of providing vision services or vision supplies to SafeHealth Subscribers. SafeHealth shall cooperate with HNL to arrange access by SafeHealth Subscribers to any Vision 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 Vision Providers. HNL and SafeHealth shall ----------------------------- jointly prepare and deliver to each Vision Provider a notice informing each Vision Provider of the agreement reached between HNL and SafeHealth for the transfer of the Vision Policies from HNL to SafeHealth pursuant to the Assumption and Indemnity Reinsurance Agreement and requesting each Vision Provider to consent to the assignment by HNL of such Vision Provider's Contract to SafeHealth (the "Notice of Transfer"). The expense of preparing and delivering the Notice of Transfer to each Vision 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 Vision Providers to the assignment by HNL of their Contracts to SafeHealth. Upon receipt of a consent by a Vision 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 Vision Provider Contracts to SafeHealth. Section 2.3 Access to Vision Providers. SafeHealth understands and ----------------------------- acknowledges that certain Vision Providers may elect not to consent to the assignment of their Contract by HNL to SafeHealth. When HNL has information that a Vision Provider has indicated that he, she or it will not consent to the assignment by HNL of such Vision Provider's Contract to SafeHealth, -3- HNL shall use its commercially reasonable efforts to cause each such Vision Provider selected by SafeHealth to provide vision services or vision supplies to SafeHealth Subscribers on the same basis, terms and conditions as such Vision Provider has agreed to 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 Vision Providers. Section 2.4 Network List. Thirty (30) calendar days prior to the ------------- Effective Date, HNL shall deliver to SafeHealth a list of Vision 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 Vision 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 Vision Providers and to maintain the sufficiency and accuracy of SafeHealth's claim processing and payment systems, (ii) a list of all Vision Providers who or which have consented to the assignment of their Contract from HNL to SafeHealth, and (iii) a list of all Vision Providers who or which have agreed to be Participating Vision Providers. Section 2.5 Maintenance of Network. HNL shall use commercially ------------------------ reasonable efforts to maintain and enforce all provisions of the Contracts with Participating Vision 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 Vision 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 Vision Provider's intention to terminate his, her or its Contract. Nothing herein shall preclude HNL from terminating any Participating Vision Provider either for cause or at the direction of SafeHealth in a manner consistent with the provisions of the Contract of each Participating Vision Provider. If the Contract of a Participating Vision Provider terminates, the obligation of HNL to use its commercially reasonable efforts to cause such Participating Vision Provider to provide vision services or vision 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 Vision Provider, including without limitation (i) any action against a Participating Vision 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 Vision Provider's duties or obligations under its Contract. -4- Section 2.8 Grievance Procedure. HNL and SafeHealth shall cooperate to ------------------- resolve any questions or complaints involving a Participating Vision Provider related to vision services or vision supplies provided to SafeHealth Subscribers. ARTICLE III OBLIGATIONS OF SAFEHEALTH ------------------------- 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 Vision 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 vision services or vision supplies to SafeHealth Subscribers. If any Vision Provider enters into a direct contractual relationship with SafeHealth, HNL's obligations to SafeHealth with respect to such Vision Provider pursuant to this Agreement shall cease, provided, however, -------- ------- HNL shall maintain its Contract with any Vision Provider who or which contracts directly with SafeHealth if necessary to provide HNL Subscribers under Non-Novated Vision Policies with access to an adequate network of Vision Providers. Section 3.2 Agreements with Contracting Providers. SafeHealth hereby -------------------------------------- accepts and agrees to comply with all provisions of the Contracts with Participating Vision Providers, including but not limited to, the responsibility to make payment to any Participating Vision Provider for vision services or vision supplies provided by the Participating Vision Providers to SafeHealth Subscribers according to the fee schedule applicable to each Contract. Any fee schedule maintained by HNL with a Participating Vision 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 Vision Provider in a manner consistent with the terms of the Contract with such Participating Vision 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 Vision Providers. Section 3.3 Payment of Vision Provider Fees. ----------------------------------- (a) SafeHealth shall retain full responsibility for the payment of all fees related to vision services and vision supplies provided to SafeHealth Subscribers by Participating Vision 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 Vision Providers pertaining to SafeHealth Subscribers. (b) HNL shall promptly forward to SafeHealth any claims for fees received by HNL from Participating Vision Providers pertaining to SafeHealth Subscribers and payable by SafeHealth, unless SafeHealth has made alternate arrangements in advance with a Participating Vision Provider to submit claims directly to SafeHealth for payment. SafeHealth shall pay the claims for fees of Participating Vision Providers for vision services or vision supplies provided to SafeHealth Subscribers as soon as practical, but subject to the following minimum standard: -5- 95% of the monthly volume of clean claims shall be paid or denied within thirty (30) calendar 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 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 re-credential the ------------- Participating Vision Providers at least every thirty-six (36) months utilizing the credentialing standards of the National Committee of Quality Assurance Standards for Accreditation of Managed Care Organizations ("NCQA Credentialing Standards"). If a Participating Vision Provider fails to meet the NCQA Credentialing Standards, upon the request of SafeHealth, HNL shall terminate the Contract of such Participating Vision Provider in accordance with its terms. SafeHealth shall require the Participating Vision 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 Vision Providers. Section 3.5 Quality of Service. SafeHealth shall monitor the quality ------------------- of Covered Services provided by the Participating Vision 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 Vision 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 Vision Provider corrects the specified deficiency, or (ii) direct HNL to terminate the Contract of such Participating Vision Provider in accordance with its Terms. HNL shall cooperate with SafeHealth and use reasonable efforts to obtain the cooperation of Participating Vision 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 Vision 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 Vision Providers pursuant to Section 3.01. SafeHealth shall not otherwise use the names, symbols, trademarks or service marks of Participating Vision Providers without the prior written consent of HNL and the Participating Vision 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. -6- 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. Section 3.9 Cooperation with Strategic Vision Partner. SafeHealth --------------------------------------------- acknowledges and agrees that Health Net, Inc. intends to enter into a strategic relationship with another party (the "Strategic Vision Partner") to sell Health Net private labeled vision products in California, Arizona and Oregon and that as part of such relationship, Health Net will assist the Vision Strategic Partner to obtain contracts with certain Vision Providers in California. SafeHealth shall provide reasonable assistance and information necessary for the Strategic Vision Partner to obtain contracts with the Vision Providers in California selected by the Strategic Vision Partner. 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) calendar days written notice of its intention to terminate upon the occurrence of any of the following: Section 4.4 If a party fails to remit any amounts due under this Agreement within ninety (90) calendar days of the date such amount is due and payable. (a) If a party breaches a material term, covenant or condition of this Agreement and fails to cure such breach within thirty (30) calendar 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) calendar 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. (b) 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. (c) 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 -7- any Governmental Authority, the other party shall have the right to terminate this Agreement immediately. (d) 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 4.5 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 vision providers other than the Vision Providers in a manner consistent with the SafeHealth Subscribers' need for continuity of vision services and vision supplies. 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 Vision Providers. SafeHealth acknowledges that all ----------------- Participating Vision 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 optometry by any Participating Vision 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 Vision 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 Vision 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 -8- 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 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 vision HMO or vision indemnity insurance business. If a JAMS arbitrator with specific experience in the vision HMO or vision indemnity insurance business is not available, the arbitrator must have general experience in the health insurance industry. Within ten (10) calendar 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) calendar days after the appointment of the arbitrator. The other party hereto shall then have twenty (20) calendar 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) calendar days to render his or her decision. -9- 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. 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 Vision 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 Vision Provider or any other person for any vision services or vision 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 Vision 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, -10- without limitation, Losses arising out of SafeHealth's performance or non-performance of the obligations under the Contracts with Participating Vision 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 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 -11- 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 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. -12- 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 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. -13- 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. 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 Vision 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/ Douglas King -------------------------------------- Name: Douglas King Title: President SAFEHEALTH LIFE INSURANCE COMPANY /s/ James E. Buncher -------------------------------------- Name: James E. Buncher Title: President and Chief Executive Officer -14- EX-10.51 6 doc5.txt EXHIBIT 10.51 TO CURRENT REPORT ON FORM 8-K DATED AS OF JUNE 30, 2003 --------------------------------------------------------------------- ADMINISTRATION AGREEMENT This Administration Agreement is entered into this 30th day of June, 2003, by and among Health Net of Arizona, Inc. ("HNT-AZ"), an Arizona corporation, 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"). WHEREAS, HNT-AZ is a duly licensed health care services organization organized pursuant to Arizona Revised Statutes Sec. 20-1051 et seq. HNT-AZ issues benefit agreements to individuals, employer groups and other entities. The benefit agreements include medical health maintenance organization agreements and vision health maintenance organization agreements. WHEREAS, HNL is duly licensed in Arizona to provide vision PPO and vision indemnity insurance benefits to Arizona residents; WHEREAS, SafeHealth represents and warrants that it is duly licensed and qualified to provide the administrative services specified in this Agreement. WHEREAS, pursuant to a Purchase and Sale Agreement by and between Health Net, Inc. and SafeGuard Health Enterprises, Inc. dated June 30, 2003 ("Purchase and Sale Agreement"), SafeGuard Health Enterprises, Inc. agreed, among other things, to provide for the transition of the vision health maintenance organization business provided by HNT-AZ, and the vision PPO and vision indemnity insurance business provided in Arizona by HNL through December 31, 2004. WHEREAS, HNT-AZ, HNL and SafeHealth intend by entering into this Agreement that SafeHealth shall provide administrative and other services specified in this Agreement on behalf of HNT-AZ and HNL in connection with the Benefit Agreements described in Appendix B to this Agreement ("Benefit Agreements"). ARTICLE ------- CERTAIN DEFINITIONS ------------------- Capitalized terms used in this Agreement and not otherwise defined shall have the meanings given such terms in the Purchase and Sale Agreement. ARTICLE ------- RELATIONSHIP OF PARTIES ----------------------- Section 2.1 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. HNT-AZ and HNL agents, officers, and employees shall not be considered or construed to be the employees of SafeHealth for any -1- purpose, and SafeHealth's agents, officers and employees shall not be considered or construed to be the employees of HNT-AZ or HNL for any purpose. Section 2.2 Receipt of Premium. Payment to SafeHealth of premiums or ------------------- charges with respect to the Benefit Agreements by or on behalf of the HNT-AZ or HNL insureds or subscribers shall be considered receipt by HNT-AZ or HNL as appropriate. The payment of return premiums or claims by HNT-AZ and HNL to SafeHealth is not considered payment to the insured, or claimant until the payment is received by the insured or claimant. Nothing in this Section 2.02 shall limit the rights of either HNT-AZ or HNL against SafeHealth resulting from SafeHealth's failure to make payments to HNT-AZ or HNL or any of their insureds, Subscribers or claimants. Section 2.3 Notice of Changes. SafeHealth shall inform HNT-AZ and HNL ----------------- in writing: (a) within thirty (30) calendar days of any changes in its computer systems, including hardware or software, that could materially affect the ability of SafeHealth to perform its obligations under this Agreement; (b) within ten (10) calendar days of a change of 25% or more in the direct or indirect ownership of SafeHealth, and of any changes in the licensing of SafeHealth material to the services rendered by SafeHealth under this Agreement; and (c) within ten (10) calendar days of changes in governmental approvals, the filing with a Governmental Authority of a complaint against SafeHealth, or the filing of a lawsuit against SafeHealth if the governmental approval, complaint or lawsuit is either (i) directly related to the services rendered by SafeHealth under this Agreement or to HNT-AZ or HNL Benefit Agreements, or (ii) the amount involved is in excess of $1,000,000. Section 2.4 Limitation of Authority. The authority of SafeHealth is ------------------------- limited to the performance of the Administrative Services specified in this Agreement. SafeHealth has no authority to modify, waive, add to or delete any provision of the Benefit Agreements. SafeHealth shall not represent to a third party that it has authority that is not provided in this Agreement. HNT-AZ and HNL shall at all times exercise ultimate control over their respective assets and operations and the ultimate authority regarding coverage or the interpretation of any Benefit Agreement shall remain at all times with HNT-AZ and HNL. Notwithstanding anything to the contrary in this Agreement, HNT-AZ and HNL shall (a) retain custody of, responsibility for, and control of all investments; (b) own, have custody of, and keep their general corporate accounts, books, and records; (c) own all of the accounts, books, and records of their business; (d) have an ultimate veto right on underwriting; (e) have the ultimate right to cancel any risk; (f) have ultimate responsibility for and at least general control of claims adjustments and claim payments; (g) retain the right to cancel this Agreement and discharge SafeHealth in the event SafeHealth fails to perform satisfactorily according to the terms of this Agreement. Section 2.5 Representations Regarding Coverage. SafeHealth shall not ----------------------------------- make any representations to applicants for coverage under the Benefit Agreements or to insureds, -2- Subscribers or claimants, regarding the existence or extent of coverage which are inconsistent with the terms and conditions of coverages available from HNT-AZ or HNL under the applicable Benefit Agreement. SafeHealth shall make known to any applicant, insured or Subscriber the full scope and effect of all exclusions and limitations under the applicable Benefit Agreement. Section 2.6 Branding. None of the parties shall make use of any other -------- party's trade marks, service marks, trade names or logos, including domain names, electronic or written content or other materials, descriptions or representations of any kind that mentions another 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 parties with such consent to utilize their respective Branding where reasonably necessary for the other parties to perform their duties and exercise their 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 Arizona consistent with this Agreement. ARTICLE ------- ADMINISTRATIVE SERVICES ----------------------- Section 3.1 Services of SafeHealth. SafeHealth shall provide HNT-AZ ------------------------ and HNL the administrative services described in Appendix A (the "Administrative Services") and such other services and responsibilities as may be expressly agreed upon in writing by the parties. Section 3.2 Facilities, Equipment and Personnel. SafeHealth shall -------------------------------------- maintain all facilities, equipment and trained personnel necessary to perform the Administrative Services under this Agreement. Section 3.3 Performance Standard. The Administrative Services provided -------------------- to HNT-AZ and HNL by SafeHealth pursuant to this Agreement shall at all times be consistent with the performance standards set forth in Schedule 3.03 and all ------------- applicable laws, regulations, and regulatory actions and pronouncements. In the event SafeHealth fails to perform the Administrative Services in a manner consistent with the performance standards set forth in Schedule 3.03, the ------------- Service Fee payable to SafeHealth shall be reduced by the amounts and in the manner set forth in Schedule 3.03. -------------- Section 3.4 Performance by Affiliates. The parties hereto recognize --------------------------- and acknowledge that the Administrative Services to be performed by SafeHealth may, by their nature, require specific legal authority to perform or will be more effectively provided by Affiliates of SafeHealth. In connection with the provisions of such Administrative Services, SafeHealth's Affiliates shall be subject to the terms and conditions of this Agreement as if such Affiliates were themselves parties hereto. Section 3.5 Notice Regarding Relationship. To the extent required by ------------------------------ applicable law, SafeHealth shall provide written notice to persons named as insureds or Subscribers under the Benefit Agreements, advising them of the identity of and relationships among SafeHealth, the insured or Subscriber, and HNT-AZ or HNL. If SafeHealth collects funds from the insured or Subscriber, SafeHealth shall provide the insured or Subscriber with written notice of the -3- premium charged by HNT-AZ or HNL for the Benefit Agreement. SafeHealth shall provide the notice in accordance with the provisions of the Benefit Agreement, but no less than thirty (30) calendar days before the premium charges become effective. Section 3.6 Enrollment Reports. HNT-AZ and HNL shall prepare periodic ------------------- and timely reports showing all Benefit Agreements sold, renewed or terminated, identifying individuals who are enrolled in each Benefit Agreement, and such other enrollment information required by SafeHealth to perform its duties under this Agreement. Such reports shall be made by HNT-AZ and HNL 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 SafeHealth. HNT-AZ and HNL shall each prepare periodic reconciliations of the enrollment information in their possession. HNT-AZ and HNL shall take all reasonable steps to ensure that the electronic documentation will be accurate and that SafeHealth may rely on such information in determining eligibility. ARTICLE ------- RECORDS, MAINTENANCE AND AVAILABILITY, INSPECTION AND AUDIT ----------------------------------------------------------- Section 4.1 Maintenance of Records. SafeHealth shall maintain adequate ---------------------- records (including copies of all correspondence) of all activities and transactions relating to the Administrative Services performed under this Agreement, and records clearly recording the deposits in and withdrawals from the disbursement accounts on behalf of HNT-AZ and HNL during the period this Agreement remains in force and for a period of five years thereafter. Such records shall be the property of HNT-AZ or HNL as appropriate. At the end of five years, the records shall at HNT-AZ's and HNL's option and at HNT-AZ's and HNL's written direction, either be transmitted to HNT-AZ or HNL or destroyed. If no written instructions are received within sixty (60) calendar days after notice to HNT-AZ and HNL of the end of the five-year period, SafeHealth may transmit the records to HNT-AZ and HNL at HNT-AZ's and HNL's expense. SafeHealth may retain a copy of any records of activities and transactions on behalf of HNT-AZ and HNL pursuant to this Agreement. Section 4.2 Information Maintenance Procedures. The records shall be ----------------------------------- maintained in accordance with prudent information and data maintenance procedures approved by HNT-AZ and HNL. Prudent information and data maintenance procedures require, at a minimum, that backup data and records (including software and operating systems) be maintained off-site in a secure manner. Section 4.3 Inspection of Records. All records maintained by ----------------------- SafeHealth under this Agreement shall be made available upon reasonable written notice during normal business hours for inspection by HNT-AZ or HNL or their authorized representatives or by a legally authorized and properly identified governmental authority. The records, or copies of the records, shall be delivered to HNT-AZ or HNL upon request at HNT-AZ's or HNL's expense. Section 4.4 Access to Records. SafeHealth shall permit HNT-AZ and HNL ----------------- reasonable access during normal business hours to its premises, records and personnel for periodic inspection or audit upon reasonable written notice by HNT-AZ or HNL and at HNT-AZ's or HNL's expense. Inspection or audit may include all aspects of this Agreement, -4- including relevant financial information. Any corrective action required by HNT-AZ or HNL as a result of an inspection or audit shall be communicated in writing to SafeHealth. SafeHealth shall, within a reasonable period of time specified by HNT-AZ or HNL, but not more than sixty (60) calendar days, take the corrective action. ARTICLE ------- COMPENSATION ------------ Section 5.1 Service Fee. Except as provided in Section 9.02, HNT-AZ ------------ and HNL shall pay SafeHealth a fee equal to fifteen (15%) percent of the claims paid by SafeHealth under the Benefit Agreements for all Administration Services relating to the Benefit Agreements (the "Service Fee"). Section 5.2 Payment of Fee. The Service Fee shall be due and payable --------------- by HNT-AZ and HNL to SafeHealth ten (10) calendar days after receipt of an invoice for such Service Fee from SafeHealth. Section 5.3 Adjustments. If it is determined that there has been ----------- either an overpayment or an underpayment of the Service Fee, the parties shall either reimburse or remit the amount of the over or under payment to the party entitled thereto within fifteen (15) calendar days of notification of such overpayment or underpayment. ARTICLE ------- DISPUTE RESOLUTION ------------------ Section 6.1 Meet and Confer. The parties shall meet and confer in good --------------- faith on all matters of common interest or disputes between the parties hereto relating to, arising out of, or in connection with any provision of this Agreement (hereinafter a "Dispute") which materially affect this Agreement, including but not limited to, any amendments or appendices to this Agreement. Section 6.2 Arbitration. In the event any Dispute cannot be resolved ----------- pursuant to Section 6.01, 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 6.3 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 vision HMO or vision indemnity insurance business. If a JAMS arbitrator with specific experience in the vision HMO or vision indemnity insurance business is not available, the arbitrator must have general experience in the health insurance industry. Within ten (10) calendar days of notice of a Dispute, the parties to the Dispute shall use their best efforts to choose a mutually agreeable arbitrator. If the parties to the Dispute cannot agree on an arbitrator, the arbitrator shall promptly be selected by JAMS. -5- Section 6.4 Procedures. The party submitting a Dispute to arbitration ---------- hereunder shall present its case to the arbitrator and the other parties to the Dispute in written form within twenty (20) calendar days after the appointment of the arbitrator. The other parties to the Dispute shall then have twenty (20) calendar 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) calendar days to render his or her decision. Section 6.5 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 6.6 Expenses. Each party to an arbitration shall bear its own -------- cost of arbitration, and the costs of the arbitrator shall be shared equally among each party to a Dispute. Section 6.7 Survival of Article. This Article VI shall survive --------------------- termination of this Agreement. ARTICLE ------- CONFIDENTIALITY AND TRADE SECRETS --------------------------------- Section 7.1 Confidentiality. --------------- (a) None of the parties shall disclose any proprietary or confidential information of any other party to a third party without the express written consent of the owner of such information 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. None of the parties shall use any proprietary and confidential information of any other party for its own benefit. Upon termination of this Agreement, each party will immediately return to the owner any confidential information, except confidential information necessary for the continued administration of any Benefit Agreement. (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 any other party of any non-public personal information, including health information, relating to such Subscribers, by means -6- of general or specific releases, as appropriate. Each party shall notify the other parties 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 7.01 hereto. -------------- ARTICLE ------- INDEMNIFICATION --------------- Section 8.1 Indemnification by SafeHealth. SafeHealth shall indemnify ----------------------------- and hold HNT-AZ and HNL (including their directors, officers and employees) harmless from all liability, losses, damages, costs or expenses (including reasonable attorneys' fees) arising out of a claim, demand, lawsuit, or cause of action asserted against HNT-AZ or HNL by a third party resulting from or arising out of SafeHealth's wrongful act or omission, including intentional, negligent, fraudulent or criminal conduct of a director, officer, shareholder, employee or independent contractor of SafeHealth, except as otherwise provided in this Article VIII. Section 8.2 Indemnification by HNT-AZ and HNL. HNT-AZ and HNL shall ----------------------------------- indemnify and hold SafeHealth (including its directors, officers and employees) harmless from all liability, losses, damages, costs or expenses (including reasonable attorneys' fees) arising out of a claim, demand, lawsuit or cause of action asserted against SafeHealth by a third party resulting from or arising out of HNT-AZ's or HNL's wrongful act or omission, including intentional, negligent, fraudulent or criminal conduct of a director, officer, shareholder, employee or independent contractor of HNT-AZ or HNL, except as otherwise provided in this Article VIII. Section 8.3 Comparative Fault. In the event that HNT-AZ, HNL and ------------------ SafeHealth claim indemnity under Sections 8.01 and 8.02 of this Agreement, and in the event it is determined that each is entitled to indemnity from the other, then the amount of indemnity due from each to the other shall be determined according to comparative fault principles. ARTICLE ------- TERM AND TERMINATION -------------------- Section 9.1 Effective Date. This Agreement shall be effective on the --------------- Closing Date of the Purchase and Sale Agreement (the "Effective Date"). Section 9.2 Term. This Agreement shall commence on the Effective Date ---- and shall terminate on December 31, 2004 (the "Term"), provided, however, that -------- ------- HNT AZ and HNL shall have the option to extend the Term of this Agreement for an additional one year period on the same terms and subject to the same conditions except that HNT-AZ and HNL shall pay SafeHealth a fee equal to twenty (20%) of the claims paid by SafeHealth under the Benefit Agreements for the Administrative Services provided during the additional one year period. -7- Section 9.3 Termination. This Agreement may be terminated as follows: ----------- (a) At any time by mutual agreement of the parties hereto in writing. (b) By any party thirty (30) calendar days after written notice has been given to any other party of the other party's material breach of this Agreement or material default in the performance of any of its duties and obligations under this Agreement, if the breach or default has not been cured within the thirty (30) day period. (c) By any party at any time after written notice, in the event of the insolvency, liquidation, rehabilitation, assignment for the benefit of creditors, or voluntary or involuntary declaration or adjudication of bankruptcy of the any other party. (d) By HNT-AZ or HNL upon written notice to SafeHealth at any time if a license that SafeHealth is legally required to maintain in performing the Administrative Services is revoked, suspended, or has expired. (e) By HNT-AZ or HNL upon thirty (30) calendar days' written notice to SafeHealth, following SafeHealth's notice to HNT-AZ or HNL under Section 2.04, above, if a material change is not satisfactory to HNT-AZ or HNL, or under Sections 4.04, above, if corrective action requested is not performed to HNT-AZ's or HNL's satisfaction. (f) By HNT-AZ or HNL upon thirty (30) calendar days' written notice to SafeHealth in the event SafeHealth fails to perform satisfactorily according to the terms of this Agreement and SafeHealth fails to remedy the unsatisfactory performance to the reasonable satisfaction of HNT-AZ or HNL within such thirty (30) day period. Section 9.4 Transition Following Termination. In the event this ---------------------------------- Agreement is terminated and the Benefit Agreements that are the subject matter of this Agreement continue to be underwritten by HNT-AZ or HNL, SafeHealth agrees to cooperate fully and promptly, at SafeHealth's expense, in the transfer of administrative functions as directed by HNT-AZ and HNL including, but not limited to, transfer of HNT-AZ's and HNL's proprietary information or records. Section 9.5 Liability Prior to Termination. Termination of this --------------------------------- Agreement shall not terminate any rights or liabilities of either party arising out of the period during which this Agreement was in effect. ARTICLE ------- GENERAL TERMS ------------- Section 10.1 Compliance with Law. 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 -8- orders concerning the activities covered by this Agreement by Governmental Authorities having 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 10.2 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: 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 if to HNT-AZ or HNL to: Health Net, Inc. Att: General Counsel 21650 Oxnard Street Woodland Hills, California 91367 Tel: (818) 676-7601 Fax: (818) 676-7503 -9- with a copy to: Kenneth B. Schnoll Sonnenschein Nath & Rosenthal 685 Market Street San Francisco, CA 94105 Tel: (415) 882-1020 Fax: (415) 543-5472 Section 10.3 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 10.4 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 10.5 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 10.6 Assignability. Except as otherwise expressly provided in this ------------- Agreement, none of the parties may assign any of its rights or obligations under this Agreement without the prior written consent of the other parties. 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 10.7 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 10.8 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 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 10.9 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 10.10 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 -10- other may reasonably require to consummate, evidence or confirm the agreements contained herein in the manner contemplated hereby. Section 10.11 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 10.12 Exhibits and Schedules. All exhibits and Schedules ------------------------ referred to in this Agreement are incorporated herein by this reference. Section 10.13 Force Majeure. None of the parties 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 10.14 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 10.15 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. Section 10.16 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 10.17 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. -11- Section 10.18 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. HEALTH NET OF ARIZONA, INC. SAFEHEALTH LIFE INSURANCE COMPANY By: /s/ Mark El-Tawil By: /s/ James E. Buncher ------------------------------------ ---------------------------------- Title: President Title: President and CEO --------------------------------- -------------------------------- Date: June 30, 2003 Date: June 30, 2003 ---------------------------------- --------------------------------- HEALTH NET LIFE INSURANCE COMPANY By: /s/ Douglas King ---------------------------------- Title: President --------------------------------- Date: June 30, 2003 ---------------------------------- -12- APPENDIX A ADMINISTRATIVE SERVICES ----------------------- A. CLAIMS ADMINISTRATION SERVICES 1. SafeHealth shall process claims for benefits made under Benefit Agreements issued by HNT-AZ and HNL in accordance with the terms of the applicable Benefit Agreement, applicable law and HNT-AZ's written instructions. 2. SafeHealth's claim processing duties for HNT-AZ and HNL include the following: a. Receive bills, invoices, statements and electronically submitted demands for payment (collectively referred to as "claims") from eligible providers, insured individuals and others. b. Determine the eligibility of an insured individual and the reasonableness of the claim, and apply HNT-AZ or HNL vision claim review guidelines, referring claims to HNT-AZ or HNL as directed. c. Implement appropriate procedures to pay, reject or modify the amount of the claim in accordance with the terms of the appropriate Benefit Agreement and applicable law. d. At SafeHealth's expense, provide HNT-AZ and HNL with on-line access to claims data. e. Provide HNT-AZ with a report by the twentieth (20th) of each month identifying all claims paid during the previous month. The report is to include a complete check register report and reconciliation of that register against paid claims, and a reconciliation report on the account including prior month open items. f. Prepare and file, in the manner prescribed by law, all IRS 1099 Forms required with respect to providers. g. Install and maintain internal control systems satisfactory to HNT-AZ and HNL on claims processing, fraudulent claims, claims quality, HNT-AZ and HNL funds, and check stock and signature plates. h. Make all reasonable efforts to collect all overpayments or other incorrect payments as determined by the provisions of the applicable Benefit Agreement, and provide HNT-AZ and HNL with information necessary to permit it to file Third Party Workers' Compensation liens. i. Prepare and implement a quality control plan, whereby SafeHealth will assure itself, HNT-AZ and HNL that its processing of claims conforms to all contractual benefit provisions, does not violate administrative procedure or policies established by HNT-AZ and HNL and communicated to SafeHealth, does not intentionally violate any applicable state or federal laws, and is reasonably free of error or bias. A-1 j. Conduct all aspects of appeals and grievances arising from claim decisions in accordance with the procedures approved by HNT-AZ and HNL. SafeHealth will notify HNT-AZ and HNL of each appeal or grievance arising from a claims decision within ten calendar days of receipt of the appeal or grievance. The ultimate determination on an appeal or grievance rests solely with HNT-AZ or HNL. k. Prepare the reports mutually acceptable to the parties. l. SafeHealth shall provide reports requested by reinsurers of HNT-AZ and HNL at SafeHealth's expense. 3. SafeHealth will adjudicate, pay or deny all claims strictly in accordance with provisions of the Benefit Agreements and, with respect to claims for services of participating vision providers, claims handling will satisfy the requirements of the provider agreements between providers and HNT-AZ or HNL. Whenever denying a claim, in whole or in part, SafeHealth will notify the covered person, in writing in a form approved by HNT-AZ and HNL, that a dispute with HNT-AZ or HNL must be resolved by binding arbitration if the applicable Benefit Agreement contains an arbitration provision. 4. In connection with the payment of claims for the services of participating vision providers, SafeHealth shall: a. Determine benefit payment on the basis of the reimbursement rate set out on the participating provider contracts and instructions from HNT-AZ or HNL on services included or excluded in those rates; and b. Receive claims from participating providers and pay or deny claims within thirty (30) calendar days of receiving a "clean claim." For purposes of this Agreement, "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 made on the claim. c. Accept HNT-AZ or HNL interpretations of provider contracts and accept HNT-AZ's or HNL's resolution of questions or disputes with providers. HNT-AZ and HNL have final authority to interpret their contracts and resolve disputes with providers. 5. In assisting HNT-AZ and HNL with utilization review, SafeHealth will: a. Forward all provider claims without a required Utilization Review Certification Form either to the provider or to HNT-AZ or HNL, as directed; b. Submit claims to HNT-AZ and HNL for retrospective utilization review in accordance with HNT-AZ's or HNL's guidelines and procedures. 6. SafeHealth will pay claims as follows: a. Issue claim checks in the name of HNT-AZ or HNL from a disbursement account established at an Arizona Bank acceptable to HNT-AZ and HNL. HNT-AZ or HNL shall fund the disbursement accounts each Monday. HNT-AZ and HNL shall provide SafeHealth with an adequate supply of HNT-AZ and HNL checkstock. A-2 b. Provide to HNT-AZ and HNL by telecopy each Thursday a listing of all claim checks to be released by the close of business on the following Monday if a Business Day, or in the event a Monday is not a Business Day, then by the first Business Day of the following week. HNT-AZ and HNL shall have the right to stop payment on and request more information about a specific claim by notifying SafeHealth by the close of business on the Friday following receipt of the listing of claim checks. c. Provide HNT-AZ and HNL with copies of the claim documentation for all proposed claim payments over $500. No claims over $1,000 may be paid without the countersignature of an authorized representative of HNT-AZ or HNL. 7. SafeHealth will satisfy the following performance criteria in the processing of claims and report the results monthly: a. Pay or reject 85% of claims submitted within fourteen (14) calendar days of receipt. b. Pay or reject 100% of uncontested claims submitted within thirty (30) calendar days of receipt. c. Respond to 98% of all claims-related written inquiries from, from a provider or from a group within fourteen (14) calendar days. d. Answer on first contact 80% of claims-related telephone inquiries from an individual insured by HNT-AZ or HNL, from a provider or from a group. 8. Should any Benefit Agreement subject to this Agreement terminate, SafeHealth will continue to process claims incurred under the Benefit Agreement with a date of service prior to termination, and to process other claims which may be payable under the Benefit Agreement but have not been adjudicated prior to termination, unless SafeHealth is otherwise instructed in writing by HNT-AZ or HNL. A-3 B. COMMUNICATIONS 1. SafeHealth will provide courteous, timely and accurate assistance and response to all verbal or written inquiries received from HNT-AZ and HNL insureds, Subscribers, and claimants with respect to all relevant topics, including but not limited to procedural aspects of claim submission, status of claim payments, calculation of benefits, and notice of conversion rights, and generally to act as a liaison between HNT-AZ, HNL, members and groups. 2. SafeHealth will promptly forward to HNT-AZ and HNL all inquiries which constitute a grievance or a request for review under ERISA. Complaints, grievances or other communications shall be forwarded by SafeHealth to HNT-AZ and HNL. Inquiries or complaints which SafeHealth receives from Governmental Authorities shall be reported immediately by telephone to the appropriate person at HNT-AZ or HNL, with written notice following immediately thereafter. 3. SafeHealth will cooperate fully with HNT-AZ, HNL and Governmental Authorities in maintaining the Benefit Agreements in compliance with existing and future Law. 4. HNT-AZ and HNL shall provide SafeHealth with an adequate supply of the most current directories of participating vision providers and SafeHealth shall promptly supply copies of the directories to Subscribers on request. 5. SafeHealth will design prepare Explanation of Benefits (EOB) forms for the purpose of informing covered persons of actions taken on claims for benefits. EOB forms may not be used without HNT-AZ's and HNL's prior review and approval. 6. SafeHealth will design and prepare a remittance advice form to be used to identify claims with respect to which a payment is being made. Remittance advice forms may not be used without HNT-AZ's and HNL's prior review and approval. A-4 APPENDIX B BENEFIT AGREEMENTS ------------------ B-1
SCHEDULE 3.03 PERFORMANCE STANDARDS --------------------- % OF SERVICE FEE AT RISK ------------ MEMBER SERVICE - -------------- 70% of calls answered within 60 seconds excluding January due to open enrollments. 0.5% Call abandonment rate less than 5% excluding January due to open enrollments. 0.5% CLAIMS - ------ Process all claims within 30 calendar days on receipt of complete, accurate data. 1% Financial accuracy of 98%. 1% NEW CASE INSTALLATION - ELECTRONIC DATA INTERFACE - ------------------------------------------------- 2 business day turnaround on files received in approved format and media. 1% 15 business day turnaround on initial set up of group upon receipt of all required data. 1% PROVIDER NETWORK MANAGEMENT - --------------------------- 90% of network retained annually. Measurement will be based on global basis and reported 1% annually. PENALTY EXPRESSED AS A PERCENTAGE OF THE TOTAL NET SERVICE FEE 6% 6% OF TOTAL SERVICE FEE AT RISK PENALTY IS PAID ONLY FOR THE TIME PERIOD STANDARD IS NOT ACHIEVED.
SCHEDULE 7.01 BUSINESS ASSOCIATE ADDENDUM --------------------------- This Business Associate Addendum (the "Addendum") supplements and is made a part of the Administration Agreement by and between Health Net of Arizona, Inc., Health Net Life Insurance Company and SafeHealth Life Insurance Company (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. 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 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. 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. (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. EX-99.1 7 doc6.txt EXHIBIT 99.1 TO CURRENT REPORT ON FORM 8-K DATED AS OF JULY 1, 2003 ------------------------------------------------------------------- [GRAPHIC OMITTED] SafeGuard 95 Enterprise, Suite 100 Aliso Viejo, California 92656-2605 949.425.4300 CONTACT: James E. Buncher President and Chief Executive Officer (949) 425-4300 SAFEGUARD HEALTH ENTERPRISES SIGNS DEFINITIVE AGREEMENT TO PURCHASE HEALTH NET, INC. VISION SUBSIDIARY ALISO VIEJO, CALIFORNIA (JULY 2, 2003) - SafeGuard Health Enterprises, Inc. (OTC Bulletin Board: SFGD) today announced the signing of a definitive agreement for the previously announced purchase of the commercial vision business from Health Net, Inc. (NYSE:HNT). Specific terms of the transactions were not disclosed. Closing is expected in the fourth quarter of 2003 subject to regulatory approval. SafeGuard's recently contracted purchase of the dental business of Health Net is also expected to close 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 through the Health Net medical sales representatives. These private label 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, more than 1.4 million members nationwide, and annual revenues exceeding $150 million. James E. Buncher, president and chief executive officer of SafeGuard Health Enterprises, Inc., said, "We are pleased to have executed the definitive agreements for the purchase of the commercial vision business from Health Net. Upon completion of this transaction, SafeGuard will obtain a vision network in California and the ability to directly administer vision benefit products. Combining the network and administrative capability with our experience in selling vision products positions us to significantly grow our vision business. "We expect this transaction to be virtually seamless to existing SafeGuard and Health Net members, employer groups, brokers and providers. Existing contracts and benefit plans administered through Health Net Dental and Vision or SafeGuard will remain unchanged. What we do expect to be apparent is an even broader range of products with a continuing commitment to quality and service." 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 each Company's Annual Report on Form 10-K for the year ended December 31, 2002, and each Company's current reports on Forms 8K and 10-Q, all on file with the U.S. Securities and Exchange Commission. -END- -----END PRIVACY-ENHANCED MESSAGE-----