EXHIBIT 10.4
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT ("Agreement") is made this 31st day of December,
2001 by and between Cobalt Corporation, a Wisconsin corporation ("Cobalt") and
United Wisconsin Insurance Company, a Wisconsin stock insurance corporation
("UWIC").
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the
meanings specified:
1.1 "ACT" means the Securities Act of 1933, as amended from time to
time, and the rules and regulations issued thereunder.
1.2 "COLLATERAL" means the Stock and the Proceeds.
1.3 "CERTIFICATES" means the certificates representing the Stock.
1.4 "EVENT OF DEFAULT" means an event described in Section V of this
Agreement.
1.5 "NOTE" means the promissory note from Cobalt to UWIC dated December
31, 2001 in the original principal amount of Twenty Two Million Six Hundred
Fifty Thousand Three Hundred Ninety Seven Dollars ($22,650,397)and any amendment
or modification thereof.
1.6 "OBLIGATIONS" means (a) the outstanding principal of, and all
interest on, the Note; (b) all liabilities, obligations, covenants and
agreements of Cobalt contained in the Note; and (c) all liabilities,
obligations, covenants and agreements of Cobalt contained in this Agreement.
1.7 "OCI" means the Office of the Commissioner of Insurance of the
State of Wisconsin.
1.8 "PROCEEDS" means whatever is received upon the sale, exchange,
collection or other disposition of the Stock, or proceeds of the Stock,
including, without limitation, all interest and other income from the Stock and
distributions with respect to the Stock, and any other products thereof. Not
intending to limit the foregoing, the term "Proceeds" shall specifically include
any consideration received by Cobalt arising from the sale of Valley capital
stock under that certain Purchase and Sale Agreement between Cobalt and
Midelfort Clinic, Ltd., Mayo Health System, dated January 1, 1992, as amended.
1.9 "STOCK" means 100% of the issued and outstanding capital stock of
each of HMO-W, Inc., Valley Health Plan, Inc., and United Heartland, Inc., each
of which is wholly owned by Cobalt.
1.10 "STOCK RIGHTS" means any stock dividend or other right or property
that Cobalt receives or becomes entitled to receive for any reason with respect
to, in substitution for, or in exchange for any shares of the Stock.
1.11 "UCC" means the Uniform Commercial Code as adopted in Wisconsin
and in effect from time to time.
1.12 "UNITED HEARTLAND" means United Heartland, Inc.
1.13 "HMO-W" means HMO-W, Inc.
1.14 "VALLEY" means Valley Health Plan, Inc.
1.15 "VALLEY OPTION" means the rights of Midelfort Clinic, Ltd., Mayo
Health System to repurchase Valley Stock under the terms of that certain
Purchase and Sale Agreement between Cobalt (previously known as United Wisconsin
Services, Inc.) and Midelfort Clinic, Ltd., Mayo Health System, dated January 1,
1992, as amended.
ARTICLE II
THE PLEDGE
2.1 THE PLEDGE. To secure the full and complete payment and performance
when due (whether at stated maturity, by acceleration or otherwise) of each of
the Obligations, Cobalt hereby grants to UWIC a security interest in the
Collateral, wherever located and whether now owned or hereafter acquired.
2.2 CERTIFICATES; STOCK POWERS. Cobalt shall deliver to UWIC, to hold
in accordance with the terms and conditions of this Agreement, the Certificates
and appropriate stock powers duly endorsed by Cobalt in blank.
2.3 ACTIONS PRIOR TO AN EVENT OF DEFAULT. Prior to the occurrence of an
Event of Default, Cobalt shall have the sole right to vote the stock and the
sole right to receive and retain any and all cash dividends and distributions
declared and paid on the Stock; provided, however, that no vote shall be cast,
or corporate right exercised, or other action taken, that would result in
violation of any provision of the Note or this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HOLDINGS
Cobalt hereby represents and warrants to UWIC as follows:
3.1 OWNERSHIP OF COLLATERAL. With the exception of the security
interest granted by this Agreement and the Valley Option, Cobalt is the owner of
the Stock, free and clear of all liens, encumbrances, security interests and
restrictions.
3.2. ENFORCEABILITY. This Agreement is a valid and binding obligation
of Cobalt, enforceable against Cobalt in accordance with its terms, except as
the enforcement thereof may be limited by applicable bankruptcy, insolvency, or
similar laws generally affecting the rights of creditors. Upon delivery of the
Certificates to UWIC, the security interest granted pursuant to this Agreement
will constitute a valid, perfected first priority lien against the Stock, except
with respect to the Valley Stock, enforceable against all persons. Upon delivery
of the Certificates representing the Valley Stock, the security interest granted
pursuant to this Agreement will constitute a valid, perfected lien against such
Stock enforceable against all persons except Midelfort Clinic, Ltd., Mayo Health
System with respect to the Valley Option.
3.3 ABSENCE OF CONFLICTING OBLIGATIONS. The making, execution, delivery
and performance of this Agreement by Cobalt, and compliance with its terms, do
not violate any presently existing provision of law, the articles of
incorporation or bylaws of Cobalt, or any agreement to which Cobalt is a party
or by which Cobalt or any of its assets is bound.
3.4 STATUS OF COLLATERAL. The Stock has been duly authorized and
validly issued and is fully paid and non-assessable. The Stock constitutes 100%
of the issued and outstanding shares of the capital stock of United Heartland,
HMO-W, and Valley.
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ARTICLE IV
COVENANTS OF COBALT
4.1 MAINTENANCE OF SECURITY INTEREST. Cobalt shall pay all expenses
and, upon request, take any action reasonably deemed advisable by UWIC to defend
and preserve Cobalt's title to the Stock or to establish, determine priority of,
perfect, continue perfected, terminate and enforce Cobalt's security interest in
the Stock or the rights of UWIC under this Agreement.
4.2 TAXES. Cobalt shall pay, when due, all taxes and other governmental
charges levied or assessed upon or against the Stock.
4.3 DELIVERY OF CERTAIN ITEMS. Cobalt shall hold in trust for UWIC upon
receipt, and immediately thereafter shall deliver to UWIC, any stock
certificate, instrument or other document evidencing or constituting any Stock
Rights.
4.4 NO OTHER LIENS. Cobalt shall keep the Stock free from all liens,
encumbrances and security interests (other than the security interest granted by
this Agreement and the Valley Option) and shall defend the Stock against all
claims and legal proceedings by persons other than UWIC.
4.5 DISPOSITION OF STOCK. Cobalt shall not sell, transfer (including,
without limitation, transfer of a security interest or other collateral
interest) or otherwise dispose of all or any part of the Stock, without the
prior written consent of OCI and UWIC, nor will Cobalt permit or cause United
Heartland, HMO-W or Valley to purchase, redeem, retire, or otherwise acquire for
value any of its capital stock now or hereafter outstanding; provided, however,
Cobalt may dispose of the Valley Stock in the event Midelfort Clinic, Ltd., Mayo
Health System exercises the Valley Option. Cobalt shall cause HMO-W in turn not
to sell, transfer (including, without limitation, transfer of a security
interest or other collateral interest) or otherwise dispose of all or any part
of the capital stock of Unity Health Plans Insurance Corporation ("Unity"), a
wholly owned subsidiary of HMO-W, without the prior written consent of OCI and
UWIC, and Cobalt shall cause HMO-W not to permit or cause Unity to purchase,
redeem, retire, or otherwise acquire for value any of its capital stock now or
hereafter outstanding; provided, however, Cobalt may allow HMO-W to dispose of
Unity capital stock in the event that Community Health Systems, LLC exercises
its option to acquire Unity capital stock in accordance with the provisions of
that certain Amended and Restated Joint Venture Agreement among Unity, Cobalt,
Blue Cross & Blue Shield United of Wisconsin, and Community Health Systems, LLC,
dated October 25, 1999 ("Unity Option").
4.6 NO ADDITIONAL STOCK. Cobalt agrees that it will cause the Stock to
constitute at all times not less than all of the total number of shares of each
class of capital stock then outstanding (including treasury shares) of United
Heartland, HMO-W or Valley, and will not consent to or approve the issuance of
and will cause United Heartland, HMO-W or Valley not to issue any additional
shares of any class of capital stock of such companies, any securities
convertible voluntarily by the holder thereof or automatically upon the
occurrence or nonoccurrence of any event or condition into, or exchangeable for,
any such shares; or any subscription agreements, warrants, options, rights, or
other commitments entitling any person to purchase or otherwise acquire any such
shares, except with respect to the Valley Option. Cobalt also agrees that it
shall cause HMO-W in turn to cause Unity not to issue any additional shares of
any class of capital stock, any securities convertible voluntarily by the holder
thereof or automatically upon the occurrence or nonoccurrence of any event or
condition into, or exchangeable for, any such shares; or any subscription
agreements, warrants, options, rights, or other commitments entitling any person
to purchase or otherwise acquire any such shares of Unity, except with respect
to the Unity Option.
4.7 DIVIDEND PROHIBITION. Cobalt will not permit or cause United
Heartland, HMO-W or Valley to pay or declare any dividend, or make any other
distribution on account of any shares of any class of each company's respective
Stock, without the prior written consent of OCI and UWIC.
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4.8 MANDATORY PREPAYMENT. In the event that the Valley Option and/or
the Unity Option are exercised at any time, Cobalt agrees to make a mandatory
prepayment of principal on the Note in an amount equal to the proceeds received
from Cobalt or any of Cobalt's affiliates from the sale of Valley Stock or Unity
capital stock, as applicable. Such a mandatory prepayment shall be made within
ten (10) days after the consummation of any such sale of stock.
ARTICLE V
EVENTS OF DEFAULT; REMEDIES
5.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an Event of Default:
(a) A breach by Cobalt of any of the terms or provisions of
Article IV of this Agreement;
(b) A material falsity in any representation or warranty made
by Cobalt to UWIC under or in connection with this Agreement as of the
date on which made;
(c) Any failure by Cobalt to pay or perform any one or more of
the Obligations when due, whether at stated maturity, by acceleration
or otherwise;
(d) Cobalt's becoming insolvent or the subject of any order
for relief under the United States Bankruptcy Code or successor law or
the subject of any insolvency or similar proceeding; or
(e) Any other event that causes UWIC, in good faith, to deem
itself insecure.
5.2 RIGHTS AND REMEDIES OF UWIC. Upon the occurrence of any Event of
Default: (i) all of the Obligations shall, at UWIC 's option, become immediately
due and payable without presentment, demand, protest or notice of any kind (all
of which hereby are expressly waived); (ii) UWIC shall have all of the rights
and remedies provided in the Note, by Article 9 of the UCC and by any other
applicable law; (iii) UWIC may exercise its right under Article 9 of the UCC and
other applicable laws to retain the Stock; (iv) in the event that UWIC elects
not to retain the Stock, it may exercise its right under Article 9 of the UCC
and any other applicable law to sell or otherwise dispose of the Stock, subject
to the prior approval of the terms and conditions of such transaction by OCI;
and (v) in the interim between UWIC's acceleration of the Obligations following
an Event of Default and UWIC 's retention of the Stock under subparagraph (iii)
above, or final disposition of the Stock under subparagraph (iv) above, UWIC may
exercise voting rights over the Stock and shall have the sole right to receive
any dividends declared and paid on the Stock. With respect to the foregoing
rights and remedies:
(i) Written notice, when required by law, sent to any address
of Cobalt in this Agreement at least ten calendar days (counting the
day of sending) before the date of a proposed disposition of the Stock
is reasonable notice.
(ii) Cobalt shall pay all fees and expenses incurred by UWIC,
including the reasonable fees of counsel, in connection with the
administration, protection and enforcement of UWIC's rights under this
Agreement or with respect to the Stock, including, without limitation,
the protection and enforcement of such rights in any bankruptcy or
insolvency proceeding involving Cobalt.
5.3 METHOD OF DISPOSITION. Whenever UWIC would have the right under
this Agreement and prior approval from OCI to sell the Stock, the parties agree
that if, in the opinion of UWIC or its legal counsel, sales of the Stock by UWIC
or Cobalt without registration of the Stock under the Act might, unless
accomplished by one or more of the methods described in this Section 5.3,
constitute either UWIC or Cobalt an "underwriter", as that term is defined in
Section 2(11) of the Act, it shall be commercially reasonable for
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UWIC, without registration, notwithstanding that the terms of any such sale
might be less favorable than sale through registration, to take any of the
following actions:
(a) sell all or part of the Stock in compliance with Rule 144,
Rule 237, Regulation A or Regulation D under the Act as then in effect,
or pursuant to any other rules or regulations under the Act then in
effect, compliance with which would make the exemptions provided
pursuant to Sections 3(b) or 4(1) of the Act applicable to the sale; or
(b) sell all or part of the Stock in an intrastate public
offering within the meaning of Section 3(a)(11) of the Act; or
(c) sell all or part of the Stock in one or more private
transactions not involving any public offering in order to secure the
exemption provided in Section 4(l) of the Act, if: (i) the Stock is
sold for cash to the highest bidder after biding or "firm" offers to
purchase have been received from at least two offerors; and (ii) UWIC
has reasonable grounds to believe and does believe that each such
offeror has sufficient financial resources to enable such offeror to
purchase the Stock offered and that the offer was made in good faith;
and (iii) each such offeror was informed, prior to the time such offer
was made, that offers to purchase the Stock were also being solicited
from others; and (iv) UWIC has, for at least 60 days prior to the sale,
solicited offers to purchase the stock within the restrictions imposed
by federal or state securities Laws.
Nothing in this Section 5.3 shall prevent UWIC from making any other
commercially reasonable disposition of the Stock, and no sale of the Stock shall
be commercially unreasonable solely because it was not made in compliance with
this Section.
5.4 APPLICATION OF PROCEEDS. UWIC shall apply the Proceeds resulting
from any sale or disposition of the Stock pursuant to this Agreement in the
following order of priority:
(a) to the costs of the sale;
(b) to the expenses incurred by UWIC in connection with the
sale, including reasonable attorneys fees;
(c) to the payment of the Obligations then due and owing in
any order selected by UWIC; and
(d) to Cobalt.
5.5 OTHER REMEDIES. No remedy herein conferred upon UWIC is intended to
be exclusive of any other remedy, and each and every such remedy shall be
cumulative and shall be in addition to every other remedy given under this
Agreement or the Note or now or hereafter existing at law or in equity or by
statute or otherwise. No failure or delay on the part of UWIC in exercising any
right or remedy hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any right hereunder preclude other or further
exercise thereof or the exercise of any other right or remedy.
5.6 LIMITATION ON UWIC'S DUTIES REGARDING COLLATERAL. Subject to any
contrary order by OCI, UWIC 's sole duty with respect to the custody,
safekeeping and physical preservation of the Stock in its possession, under the
UCC or otherwise, shall be to deal with it in the same manner as UWIC deals with
similar securities and property for its own account. Neither UWIC nor any of its
directors, officers, employees or agents shall be liable for failure to demand,
collect or realize upon any of the Stock or for any delay in doing so or shall
be under any obligation to sell or otherwise dispose of any Stock upon the
request of Cobalt or otherwise.
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ARTICLE VI
MISCELLANEOUS
6.1 UWIC APPOINTED ATTORNEY-IN-FACT. Cobalt hereby appoints UWIC
Cobalt's attorney-in-fact, with full authority in the place and stead of Cobalt
and in the name of Cobalt or otherwise, from time to time in UWIC's discretion
to take any action and to execute any instrument which UWIC may deem necessary
or advisable to accomplish the purposes of this Agreement, including, without
limitation, to receive, endorse and collect all instruments made payable to
Cobalt pursuant to Section 4.3 representing any dividend, interest payment or
other distribution in respect of the Stock or any part thereof and to give full
discharge for the same. If Cobalt fails to perform any agreement contained
herein, UWIC may itself perform, or cause performance of, such agreement, and
the expenses of UWIC incurred in connection therewith, including without
limitation reasonable attorneys' fees and expenses, shall be payable by Cobalt.
6.2 ASSIGNABILITY; SUCCESSORS. Cobalt's rights and liabilities under
this Agreement are not assignable or delegable, in whole or in part, without the
prior written consent of UWIC and OCI. The provisions of this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of the
parties.
6.3 SURVIVAL. All agreements, representations and warranties made
herein or in any document delivered pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the delivery of any such document.
6.4 GOVERNING LAW. This Agreement shall be governed by, and construed
and interpreted in accordance with, the laws of the State of Wisconsin.
6.5 AMENDMENT. No amendment of this Agreement shall be effective unless
in writing, signed by both parties, and approved by OCI.
IN WITNESS WHEREOF, this Agreement has been executed as of the day and
year first above written.
COBALT CORPORATION
By: /s/ Thomas R. Hefty
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Title: Chief Executive Officer and President
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UNITED WISCONSIN INSURANCE COMPANY
By: /s/ Gail L. Hanson
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Title: Treasurer
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