As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 4/23/07  Sierra Health Services Inc        PREM14A     4/20/07    1:208                                    Merrill Corp-MD/FA

Document/Exhibit                   Description                      Pages   Size 

 1: PREM14A     Preliminary Proxy Solicitation Material -- Merger   HTML  1,104K 
                          or Acquisition                                         

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on [•], 2007 

To the Stockholders:

A special meeting of stockholders of Sierra Health Services, Inc. will be held on [•], 2007, at [•] a.m., Pacific Daylight Time, at [•], for the following purposes:

1.                to consider and vote on the proposal to approve the Agreement and Plan of Merger, dated as of March 11, 2007, by and among UnitedHealth Group Incorporated (“UnitedHealth Group”), Sapphire Acquisition, Inc. (“Merger Sub”) and Sierra Health Services, Inc. (the “Company”), pursuant to which Merger Sub will be merged with and into the Company and the Company will become an indirect wholly-owned subsidiary of UnitedHealth Group (the “Merger”); and

2.                to transact any other business as may properly come before the special meeting or at any adjournment of the special meeting.

The Company’s board of directors has determined that the merger agreement and the merger are advisable to and in the best interests of the Company and its stockholders and has unanimously adopted the merger agreement, the merger and the other transactions contemplated by the merger agreement. If the merger is completed, each issued and outstanding share of our common stock will be converted into the right to receive $43.50 in cash, without interest. Under Nevada law, no dissenters’ rights or rights of appraisal will apply in connection with the merger.

The merger is described in the accompanying proxy statement, which you are urged to read carefully. A copy of the merger agreement is attached to the proxy statement as Appendix A.

The Company’s board of directors has fixed the close of business on [•], 2007, as the record date for the determination of stockholders entitled to notice of and to vote at the special meeting. Accordingly, only stockholders of record on that date are entitled to vote at the special meeting or any adjournments thereof. A list of stockholders entitled to vote at the special meeting will be open for inspection by any stockholder at any time during usual business hours for a period of 5 days prior to the special meeting at the offices of the Company, 2724 North Tenaya Way, Las Vegas, Nevada 89128.

Approval of the merger agreement requires the affirmative vote by the holders of a majority of the shares of our common stock outstanding on the record date in accordance with Nevada law, our restated articles of incorporation and our amended and restated bylaws. Under the terms of a voting and support agreement (which will terminate upon the termination of the merger agreement), Anthony M. Marlon, M.D., the Chairman of our board of directors and our Chief Executive Officer, has agreed to vote the shares of our common stock he beneficially owns (other than any shares of our common stock as to which Dr. Marlon acts in a fiduciary capacity on behalf of persons other than members of his family) in favor of the approval of the merger agreement. Such shares represent approximately [8.0]% of the outstanding shares of our common stock.

The board of directors is not aware of any matters that may be brought before the special meeting other than those set forth in this Notice of Special Meeting of Stockholders. If other matters properly come before the special meeting, the persons named in the accompanying proxy card will vote the shares represented by all properly submitted proxies on such matters in accordance with any recommendation of the board of directors or, in the absence of such recommendation, in their discretion.

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Whether or not you plan to attend the special meeting in person, please complete, sign, date and return the enclosed proxy card in the postage-paid envelope provided or appoint a proxy over the Internet or by telephone, in accordance with the directions set forth on the proxy card, to ensure that your shares will be represented at the special meeting. If you do attend the special meeting and wish to vote in person, you may do so notwithstanding the fact that you previously submitted or appointed a proxy. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain from your nominee a proxy issued in your name.

Please do not send your stock certificates at this time. If the merger is completed, you will be sent instructions regarding the surrender of your stock certificates.

The board of directors has unanimously adopted the merger agreement and recommends that our stockholders vote “FOR” the approval of the merger agreement.

 

Las Vegas, Nevada
[•], 2007

PROXY STATEMENT
TABLE OF CONTENTS 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER 

The following questions and answers address briefly some questions you may have regarding the special meeting of stockholders and the merger. Please refer to the more detailed information contained elsewhere in this proxy statement, the appendices to this proxy statement and the documents referred to in this proxy statement.

Unless we otherwise indicate or unless the context requires otherwise, all references in this document to the “Company,” “Sierra Health,” “we,” “our,” and “us” refer to Sierra Health Services, Inc. and its subsidiaries, all references to “Merger Sub” refer to Sapphire Acquisition, Inc., all references to “UnitedHealth Group” refer to UnitedHealth Group Incorporated, all references to “Lehman Brothers” refer to Lehman Brothers Inc., all references to “Dr. Marlon” refer to Anthony M. Marlon, M.D., the Company’s Chairman of the board of directors and Chief Executive Officer, all references to the “merger agreement” refer to the Agreement and Plan of Merger, dated as of March 11, 2007, among UnitedHealth Group, Merger Sub and the Company, a copy of which is attached to this proxy statement as Appendix A, all references to the “voting and support agreement” refer to the Voting and Support Agreement, dated as of March 11, 2007, between UnitedHealth Group and Dr. Marlon, a copy of which is attached to this proxy statement as Appendix B, and all references to the “merger” refer to the merger contemplated by the merger agreement.

All information contained in this proxy statement concerning UnitedHealth Group and Merger Sub has been supplied by UnitedHealth Group and has not been independently verified by the Company. All information contained in this proxy statement concerning Lehman Brothers has been supplied by Lehman Brothers and has not been independently verified by the Company.

Q:             Why am I receiving these materials?

A:             You are receiving these materials because you are being asked to attend a special meeting of the Company’s stockholders to vote to approve the merger agreement providing for the acquisition of the Company by UnitedHealth Group.

Q:             What is the proposed transaction?

A:             Under the merger agreement, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving entity and as an indirect wholly-owned subsidiary of UnitedHealth Group. See “The Merger Agreement” on page 44.

Q:             What will I receive if the merger is approved?

A:             Upon completion of the merger, you will be entitled to receive $43.50 in cash, without interest, for each share of Company common stock owned by you immediately prior to the effective time of the merger. “The Merger Agreement—Per Share Merger Consideration” on page 45.

Q:             What will happen in the proposed merger to options to purchase Company common stock and restricted stock units?

A:             At the effective time of the merger, each outstanding stock option of the Company, vested or unvested, will be cancelled and the holder thereof will only be entitled to receive, as soon as reasonably practicable after the effective time of the merger, an amount in cash equal to the total number of shares of Company common stock subject to such stock option multiplied by the excess, if any, of the value of the per share merger consideration (i.e., $43.50) over the exercise price per share under such option, less any required withholding taxes.

At the effective time, each right of any kind, contingent or accrued, vested or unvested, to acquire or receive shares of Company common stock or benefits measured by the value of shares of Company common stock, and each vested or unvested award of any kind consisting of shares of Company

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common stock that may be held, awarded, outstanding, payable or reserved for issuance under the Company’s stock plans, including restricted stock units under the Company’s stock plans (other than Company stock options which are addressed in the prior paragraph) will be cancelled and the holder thereof will only be entitled to receive from the surviving entity, as soon as reasonably practicable after the effective time of the merger, an amount in cash equal to the total number of shares of Company common stock subject to such awards multiplied by $43.50 (or, if the award provides for payments to the extent the value of the Company common stock exceeds a specified reference price, the amount, if any, by which $43.50 exceeds that reference price), less any required withholding taxes.

Q:             When and where is the special meeting?

A:             The special meeting of the Company’s stockholders will be held at [•] on [•], 2007, at [•] a.m., Pacific Daylight Time.

Q:             What matters will I vote on at the special meeting?

A:             You will vote on:

·       the approval of the merger agreement; and

·       such other business as may properly come before the special meeting or any adjournment thereof.

Q:             How does the Company’s board of directors recommend that I vote on the approval of the merger agreement?

A:             The board of directors unanimously recommends that you vote “FOR” the proposal to approve the merger agreement.

Q:             What vote of stockholders is required to approve the merger agreement?

A:             Under Nevada law and the Company’s restated articles of incorporation and amended and restated bylaws, in order for the merger agreement to be approved, the holders of a majority of the shares of Company common stock outstanding on the record date must vote in favor of approval of the merger agreement, provided that a quorum is present.

Q:             Who is entitled to vote?

A:             Stockholders of record as of the close of business on [•], 2007, the record date for the special meeting, are entitled to receive notice of and to vote at the special meeting. On the record date, approximately [•] shares of Company common stock, held by approximately [•] stockholders of record, were outstanding and entitled to vote at the special meeting. You may vote all shares you owned as of the close of business on the record date. All shares are entitled to one vote per share.

Most of the Company’s stockholders hold their shares through a stockbroker, bank, trustee or other nominee rather than directly in their own name. As summarized below, there are some distinctions between shares held of record and those owned beneficially:

·       STOCKHOLDER OF RECORD—If your shares are registered directly in your name with our Transfer Agent, Wells Fargo Bank, N.A., then you are considered the stockholder of record of those shares and these proxy materials are being sent directly to you by Wells Fargo. As the stockholder of record, you have the right to grant a proxy or vote in person at the meeting.

·       BENEFICIAL OWNER—If your shares are held in a stock brokerage account or otherwise, by a broker, bank, trustee, or other nominee, then you are considered the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your broker, bank, trustee, or other nominee who is considered the stockholder of record of those shares. As the beneficial owner, you have the right to direct your broker, bank, trustee, or other nominee on how

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to vote your shares. You are also invited to attend the special meeting. However, since you are not the stockholder of record, you may not vote these shares in person at the meeting, unless you first obtain a legal proxy from your broker, bank, trustee or other nominee holding your shares.

Under the voting and support agreement, Dr. Marlon has agreed to vote all shares of Company common stock he beneficially owns and as to which he has voting power (other than any shares of Company common stock as to which Dr. Marlon acts in a fiduciary capacity on behalf of persons other than members of his family) in favor of the approval of the merger agreement. As of [•], 2007, the record date for stockholders entitled to vote at the special meeting, Dr. Marlon beneficially owned [4,452,080] shares of Company common stock. Such shares represent approximately [8.0]% of the issued and outstanding Company common stock.

Q:             How do I cause my shares to be voted without attending the special meeting?

A:             If you hold shares directly as the STOCKHOLDER OF RECORD, you may vote your shares as follows:

·       Complete, sign and date your proxy card and mail it to Wells Fargo Shareholder Services in the postage-paid envelope provided with your proxy statement, or

·       Follow the instructions on your proxy card and vote over the Internet, or

·       Follow the instructions on your proxy card and vote by telephone.

If Wells Fargo Bank does not receive your voting instruction by one of the three ways described above, then your shares will not be voted.

If you hold shares BENEFICIALLY in street name, you may vote your shares as follows:

·       Submit your voting instruction form to your broker, bank, trustee or other nominee as instructed on the voting instruction form in the envelope provided with your proxy statement, or

·       Follow the instructions on your voting instruction form and vote over the Internet, or

·       Follow the instructions on your voting instruction form and vote by telephone.

If your broker, bank, trustee or other nominee does not receive your voting instruction by one of the three ways described above, then your shares will not be voted.

Q:             What does it mean if I get more than one proxy card or form of proxy submission instructions?

A:             If you have shares of Company common stock that are registered differently or are in more than one account, then you will receive more than one proxy card or voting instruction form. Please follow the directions for each proxy card or voting instruction form that you receive to ensure that all of your shares are voted.

Q:             How do I vote in person at the special meeting?

A:             If you hold shares in your name as the STOCKHOLDER OF RECORD, then you may vote your shares at the special meeting by giving us your signed ballot before the voting is closed. We recommend, however, that you submit your proxy card via mail or submit your voting instructions over the Internet or by telephone even if you plan to attend the special meeting. The giving of your proxy will not affect your right to vote in person should you decide to attend the special meeting. If you plan to vote your shares at the special meeting, then you must either bring your proxy card or proof of identification with you.

If you hold shares BENEFICIALLY in street name through a broker, bank, trustee or other nominee, then you may vote your shares in person at the special meeting only if you obtain and bring with you a

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legal proxy signed by your broker, bank, trustee or other nominee giving you the right to vote your shares. To do this, you will need to contact your broker, bank, trustee or other nominee prior to the special meeting. We recommend, however, that you submit your proxy card via mail or submit your voting instructions over the Internet or by telephone even if you plan to attend the special meeting.

Q:             Can I change my vote?

A:             After you submit a proxy for your shares, you may change your vote at any time before voting is closed at the special meeting. If you hold shares in your name as the stockholder of record and you previously submitted a proxy card, you should write to our Secretary at P.O. Box 15645, Las Vegas, Nevada, 89114-5645, stating that you want to revoke your proxy and that you need another proxy card. If you submitted the proxy you are seeking to revoke via the Internet or telephone, you may submit a new proxy using the same method of transmission (Internet or telephone) as the proxy being revoked. Attendance at the special meeting will not by itself constitute revocation of a proxy. If you attend the special meeting, you may vote by ballot as described above, which will cancel your previous vote. Your last proxy submission or vote, as the case may be, before voting is closed at the special meeting is the vote that will be counted. If you hold your shares in street name through a broker, bank or other nominee, you should follow your nominee’s proxy submission instructions.

Q:             What is a quorum for the special meeting?

A:             A quorum of the holders of the outstanding shares of Company common stock must be present for the special meeting to be held. A quorum exists if stockholders representing at least a majority of the outstanding shares of Company common stock entitled to vote at the special meeting are present in person or by proxy. Abstentions and broker non-votes (as described below) are counted as present for the purpose of determining whether a quorum is present.

Under the voting and support agreement, Dr. Marlon (who beneficially owns [8.0]% of the outstanding shares of Company common stock) is obligated to be present for purposes of determining that a quorum is present at the special meeting.

Q:             How are votes counted?

A:             You may vote “FOR”, “AGAINST” or “ABSTAIN” on the vote to approve the merger agreement. An abstention will not count as a vote cast “FOR” the merger agreement, but will count for the purpose of determining whether a quorum is present.

A broker non-vote generally occurs when a broker, bank or other nominee holding shares on your behalf does not vote on a proposal because the nominee has not received your voting instructions and lacks discretionary power to vote the shares. Like an abstention, broker non-votes will not count as votes cast in favor of a proposal, but will count for the purpose of determining whether a quorum is present.

The affirmative vote by the holders of a majority of the outstanding shares of Company common stock is required to approve the merger agreement. As a result, abstentions and broker non-votes on the proposal to approve the merger agreement will have the same effect as a vote “AGAINST” the approval of the merger agreement.

If you submit or appoint a proxy without indicating your vote, your shares will be voted “FOR” the approval of the merger agreement and in accordance with any recommendation of the board of directors or, in the absence of such recommendation, in the discretion of the proxies named in the enclosed proxy card on any other matter properly brought before the meeting for a vote.

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Q:             Do dissenters’ rights exist in connection with the merger?

A:             No, under Nevada law no dissenters’ rights or rights of appraisal will apply in connection with the merger.

Q:             Who will bear the cost of this solicitation?

A:             We will pay the cost of soliciting stockholder proxies, and have retained The Altman Group to assist us in this process for an estimated $9,500, plus expenses. We will, upon request, reimburse stockholders who are brokers, banks or other nominees for their reasonable expenses in sending proxy materials to the beneficial owners of the shares they hold of record. We will solicit proxies by mail and may also solicit them in person or by telephone, e-mail, facsimile or other electronic means of communication.

Q:             Should I send in my stock certificates now?

A:             No. Shortly after the merger is completed, you will receive a letter of transmittal with instructions informing you how to send your stock certificates to the paying agent in order to receive the per share merger consideration. You should use the letter of transmittal to exchange your Company stock certificates for the per share merger consideration to which you are entitled as a result of the merger. DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY CARD.

Q:             Who can help answer my other questions?

A:             If you have more questions about the merger, including the procedures for voting your shares, you should contact our proxy solicitor, The Altman Group, at 1200 Wall Street West, 3rd Floor, Lyndhurst, New Jersey, 07071, or by calling 201-806-7300. If your broker holds your shares, then you should also contact your broker for additional information.

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SUMMARY TERM SHEET 

The following summary highlights material information contained in this proxy statement but does not contain all of the information that may be important to you. You are urged to read the entire proxy statement carefully, including the appendices. The information contained in this summary is qualified in its entirety by reference to the more detailed information contained in this proxy statement and the appendices.

·       The Parties to the Merger. 

·       Sierra Health Services, Inc., based in Las Vegas, is a diversified health care services company that operates health maintenance organizations, indemnity insurers, preferred provider organizations, prescription drug plans and a multi-specialty medical group. The Company’s subsidiaries serve more than 850,000 people through health benefit plans for employers, government programs and individuals.

·       UnitedHealth Group Incorporated is a diversified health and well-being company dedicated to making health care work better. Headquartered in Minnetonka, Minnesota, UnitedHealth Group offers a broad spectrum of products and services through six operating businesses. Through its family of businesses, UnitedHealth Group serves approximately 70 million individuals nationwide.

·       Sapphire Acquisition, Inc., a Nevada corporation, is an indirect wholly-owned subsidiary of UnitedHealth Group that it formed for the sole purpose of effecting the merger. Sapphire Acquisition has not conducted any business operations other than in connection with the transactions contemplated by the merger agreement.

See “The Parties to the Merger” on page 14.

·       The Merger Agreement and the Merger.    You are being asked to vote to approve the merger agreement providing for the acquisition of the Company by UnitedHealth Group.

Under the merger agreement, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving entity and as an indirect wholly-owned subsidiary of UnitedHealth Group. The merger will occur according to the terms and conditions of the merger agreement, which is described in this proxy statement and is attached as Appendix A. You should read the description of the merger agreement in this proxy statement under the heading “The Merger Agreement,” as well as the merger agreement itself, carefully.

See “The Merger Agreement” on page 44.

·       The Voting and Support Agreement.    In connection with the execution of the merger agreement, Dr. Marlon entered into a voting and support agreement, dated as of March 11, 2007, with UnitedHealth Group with respect to 4,372,080 shares of Company common stock beneficially owned by Dr. Marlon on such date and any additional shares of Company common stock acquired by Dr. Marlon of record or otherwise beneficially owned (other than any shares of Company common stock as to which Dr. Marlon acts in a fiduciary capacity on behalf of persons other than members of his family) in which he agreed to vote such shares of Company common stock in favor of the approval of the merger agreement. As of [•], 2007, the record date for stockholders entitled to vote at the special meeting, Dr. Marlon beneficially owned [4,452,080] shares of Company common stock. Such shares represent approximately [8.0]% of the issued and outstanding Company common stock.

See “The Voting and Support Agreement” on page 58 and Appendix B—Voting and Support Agreement.

·       Timing and Likelihood of Closing.    We are working toward completing the merger as soon as possible, and we anticipate that it will be completed during the third or fourth quarter of 2007, assuming satisfaction or waiver of all of the conditions to the merger. However, because the merger is subject to

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certain conditions, the exact timing of the merger and the likelihood of its completion cannot be predicted. If certain of the conditions in the merger agreement are not satisfied, the merger agreement may be terminated.

See “The Merger Agreement—Conditions to Closing the Merger” on page 55.

·       Per Share Merger Consideration.    Upon completion of the merger, you will be entitled to receive $43.50 in cash, without interest, for each share of Company common stock owned by you immediately prior to the effective time of the merger.

See “The Merger Agreement—Per Share Merger Consideration” on page 45.

·       Board of Directors Recommendation.    The board of directors unanimously recommends that you vote “FOR” the approval of the merger agreement.

See “The Merger—Recommendation of the Board of Directors” on page 26.

·       Opinion of Lehman Brothers.    On March 11, 2007, Lehman Brothers rendered its opinion to the Company’s board of directors that, as of such date, and based on and subject to the matters stated in its opinion, from a financial point of view, the consideration to be offered to the stockholders of the Company in the merger was fair to such stockholders. The full text of Lehman Brothers’ written opinion, dated March 11, 2007, is attached as Appendix C to this proxy statement. Stockholders are encouraged to read Lehman Brothers’ opinion carefully in its entirety for a description of the assumptions made, procedures followed, factors considered and limitations on the review undertaken by Lehman Brothers in rendering its opinion.  Lehman Brothers’ opinion is not intended to be and does not constitute a recommendation to any Company stockholder as to how such stockholder should vote in connection with the merger.

See “The Merger—Opinion of Lehman Brothers” on page 26 and Appendix C—Opinion of Lehman Brothers.

·       Record Date and Voting Power.    You are entitled to vote at the special meeting if you owned of record shares of Company common stock as of the close of business on [•], 2007, the record date for the special meeting. Each outstanding share of Company common stock on the record date entitles the holder to one vote on each matter submitted to stockholders for approval at the meeting. As of the close of business on the record date, there were [•] shares of Company common stock outstanding and entitled to vote.

See “The Special Meeting—Record Date, Quorum and Voting Power” on page 14.

·       Stockholder Vote Required to Approve the Merger Agreement.    For the merger agreement to be approved, the holders of a majority of the shares of Company common stock outstanding as of the close of business on the record date must vote “FOR” the approval of the merger agreement.

In connection with the execution of the merger agreement, Dr. Marlon entered into a voting and support agreement, dated as of March 11, 2007, with UnitedHealth Group in which he agreed to vote all shares of Company common stock he beneficially owns (other than any shares of Company common stock as to which Dr. Marlon acts in a fiduciary capacity on behalf of persons other than members of his family) in favor of the approval of the merger agreement. As of [•], 2007, the record date for stockholders entitled to vote at the special meeting, Dr. Marlon beneficially owned [4,452,080] shares of Company common stock. Such shares represent approximately [8.0]% of the issued and outstanding Company common stock.

See “The Special Meeting—Required Vote” on page 15.

·       Material United States Federal Income Tax Consequences.    If you are a U.S. holder of Company common stock, then the merger will be a taxable transaction for you. You should consult your own tax advisor for a full understanding of how the merger will affect your individual income taxes.

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See “The Merger—Material United States Federal Income Tax Consequences” on page 42.

·       Dissenters’ Rights.  Under Nevada law, no dissenters’ rights or rights of appraisal will apply in connection with the merger.

See “The Merger Agreement-Dissenters’ Rights” on page 46 and “Dissenters’ Rights” on page 59.

·       Share Ownership of Directors, Executive Officers and Certain Beneficial Owners.    As of [•], 2007, the record date for the special meeting, our directors, including Dr. Marlon, are beneficial owners of a total of [•] shares of Company common stock, representing [•]% of the shares outstanding and entitled to vote at the special meeting.

As discussed above, in connection with the execution of the merger agreement, Dr. Marlon entered into a voting and support agreement, dated as of March 11, 2007, with UnitedHealth Group in which he agreed to vote all shares of Company common stock he beneficially owns (other than any shares of Company common stock as to which he acts in a fiduciary capacity on behalf of persons other than members of his family) in favor of approval of the merger agreement.

See “The Special Meeting—Required Vote” on page 15, “Security Ownership of Certain Beneficial Owners and Management” on page 60.

·       Interests of the Company’s Directors, Executive Officers and Certain Beneficial Owners in the  Merger.   Our directors and executive officers have interests in the merger that may differ from your interests, including the following:

·       At the effective time of the merger, each holder of outstanding stock options of the Company, including certain of the Company’s directors, officers and beneficial owners, will be entitled to receive an amount in cash equal to the total number of shares of Company common stock subject to such stock option multiplied by the excess, if any, of the value of the per share merger consideration (i.e., $43.50) over the exercise price per share under such option, less any required withholding taxes.

·       At the effective time, each holder of rights of any kind to acquire or receive shares of Company common stock or benefits measured by the value of shares of Company common stock, including certain of the Company’s directors, officers and beneficial owners, and each holder of awards of any kind consisting of shares of Company common stock that may be held, awarded, outstanding, payable or reserved for issuance under the Company’s stock plans (other than Company stock options which are addressed above), including restricted stock units under the Company’s stock plans, including certain of the Company’s directors, officers and beneficial owners, will be entitled to receive an amount in cash equal to the total number of shares of Company common stock subject to such awards multiplied by $43.50 (or, if the award provides for payments to the extent the value of the Company common stock exceeds a specified reference price, the amount, if any, by which $43.50 exceeds that reference price), less any required withholding taxes.

·       The Company has entered into employment agreements with certain of our executive officers that provide for severance payments under certain circumstances as a result of the merger. Certain of these agreements will be superseded at the effective time of the merger by the agreements with UnitedHealth Group that are discussed below.

·       UnitedHealth Group entered into employment agreements with certain of our executive officers, each commencing on the effective time of the merger. These agreements are intended to supersede and replace any earlier agreements we have with them. Within 15 days of the effective time of the merger, and in lieu of any potential payments these executives would have received in the event of a change in control of the Company, they will receive one or more of the following: a sign-on bonus, other cash payments and/or a restricted stock grant from UnitedHealth Group.

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·       UnitedHealth Group has agreed to provide to our employees employed immediately prior to the effective time of the merger and who remain employed with the surviving entity, compensation and employee benefits (other than accruals of supplemental executive retirement plan benefits for service after the effective time of the merger) that are, in the aggregate, no less favorable than the compensation and employee benefits provided to such persons immediately prior to the effective time of the merger for a period of one year, and UnitedHealth Group must thereafter provide compensation and employee benefits to such persons that are no less favorable, in the aggregate, than the compensation and employee benefits provided to similarly situated employees of UnitedHealth Group (including by providing credit to such employees for any co-payments or deductibles paid prior to the effective time of the merger under any pre-existing Company plan.

·       Under the Company’s “Project Pay Plan” the Company pays certain bonuses to individuals who work on specific projects. The Company expects to pay bonuses of approximately $1.5 million to approximately sixty (60) individuals who, during the months leading up to the merger, worked on the merger and the other transactions contemplated by the merger agreement.

·       The merger agreement provides for director and officer indemnification arrangements and insurance coverage for each of our directors and officers that are currently covered by the Company’s indemnification arrangements and directors’ and officers’ liability insurance policy that will continue for six years following completion of the merger.

·       On March 11, 2007, the Company entered into separate indemnity agreements with each of our directors and with a number of our officers and our subsidiaries’ officers in which the Company agreed to indemnify these individuals to the fullest extent permitted by Nevada law, by our restated articles of incorporation and by our amended and restated bylaws in proceedings commenced by third parties, in derivative actions, and in situations where any of them becomes a witness or is threatened to be made a witness in a proceeding.

·       The board of directors has taken steps to exempt from short-swing profit liability under Rule 16b-3 promulgated under the Exchange Act any dispositions of Company common stock in the merger by directors or officers of the Company who are subject to Section 16 of the Exchange Act.

See “The Merger—Interests of the Company’s Directors, Executive Officers and Certain Beneficial Owners in the Merger” on page 34.

·       Company Takeover Proposals; Company Superior Proposals.    The merger agreement prohibits us, and the voting and support agreement prohibits Dr. Marlon, from soliciting and engaging in discussions or negotiations with third parties regarding competing takeover proposals for the acquisition of the Company. Despite these restrictions, if our board of directors determines (after receiving advice from our outside counsel) that there is a reasonable probability that failure to participate in discussions or negotiations would be inconsistent with the board of directors’ fiduciary duties to the Company, the board of directors may, in response to an unsolicited competing takeover proposal for the acquisition of the Company that the board of directors determines (after receiving advice from a financial advisor of nationally recognized reputation and our outside counsel) constitutes or is reasonably likely to lead to a superior proposal, engage in discussions or negotiations with third parties so long as UnitedHealth Group is notified prior to such determination.

See “The Merger Agreement—Company Takeover Proposals; Company Superior Proposals” on page 53 and “The Merger Agreement—Termination Fees” on page 57.

·       Regulatory Approvals.    The merger is subject to U.S. antitrust laws. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), each of UnitedHealth Group and the Company was required to file Hart-Scott Rodino notification and report forms with the Antitrust Division of the Department of Justice, referred to as the DOJ, and the U.S. Federal Trade Commission,

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referred to as the FTC, and certain waiting periods must be terminated or expire before the merger can be completed. The applicable waiting period began on April 16, 2007, the date of filing by both parties, and will expire on May 16, 2007, unless the waiting period is earlier terminated or extended by a request for additional information. In addition, certain state attorneys general may review the proposed transaction to determine if there are potential antitrust issues arising therefrom. The DOJ or the FTC, as well as a State Attorney General or private person, may challenge the merger at any time before or after its completion.

In addition, pursuant to applicable state laws and regulations, in order for the parties to complete the merger, the Nevada Commissioner of Insurance must approve UnitedHealth Group’s acquisition of control of Health Plan of Nevada, Inc., the Company’s health maintenance organization, and the California Commissioner of Insurance must approve UnitedHealth Group’s acquisition of control of Sierra Health and Life Insurance Company, Inc. In addition, pre-acquisition notification forms are required to be filed with the Commissioners of Insurance in Arizona and Nevada, respectively. To obtain the requisite approvals, UnitedHealth Group has filed acquisition of control applications in Nevada and California and has filed pre-acquisition notification forms in Arizona and Nevada. There can be no assurance that any of these local authorities will grant the necessary approvals or consents in order for the merger to be completed.

While UnitedHealth Group and the Company expect to obtain all required regulatory approvals, we cannot assure you that these regulatory approvals will be obtained or that the granting of these regulatory approvals will not involve the imposition of conditions on the completion of the merger. Such conditions or changes could result in the conditions to the merger not being satisfied.

See “The Merger—Regulatory Approvals” on page 43.

Conditions to Closing.    Before we can complete the merger, a number of conditions must be satisfied or waived (to the extent waiver is permitted by law).

The merger agreement contains the following mutual conditions to closing:

·       the merger agreement must have been approved by the holders of a majority of the outstanding shares of Company common stock;

·       the waiting period (and any extension thereof) applicable to the merger under the HSR Act, and any other clearances or approvals required under other applicable competition, merger control, antitrust or similar laws must have been granted, terminated or have expired, without any conditions, restrictions, or requirements, subject to certain exceptions;

·       certain regulatory consents must have been obtained and must be in full force and effect, without any conditions, restrictions, or requirements that would have a material adverse effect; and

·       no temporary restraining order, preliminary or permanent injunction or other judgment, order or decree issued by any court of competent jurisdiction or other statute, law, rule, legal restraint or prohibition shall be in effect preventing the consummation of the merger.

The obligation of UnitedHealth Group and Merger Sub to effect the merger is subject to the satisfaction or waiver by UnitedHealth Group of the following conditions:

·       the representations and warranties of the Company set forth in the merger agreement (other than certain representations and warranties relating to the capital structure of the Company) must be true and correct in all respects as of the effective time of the merger (except to the extent that any such representations and warranties expressly relate to an earlier date, in which case such representations and warranties must be true and correct as of such other time), except where the failure of such representations and warranties to be so true and correct (without giving effect to any “materiality” or “material adverse effect” or similar qualifiers set forth in the merger agreement)

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does not have, and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Company and its subsidiaries, taken as a whole, and certain other representations and warranties relating to the capital structure of the Company must be true and correct in all respects (subject to certain de minimis exceptions) as of the effective time of the merger; and

·       the Company must have performed in all material respects all of the obligations required to be performed by it under the merger agreement at or prior to the closing date of the merger.

See “The Merger Agreement—Conditions to Closing the Merger” on page 55.

·       Termination of the Merger Agreement.    The Company and UnitedHealth Group may mutually agree to abandon or terminate the merger agreement at any time prior to the effective time of the merger, even after our stockholders have approved the merger agreement. The merger agreement may also be terminated in certain other circumstances, including:

·       the merger is not completed on or before December 11, 2007 (the “termination date”), provided, however, that if on the termination date all conditions to closing have been satisfied except for the fact that a governmental authority is seeking to restrain, enjoin or prohibit the merger, then the termination date of the merger agreement will be automatically extended to March 11, 2008, provided, further, that the right to terminate the merger agreement under this condition will not be available to any party whose action or inaction is the principal cause of the merger not being completed on or before the termination date;

·       if the merger is permanently restrained, enjoined or otherwise prohibited;

·       if stockholder approval of the merger agreement is not obtained at the special meeting for stockholders or any adjournment thereof;

·       if the Company’s board of directors changes its recommendation with respect to the merger; or

·       the other party has breached or failed to perform any of its respective representations, warranties, covenants or other agreements set forth in the merger agreement, which breach or failure to perform would result in the failure of a closing condition (see “The Merger Agreement—Conditions to Closing the Merger”) and such breach or failure to perform is not cured within 30 calendar days after receipt of written notice from the other party of such breach or failure to perform.

Despite the foregoing, a party may not terminate the merger agreement if at the time of such termination such party is in breach or has failed to perform any of its representations, warranties, covenants or agreements set forth in the merger agreement so as to give rise to the failure of a closing condition of that party.

See “The Merger Agreement—Termination of the Merger Agreement” on page 56.

·       Termination Fees. 

·       Company Termination Fee. If the merger agreement is terminated, then in certain circumstances we may be obligated to pay UnitedHealth Group an $85.0 million termination fee.

·       UnitedHealth Group Termination Fee. If the merger agreement is terminated for certain regulatory reasons, then UnitedHealth Group may be obligated to pay us a $25.0 million termination fee.

See “The Merger Agreement—Termination Fees” on page 57.

·       Procedure for Receiving the Per Share Merger Consideration.    As soon as reasonably practicable after the merger becomes effective, a paying agent designated by UnitedHealth Group will mail a form of

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letter of transmittal and instructions to all of the Company’s stockholders of record. The form of letter of transmittal and instructions will tell you how to surrender your Company stock certificates in exchange for $43.50 per share, without interest. You should not return any stock certificates you hold with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

See “The Merger Agreement—Exchange and Payment Procedures” on page 45.

·       Market Prices of the Company’s Common Stock.    The Company common stock is listed and traded on the New York Stock Exchange, or NYSE, under the symbol “SIE.”  The closing sale price per share of Company common stock as quoted on the NYSE was (1) $35.90 on March 9, 2007, the last trading day before the Company announced that it had entered into the merger agreement and (2) $[•] on [•], 2007, the last trading day before this proxy statement was first given or sent.

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CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION 

Certain statements contained in this proxy statement regarding the merger and our future operating results, performance, business plans and prospects and any other statements not constituting historical fact are “forward-looking statements” subject to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “believe,” “expect,” “anticipate,” “should,” “will,” “would,” “plan,” “estimate,” “potential,” “goal,” “outlook,” “may,” “predicts,” “could,” or the negative of those words and other comparable expressions are used to identify such forward-looking statements. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties that could cause actual results and events to differ materially from those described in the forward-looking statements.

We believe the following factors related to the merger could cause actual results or events to differ materially from those described in the forward-looking statements:

·       the satisfaction of the conditions to the completion of the merger, including the receipt of the required stockholder and regulatory approval;

·       the occurrence of events, changes or other circumstances that could give rise to the termination of the merger agreement;

·       the outcome of any legal proceedings against us and others that have been or may be instituted following announcement of the merger agreement; and

·       the failure of the merger to close for any reason including, among other things, the failure of either the Company or UnitedHealth Group to perform all of the covenants and agreements required to be performed by it under the merger agreement at or prior to the closing of the merger.

We believe the following factors related to our future operating results if the merger is not completed could cause actual results to differ materially from those described in the forward-looking statements:

·       future legislative changes related to the health care or managed care industries;

·       competitive pressures on prices;

·       significant reductions in account and member retention;

·       loss of Medicare, Medicaid, or large commercial contracts;

·       loss of or significant changes in our health care provider contracts;

·       a sustained economic recession, especially in Nevada;

·       adverse legal judgments that are not covered by insurance or that indirectly impact our ability to obtain insurance in the future at reasonable costs;

·       diversion of management and employee attention and potential employee attrition as a result of the merger process;

·       the potential effect on business, employee and customer relationships and potential litigation, brought by stockholders of the Company, arising from the merger agreement or the transactions contemplated thereby; and

·       the restrictions on the conduct of the Company’s business prior to the completion of the merger, including restrictions on incurring indebtedness, canceling, modifying, terminating or waiving material contracts and permits, acquiring or selling assets and exceeding the Company’s current capital expenditure budget.

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All forward-looking statements reflect only our current beliefs and assumptions, and are based solely on information currently available to us. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or events. These forward-looking statements are made as of the date of this proxy statement and, except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (the “SEC”), we assume no obligation to update or revise them or to provide reasons why actual results or events may differ.

THE PARTIES TO THE MERGER 

Sierra Health Services, Inc. 

We are a Nevada corporation, with our principal executive office at 2724 North Tenaya Way, Las Vegas, Nevada 89128. The phone number for our principal executive office is 702-242-7000. We are a diversified health care services company that operates health maintenance organizations, indemnity insurers, preferred provider organizations, prescription drug plans and multi-specialty medical groups. Our subsidiaries serve more than 850,000 people through health benefit plans for employers, government programs and individuals.

UnitedHealth Group Incorporated 

UnitedHealth Group is a Minnesota corporation with its principal executive office at UnitedHealth Group Center, 9900 Bren Road East, Minnetonka, Minnesota, 55343. The phone number for UnitedHealth Group’s principal executive office is 952-936-1300. UnitedHealth Group is a diversified health and well-being company dedicated to making health care work better. Headquartered in Minnetonka, Minnesota, UnitedHealth Group offers a broad spectrum of products and services through six operating businesses. Through its family of businesses, UnitedHealth Group serves approximately 70 million individuals nationwide.

Sapphire Acquisition, Inc. 

Sapphire Acquisition, Inc., a Nevada corporation, is an indirect wholly-owned subsidiary of UnitedHealth Group that it formed for the sole purpose of effecting the merger. Sapphire Acquisition’s mailing address is c/o UnitedHealth Group Incorporated, UnitedHealth Group Center, 9900 Bren Road East, Minnetonka, Minnesota, 55343, and its telephone number is c/o UnitedHealth Group Incorporated, 952-936-0100. Sapphire Acquisition has not conducted any business operations other than in connection with the transactions contemplated by the merger agreement.

THE SPECIAL MEETING 

Time, Place and Purpose of the Special Meeting 

This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by the board of directors for use at the special meeting of stockholders to be held at [•] on [•], 2007, at [•] a.m., Pacific Daylight Time, or any adjournment thereof. The purpose of the special meeting is for our stockholders to consider and vote upon a proposal to approve the merger agreement and to act on such other matters and transact such other business as may properly come before the special meeting or any adjournment thereof. A copy of the merger agreement is attached to this proxy statement as Appendix A. This proxy statement, the Notice of Special Meeting of Stockholders and the enclosed proxy card are first being given or sent to our stockholders on or about [•], 2007.

Record Date, Quorum and Voting Power 

The holders of record of Company common stock as of the close of business on [•], 2007, the record date for the special meeting, are entitled to receive notice of, and to vote at, the special meeting or any

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adjournment thereof. As of the close of business on the record date, there were [•] shares of Company common stock outstanding and entitled to vote.

Each outstanding share of Company common stock as of the close of business on the record date entitles the holder to one vote on each matter submitted to stockholders for a vote at the special meeting or any adjournment thereof.

The holders of a majority of the shares of Company common stock outstanding on the record date, represented in person or by proxy, will constitute a quorum for purposes of the special meeting. A quorum is necessary to hold the special meeting. Once a share is represented at the special meeting, it will be counted for the purpose of determining a quorum at the special meeting and at any adjournment thereof. However, if a new record date is set for an adjourned special meeting, then a new quorum would need to be established.

Under the voting and support agreement, Dr. Marlon (who beneficially owns [8.0]% of the outstanding shares of Company common stock) is obligated to be present for purposes of determining that a quorum is present at the special meeting.

See “The Voting and Support Agreement” on page 58 and Appendix B—Voting and Support Agreement.

Required Vote 

For the merger agreement to be approved, the holders of a majority of the shares of Company common stock outstanding as of the close of business on the record date must vote “FOR” the approval of the merger agreement.

If you are a STOCKHOLDER OF RECORD (which means that your shares are registered directly in your name with our Transfer Agent, Wells Fargo Bank, N.A.), then you may submit your proxy card for your shares via mail in the postage-paid envelope provided with your proxy statement, or you may cast your vote via the Internet or telephone. Submitting your vote by mail, Internet or telephone will not affect your right to vote in person should you decide to attend the special meeting.

As a STOCKHOLDER OF RECORD, you may vote your shares as follows:

·       Complete, sign and date your proxy card and mail it to Wells Fargo Shareholder Services in the postage-paid envelope provided with your proxy statement, or

·       Follow the instructions on your proxy card and vote over the Internet, or

·       Follow the instructions on your proxy card and vote by telephone.

If Wells Fargo Bank does not receive your proxy in one of the three ways described above and you do not vote at the special meeting, then your shares will not be voted.

If your shares are held BENEFICIALLY in street name (which means your shares are held in a stock brokerage account, by a broker, bank, trustee, or other nominee), then you may instruct your broker, bank, trustee or other nominee how to vote your shares by submitting the voting instruction form via mail in the envelope provided with your proxy statement, or by casting your vote via the Internet or telephone.

As a BENEFICIAL holder of shares of Company common stock, you may vote your shares as follows:

·       Submit your voting instruction form to your broker, bank, trustee or other nominee as instructed on the voting instruction form in the envelope provided with your proxy statement, or

·       Follow the instructions on your voting instruction form and vote over the Internet, or

·       Follow the instructions on your voting instruction form and vote by telephone.

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If your broker, bank, trustee or other nominee does not receive your voting instruction in one of the three ways described above, then your shares will not be voted.

A broker non-vote generally occurs when a broker, bank, trustee or other nominee holding shares on your behalf does not vote on a proposal because the broker, bank, trustee or other nominee has not received your voting instructions and lacks discretionary power to vote the shares. Broker non-votes and abstentions will not count as votes cast in favor of the proposal to approve the merger agreement, but will count for the purpose of determining whether a quorum is present. As a result, abstentions and broker non-votes will have the same effect as a vote against the approval of the merger agreement.

Voting by Directors, Executive Officers and Certain Record Holders 

As of [•], 2007, the record date for the special meeting, our directors, including Dr. Marlon, are the beneficial owners of an aggregate of [•] shares of Company common stock, representing [•]% of the shares outstanding entitled to vote at the special meeting.

In connection with the execution of the merger agreement, Dr. Marlon entered into a voting and support agreement, dated as of March 11, 2007, with UnitedHealth Group in which he agreed to vote all shares of Company common stock he beneficially owns (other than any shares of Company common stock as to which Dr. Marlon acts in a fiduciary capacity on behalf of persons other than members of his family) in favor of the approval of the merger agreement. As of [•], 2007, the record date for stockholders entitled to vote at the special meeting, Dr. Marlon beneficially owned [4,452,080] shares of Company common stock. Such shares represent approximately [8.0]% of the outstanding Company common stock.

See “Security Ownership of Certain Beneficial Owners and Management” on page 60, “The Voting and Support Agreement” on page 58 and Appendix B—Voting and Support Agreement.

Proxies; Revocation 

If you submit a proxy for your shares by signing and delivering a proxy card, your shares will be voted at the special meeting in accordance with the instructions given. If no instructions are indicated on your signed proxy card, your shares will be voted “FOR” the approval of the merger agreement and in accordance with any recommendation of the board of directors or, in the absence of a recommendation, in the discretion of the proxies named in the enclosed proxy card on any other matter properly brought before the meeting for a vote.

You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must either (i) advise our Secretary in writing that you would like to revoke your proxy, (ii) submit a later-dated proxy in writing, provided that if you submitted the proxy that you are seeking to revoke via the Internet or telephone, you may submit this later-dated proxy using the same method of transmission (Internet or telephone) as the proxy being revoked or (iii) attend the special meeting and vote your shares in person. Attendance at the special meeting will not by itself constitute revocation of a proxy.

If you have instructed your broker, bank or other nominee to vote your shares, the above options for revoking your proxy do not apply and instead you must follow the proxy submission instructions provided by your nominee to change your voting instructions.

The Company does not expect that any matter will be brought before the special meeting other than the proposal to approve the merger agreement. If, however, another matter is properly presented at the special meeting or any adjournment thereof, the persons named as proxies in the enclosed proxy card will vote the shares in accordance with the recommendation of the board of directors or, in the absence of such a recommendation, in the discretion of the proxies.

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Expenses of Proxy Solicitation 

The Company will pay the cost of this proxy solicitation, and we have retained The Altman Group to assist us in this process for an estimated $9,500, plus expenses. We will, on request, reimburse stockholders who are brokers, banks or other nominees for their reasonable expenses in sending proxy materials to the beneficial owners of the shares they hold of record. We will solicit proxies by mail and may also solicit them in person or by telephone, e-mail, facsimile or other electronic means of communication.

Adjournments 

Although it is not currently expected, the special meeting may be adjourned if a quorum is not present or for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the merger agreement. If the special meeting is adjourned, notice need not be given of the date, time or place of the adjourned meeting if they are announced at the special meeting, unless the adjournment is for more than 45 days. A determination of stockholders of record entitled to notice of or to vote at the special meeting applies to an adjournment of the meeting unless the board of directors fixes a new record date for the adjourned meeting. The board of directors will fix a new record date if the meeting is adjourned to a date more than 45 days later than the date set for the special meeting. If a new record date is fixed for the adjourned meeting, the Company will give notice of the adjourned meeting to each stockholder of record as of the new record date.

THE MERGER 

Background of the Merger 

At various times over the past several years the Company’s board of directors has considered alternatives to maximize value for our stockholders, including, but not limited to, the sale or merger of the Company with another entity, strategic acquisitions by the Company and growing the Company’s healthcare business consistent with its business plan. As part of this process, in 2002, the Company retained Merrill Lynch to assist the Company in evaluating strategic alternatives. Beginning in 2002, and continuing through the end of 2003, the Company, with Merrill Lynch’s assistance, gauged the interest levels of different potential acquirors and held exploratory discussions with some of them.

In December 2003, the Company, with Merrill Lynch’s assistance, focused on one potential bidder. Between December 2003 and February 2004 this bidder conducted a detailed financial and legal due diligence review of the Company, its operations and prospects. Discussions were held with the representatives of this bidder regarding the possible terms for a sale of the Company. In February 2004, these discussions ceased as a result of the inability of the Company and the bidder to agree upon the consideration to be paid to the Company’s stockholders. The closing sale prices of the Company common stock as quoted on the NYSE in February 2004 ranged between $14.70 and $16.72 (as adjusted to give effect to our 2 for 1 stock split on December 30, 2005).

Following the termination of these negotiations, the Company continued to focus on developing and expanding its core businesses and strategies.

Upon the expiration of the engagement letter between the Company and Merrill Lynch, the Company subsequently engaged Lehman Brothers to assist it in analyzing its strategic alternatives. The Company signed an engagement letter with Lehman Brothers on August 10, 2004.

From August 2004 though October 2006, representatives of Lehman Brothers and management of the Company considered potential strategic alternatives. Although the southern Nevada healthcare industry continued to grow as the region’s population expanded at a significant pace, which led to continued growth in the Company’s business and revenues, the Company, despite its and its investment bankers’ efforts over the years, had not been able to identify suitable acquisition candidates or other avenues for significant

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growth. In addition, the Nevada gaming industry, which had been a principal source of the Company’s business and growth, began to consolidate on a national basis with the result that these multi-state gaming companies began to look for national solutions to their healthcare needs. As a regional healthcare provider, the Company recognized that it could not fulfill the national needs of these customers and could lose business as the trend toward gaming industry consolidation continued. At the same time, because of the Company’s strong history of organic growth, its stock price reflected one of the higher earnings per share multiples among its peers.

With these factors in mind, the Company explored its possible sale. Lehman Brothers, as part of its regular discussions with larger national and regional healthcare providers and other potential acquirors, attempted to gauge their interest in acquiring the Company. As a result of these inquiries, between August 2004 and December 2006, the Company entered into confidentiality agreements with parties that had expressed interest in possibly acquiring the Company, including both UnitedHealth Group and Bidder A (discussed below). Pursuant to these confidentiality agreements, the Company provided each of these potential acquirors with information and data to enable them to evaluate the Company and determine whether to proceed to negotiating a potential acquisition. As of the end of September 2006, however, the Company had not received any significant expressions of interest from any of these potential acquirors.

In October 2006, one of these potential acquirors (“Bidder A”) notified the Company that it wished to re-engage in discussions to acquire the Company. As a result, on October 9, 2006, Bidder A and the Company entered into an amendment extending the term of their existing confidentiality agreement. On October 9, 2006, representatives of the Company and Lehman Brothers met with representatives of Bidder A to discuss operational and financial matters relating to Bidder A’s possible acquisition of the Company. Throughout the rest of October 2006, representatives of the Company and Lehman Brothers held further discussions with representatives of Bidder A. On or about October 31, 2006, Bidder A informed Lehman Brothers (and Lehman Brothers informed the Company) that Bidder A’s board of directors had authorized Bidder A to have further discussions with the Company and to initiate detailed legal and financial due diligence with a view towards Bidder A’s acquisition of the Company. Beginning on November 6, 2006, the Company provided additional due diligence information and data to Bidder A through an electronic data room. Additional discussions were held between the Company and Bidder A throughout November and December 2006, including a detailed management presentation made by the Company to Bidder A’s management team on November 13 and November 14, 2006 and meetings between representatives of the Company and Bidder A on December 22, 2006 to discuss various matters relating to the Company.

On December 5, 2006, Company management reported to the Company’s board of directors as to the discussions with Bidder A and the level of interest from other potential acquirors.

On December 6, 2006, Lehman Brothers informed the Company that UnitedHealth Group had expressed an interest in re-engaging in discussions with the Company with a view to a possible acquisition of the Company. As a result, on December 20, 2006, UnitedHealth Group and the Company entered into a confidentiality agreement and, on December 21, 2006, representatives of the Company and Lehman Brothers met with representatives of UnitedHealth Group to discuss various high-level matters relating to UnitedHealth Group’s possible acquisition of the Company.

The Company continued preliminary discussions with UnitedHealth Group and Bidder A in January 2007. At the same time, Lehman Brothers continued to solicit indications of interest in the Company from other larger health care companies and other potential acquirors.

During the first two weeks of January 2007, the Company and its advisors held discussions with respect to developing a sale process that could be employed by the Company with UnitedHealth Group and with Bidder A, in order to achieve the best reasonably attainable terms for a sale of the Company.

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On January 16, 2007, UnitedHealth Group informed Lehman Brothers (and Lehman Brothers informed the Company) that UnitedHealth Group was potentially interested in commencing due diligence and in exploring an acquisition of the Company in an all cash transaction at a price range of $38.50 to $40.00 per share of Company common stock, pending the outcome of UnitedHealth Group’s due diligence. The closing sale price of the Company common stock as quoted on the NYSE on January 16, 2007 was $35.92 per share. Representatives of the Company and UnitedHealth Group met on January 16, 2007 to discuss logistical details of due diligence and, beginning on January 17, 2007, the Company made due diligence materials available to UnitedHealth Group through an electronic data room.

On January 19, 2007, Bidder A informed Lehman Brothers (and Lehman Brothers informed the Company) that Bidder A had substantially concluded its due diligence review of the Company and was interested in pursuing an acquisition of the Company in an all cash transaction at a price of $38.00 per share of Company common stock. The closing sale price per share of the Company common stock as quoted on the NYSE on January 19, 2007 was $35.86 per share.

On January 25, 2007, the Company’s board of directors held a special meeting to discuss the status of the preliminary discussions with UnitedHealth Group and Bidder A. At this meeting, members of the Company’s management and representatives of Lehman Brothers reported to the board of directors on the status of the preliminary discussions with UnitedHealth Group and Bidder A. The board of directors discussed the per share prices indicated by both UnitedHealth Group and Bidder A and further discussed the sale process (including the possibility of the Company remaining independent). The board of directors determined that it did not need to accept any offer unless it received a purchase price and transaction terms that were advisable to and in the best interests of the stockholders. As a result of these discussions, the board of directors unanimously concluded that an offer below $40.00 per share would not be an adequate price for the Company. At this meeting, a presentation was made by representatives of Morgan, Lewis & Bockius LLP, counsel to the Company (“Morgan Lewis”) and Brownstein Hyatt Farber Schreck, P.C., the Company’s Nevada counsel (“Brownstein Hyatt”), regarding the board of directors’ fiduciary duties in a sale process. As a result of these discussions and presentations, the board of directors authorized the Company’s senior management to continue discussions with a view to concluding an agreement for the sale of the Company if an appropriate valuation could be reached.

From January 23, 2007 through February 13, 2007, UnitedHealth Group continued its due diligence review of the Company and engaged in several discussions with senior management of the Company relating to due diligence matters. On February 2, 2007, a senior executive of Bidder A contacted the Company and stated that Bidder A continued to value the Company at a price equal to $38.00 per share. The closing sale price per share of the Company common stock as quoted on the NYSE on February 1, 2007 (the last trading day before February 2, 2007) was $40.60. On or about February 17, 2007, senior management of UnitedHealth Group contacted senior management of the Company and indicated that UnitedHealth Group was willing to make an all-cash offer to acquire the Company at a price approximately equal to the then current trading price of Company common stock. The closing sale price per share of the Company common stock as quoted on the NYSE on February 16, 2007 (the last trading day before February 17, 2007) was $40.54 per share.

On February 21, 2007, our board of directors held a special meeting to discuss UnitedHealth Group’s indication of an all-cash offer and the status of the negotiations with Bidder A.

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On February 23, 2007, members of the senior management team of UnitedHealth Group and the Company met to further discuss UnitedHealth Group’s possible acquisition of the Company. At this meeting, UnitedHealth Group expressed its interest in pursuing an all-cash transaction at a price between $40.00 and $41.00 per share of Company common stock and requested that the Company enter into an exclusivity agreement with UnitedHealth Group to provide UnitedHealth Group with an opportunity to complete its due diligence review and to negotiate a definitive merger agreement. The Company’s management declined to enter into an exclusivity agreement with UnitedHealth Group but indicated that the Company would work with UnitedHealth Group to finalize UnitedHealth Group’s due diligence process and to negotiate a merger agreement as promptly as practicable.

Later in the day on February 23, 2007, the board of directors held a special meeting to discuss the sales process (including a detailed discussion of UnitedHealth Group’s offer). Additionally, on February 23, 2007, the Company received from UnitedHealth Group a proposed draft of a merger agreement to be used in connection with UnitedHealth Group’s acquisition of the Company. On March 1, 2007, Dr. Marlon received from UnitedHealth Group a proposed draft of a voting and support agreement to be entered into by Dr. Marlon in support of UnitedHealth Group’s acquisition of the Company. From February 23 through March 5, 2006, the Company’s senior management and representatives of its outside counsel engaged in discussions with representatives of UnitedHealth Group and its counsel over various aspects of the merger agreement and the voting and support agreement. The principal issues addressed in such negotiations included the scope of the Company’s representations and warranties, the restrictions on the Company’s conduct of business during the period between signing and closing, the ability of the Company’s board of directors to change its recommendation and terminate the merger agreement, termination fees payable by the Company and by UnitedHealth Group if the merger agreement were terminated and UnitedHealth Group’s ability to terminate the merger agreement as a result of regulatory issues arising out of the transaction. During this time certain members of senior management of the Company and representatives of Lehman Brothers held several discussions with members of the senior management of UnitedHealth Group regarding the potential transaction, including UnitedHealth Group’s position that the transaction be conditioned on certain members of the Company’s senior management team signing employment agreements with UnitedHealth Group.

On March 5, 2007, the board of directors held a special meeting to receive a report on the negotiations with UnitedHealth Group. This update included a discussion of the price offered by UnitedHealth Group and the employment agreements that UnitedHealth Group wished to enter into with the Company’s senior management team. The board of directors determined that they would allow UnitedHealth Group to enter into post-closing employment agreements with members of the Company’s senior management team (other than Dr. Marlon) at the same time as executing the merger agreement but that the closing of the merger would not be conditioned on the effectiveness of such agreements. Representatives of Lehman Brothers and Morgan Lewis discussed with the board of directors the status of the merger agreement. The material issues that remained outstanding at that time were the board of directors’ ability to change its recommendation and terminate the merger agreement, termination fees payable by the Company and by UnitedHealth Group if the merger agreement was terminated and UnitedHealth Group’s ability to terminate the merger agreement as a result of regulatory issues arising out of the transaction. There were further discussions with the board of directors concerning its fiduciary duties in connection with the proposed transaction.

Later in the day on March 5, 2007, a senior officer of Bidder A contacted Dr. Marlon and expressed a continued interest in a potential acquisition of the Company by Bidder A and stated that Bidder A intended to submit a written proposal to such effect (including an increased price) after such proposal was approved by Bidder A’s board of directors on March 6, 2007. On March 6, 2007, Bidder A submitted a proposal to the Company indicating its willingness to acquire the Company in an all-cash transaction at a

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price of $43.00 per share of Company common stock. The closing sale price per share of the Company common stock as quoted on the NYSE on March 6, 2007 was $37.45 per share.

The Company determined that the best process for moving negotiations with UnitedHealth Group and Bidder A forward in a manner so as to produce the best terms reasonably attainable for the Company was to require that both UnitedHealth Group and Bidder A complete their due diligence and finalize the terms of their potential acquisition (including the terms of the merger agreement) by Saturday, March 10, 2007 with the intention that the Company would enter into a definitive agreement with either UnitedHealth Group or Bidder A on Sunday, March 11 or Monday, March 12, 2007. Additionally, it was decided that, in order to enable the Company to evaluate the offers on a consistent basis, Bidder A would be requested to use the form of merger agreement that had been substantially negotiated with UnitedHealth Group. Further, each of UnitedHealth Group and Bidder A would be informed that there was another potential acquiror with whom the Company was negotiating.

On March 7, 2007, representatives of Bidder A met with representatives of the Company to discuss the potential sale and any remaining due diligence required by Bidder A. At this meeting, representatives of Bidder A expressed their strong preference to negotiate a merger agreement from a form prepared by Bidder A’s counsel but were informed that the Company wished to use the form of merger agreement that had been substantially negotiated with UnitedHealth Group. Bidder A subsequently agreed to work with the Company’s form of merger agreement.

On March 8, 2007, our board of directors held a special meeting to discuss the status of the negotiations with each of UnitedHealth Group and Bidder A. The board of directors discussed the timing for providing certain commercially sensitive due diligence information to UnitedHealth Group and Bidder A. The board of directors agreed that neither UnitedHealth Group nor Bidder A would receive access to such information until it had agreed upon a form of definitive merger agreement with the Company and that only the party that was being recommended by the Company’s management to the board of directors as the potential acquiror would be provided such access. Also at this meeting, a representative of Crowell & Moring, the Company’s regulatory counsel, made a presentation to the board of directors regarding the regulatory aspects of a potential transaction with each of UnitedHealth Group and Bidder A and the status of the negotiations with each of UnitedHealth Group and Bidder A to address those aspects. The board of directors discussed the regulatory issues presented by a potential transaction with each of UnitedHealth Group and Bidder A and concluded that if the bidders agreed to the resolution of such issues as proposed by the Company, each transaction would face regulatory risk at a level acceptable to the Company. Dr. Marlon then informed our board of directors of the sale process recommended by management of the Company, including the desire to have each bidder submit a “best and final” price to the Company on March 10, 2007 and for each bidder to be informed that such price should be the highest price that the bidder was willing to pay for the Company.

From March 8, 2007 through March 10, 2007, representatives of the Company and its advisors discussed various aspects of a merger agreement and voting and support agreement separately with UnitedHealth Group and Bidder A. By March 10, 2007, the Company was able to substantially complete negotiations with each of UnitedHealth Group and Bidder A on the terms of the merger agreement other than with respect to the following material issues: (i) the size of the termination fee payable by the Company to UnitedHealth Group in connection with certain terminations of the merger agreement (the Company had proposed an $85 million termination fee); and (ii) the ability of either bidder to terminate the merger agreement as a result of regulatory issues arising out of the transaction (including the Company’s proposal that the buyer pay the Company a reverse termination fee in connection with such a termination). In addition, the terms of the negotiated merger agreement with each of UnitedHealth Group and Bidder A were materially similar except that the form of merger agreement agreed with Bidder A included additional representations and warranties by the Company, additional restrictions on the conduct of the Company’s business prior to closing of the merger and an earlier outside date upon when either

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party could terminate the merger agreement if all required regulatory approvals have not been received. From March 8, 2007 through March 10, 2007, each of UnitedHealth Group and Bidder A completed its due diligence investigation of the Company other than a review of the commercially sensitive diligence information.

In the early afternoon of March 10, 2007, Dr. Marlon spoke with members of the senior management team of each of UnitedHealth Group and Bidder A and reiterated the Company’s previous request that each party submit its “best and final” price and its proposed resolution of all outstanding issues in the merger agreement by 6:00 p.m. that day. Each of UnitedHealth Group and Bidder A had further discussions with Dr. Marlon to confirm that it should submit the highest price that it was willing to pay for the Company and that it would not be asked to further raise its price. Dr. Marlon confirmed this fact for both bidders.

Each bidder submitted its final proposal (including its “best and final” price) prior to the 6:00 p.m. deadline. UnitedHealth Group’s proposal included a purchase price of $43.50 per share of Company common stock, an $85 million termination fee, a resolution of potential regulatory issues in the manner desired by the Company and a $25 million reverse termination fee payable by UnitedHealth Group if the merger agreement was terminated by UnitedHealth Group as a result of such regulatory issues.

Bidder A’s proposal also included a purchase price of $43.50 per share of Company common stock, an $85 million termination fee and a resolution of potential regulatory issues in the manner desired by the Company; however, Bidder A’s proposal included an offer to reimburse the Company for only up to $3 million of its out-of-pocket expenses in connection with certain regulatory filings in the event of a termination as a result of regulatory issues (as opposed to a reverse termination fee).

After receipt of these proposals, management of the Company and representatives of its outside advisors held a conference call to discuss them. Although UnitedHealth Group and Bidder A offered the same price, it was determined by management that UnitedHealth Group’s offer was superior to Bidder A’s offer. The reasons for this determination included, among other reasons: the fact that the merger agreement offered by UnitedHealth Group included fewer representations and warranties from the Company and fewer restrictions on the Company’s conduct of business prior to the closing of the merger than those proposed by Bidder A; the fact that UnitedHealth Group was willing to provide the Company with a greater certainty of closing by offering to extend the outside date upon when either party could terminate the merger agreement if all required regulatory approvals were not received; the fact that UnitedHealth Group was willing to assume a greater portion of the risk that the merger agreement would be terminated as a result of regulatory issues by offering a $25 million reverse termination fee in such event; and the fact that UnitedHealth Group has a proven track record of successfully completing and integrating large acquisitions. Additionally, it was determined that, based upon the Company’s understanding of UnitedHealth Group’s historical and proposed transition and integration plans, a transaction with UnitedHealth Group would be more beneficial to the Company’s employees, suppliers, creditors and customers than a transaction with Bidder A.

Following the conference call, Dr. Marlon informed UnitedHealth Group that, subject to UnitedHealth Group’s finalization of the merger agreement and all remaining due diligence prior to the Company’s board of directors meeting scheduled for March 11, 2007, management would recommend the proposed transaction with UnitedHealth Group to the board of directors, although the board of directors would make the decision as to which proposal it would accept and recommend to the Company’s stockholders. Dr. Marlon also informed Bidder A of this decision shortly after such conference call concluded.

During the remainder of the day on March 10 and early in the morning on March 11, the remaining issues in the merger agreement with UnitedHealth Group were finalized. Additionally, on March 11, 2007, UnitedHealth Group was given access to the additional due diligence information. After reviewing this

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information, UnitedHealth Group informed the Company that it was willing to proceed with the transaction on the terms set forth in the proposed merger agreement, subject to receipt of the approval of UnitedHealth Group’s board of directors.

In the afternoon of March 11, 2007, our board of directors met to consider the adoption of the merger agreement and the transactions contemplated by such agreement. At the meeting, the board of directors received an update on the events that had occurred since the previous meeting and the offers from UnitedHealth Group and Bidder A. The board of directors was provided with a summary of the final terms of the merger agreements negotiated with each of UnitedHealth Group and Bidder A. The board of directors was informed of the material differences between the agreements. The board of directors and its outside counsel discussed the regulatory risks relating to a transaction with each of UnitedHealth Group and Bidder A. Lehman Brothers presented to the board of directors various financial analyses and gave the board of directors an oral opinion, which opinion was confirmed by delivery of a written opinion dated March 11, 2007, that, as of that date and based upon and subject to various assumptions, matters considered and limitations described in its opinion, the $43.50 per share consideration to be offered to the stockholders of the Company in the merger was fair, from a financial point of view, to such stockholders. The board of directors was also advised concerning its fiduciary duties in connection with the proposed transaction. The board of directors then discussed the proposed transaction with members of management and the Company’s advisors present at the meeting and considered the various factors discussed below. The board of directors then excused each person who was not a director from the meeting and continued its deliberations. The board of directors then invited the Company’s management and representatives back into the meeting and continued discussion of the transaction. Following further discussion, the board of directors unanimously adopted the merger agreement with UnitedHealth Group for the sale of the Company and declared the merger and the merger agreement advisable to and in the best interests of the Company and its stockholders and resolved to recommend that the Company’s stockholders approve the merger agreement. The board of directors also unanimously authorized management to enter into the merger agreement. At this meeting, the board of directors also adopted amended and restated bylaws in which Sections 7.01 and 7.02 of our bylaws were amended to provide for indemnification of our directors, officers, employees and agents to the maximum extent presently permitted under Nevada law.

Immediately following the conclusion of the meeting, the Company and UnitedHealth Group executed the merger agreement.

Additionally, on March 11, 2007, the Company entered into separate indemnity agreements with each of our directors and with a number of our officers and our subsidiaries’ officers pursuant to which the Company agreed to indemnify these individuals to the fullest extent permitted by Nevada law, by our restated articles of incorporation and by our amended and restated bylaws in proceedings commenced by third parties, in derivative actions, and in situations where any of them becomes a witness or is threatened to be made a witness in a proceeding.

On March 12, 2007, the Company and UnitedHealth Group issued a joint press release announcing the execution of the merger agreement. The closing sale price of the Company’s common stock on the NYSE on March 9, 2007, the last trading day before the announcement of the execution of the merger agreement, was $35.90 per share. If the merger is completed, each share of Company common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive $43.50 in cash, without interest. If the merger is completed, each outstanding stock option of the Company will be cancelled and the holder thereof will be entitled to $43.50 over the exercise price per share under such option, less any required withholding taxes. If the merger is completed, each right of any kind to acquire or receive shares of Company common stock, including restricted stock units, will be cancelled and the holder thereof will be entitled to $43.50 (or, if the award provides for payments to the extent the value of the Company common stock exceeds a specified reference price, the amount, if any, by which $43.50 exceeds that reference price), less any required withholding taxes.

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On March 19, 2007, a purported class action complaint, styled Edward Sara, on behalf of himself and all others similarly situated v. Sierra Health Services, Inc., Anthony M. Marlon, Charles L. Ruthe, Thomas Y. Hartley, Anthony L. Watson, Michael E. Luce and Albert L. Greene, was filed in the Eighth Judicial District Court for the State of Nevada in and for the County of Clark. The complaint names the Company and each of its directors as defendants (collectively, the “defendants”), and was filed by a purported stockholder of the Company. The complaint alleges, among other things, that the defendants breached and/or aided the other defendants’ breaches of their fiduciary duties of loyalty, due care, independence, good faith and fair dealing in connection with the merger contemplated by the merger agreement, the defendants breached their fiduciary duty to secure and obtain the best price reasonably available for the Company and its shareholders, and the defendants are engaging in self-dealing and unjust enrichment. The complaint seeks, among other relief, (i) an injunction prohibiting the defendants from consummating the merger unless and until the Company adopts and implements a procedure or process to obtain the highest possible price for shareholders and (ii) the imposition of a constructive trust upon any benefits improperly received by the defendants as a result of the alleged wrongful conduct. The Company believes that this complaint is without merit.

A press release issued on March 19, 2007, stated that the American Medical Association has approached the Department of Justice to object to the proposed merger on antitrust grounds. A press release issued on March 26, 2007, indicated that the Consumers for Health Care Choices, a consumer advocacy group founded by the past president of the American Medical Association, has also approached the Department of Justice to object to the proposed merger on antitrust grounds. In a letter dated April 10, 2007 and posted on its website, the American Hospital Association also contacted the Department of Justice to object to the proposed merger on antitrust grounds.

Reasons for the Merger 

The board of directors has unanimously adopted the merger agreement and declared the merger agreement advisable to and in the best interests of the Company and its stockholders. In the course of reaching its decision to adopt the merger agreement, the board of directors consulted with the Company’s financial and legal advisors and considered a number of factors that it believed supported its decision, including the following:

·       The board of directors’ familiarity with the business, financial condition, results of operations, prospects and competitive position of the Company, including the challenges faced by the Company in the health care and managed care industries as a regional health company, the prospects for continued growth of the Company, the changes affecting the Company’s customer base and the likely effect the foregoing will have on the Company’s future earnings, growth, direction and share price.

·       The board of directors’ view that the merger is more favorable to the Company’s stockholders than the possible alternatives to the merger, including continuing to operate the Company as an independent publicly traded company, particularly upon considering the risks and uncertainties associated with such alternatives, including the risks associated with the Company’s ability to meet its projections for future results of operations, compared to the opportunity of realizing value in cash for the Company’s stockholders by the merger.

·       The current and historical prices of Company common stock and the fact that the per share merger consideration of $43.50 in cash represents a premium of approximately 21.2% to the closing sale price of Company common stock on the NYSE on March 9, 2006, the last trading day before we publicly announced the merger.

·       The per share merger consideration is all cash, which provides certainty of value to the Company stockholders and immediate liquidity.

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·       The sale process conducted by the Company, with the assistance of its advisors, which involved contact with the bidders most likely to be interested in acquiring the Company to determine their interest in acquiring the Company.

·       The judgment that continuing the process by entering into negotiations with any other parties or requesting additional offers from the bidders would subject the Company to significant additional negotiation and risk, and could endanger the offers received from UnitedHealth Group and Bidder A.

·       The price proposed by UnitedHealth Group and the merger agreement it was willing to enter into, including a $25.0 million reverse termination fee payable to the Company in the event that the merger agreement is terminated for regulatory reasons, reflected extensive negotiations between the parties and represented the highest total value that the Company had been offered for the acquisition of the Company and the highest price reasonably attainable by the Company.

·       The Company entered into confidentiality agreements with certain bidders and received two definitive proposals to acquire the Company. The Company negotiated a separate agreement with each of the two bidders and maintained a competitive bid process through the execution of the merger agreement.

·       The terms and conditions of the merger agreement, including (i) the conditions to the closing of the merger, (ii) the ability of the Company under certain conditions to consider unsolicited alternative takeover proposals, (iii) the ability to terminate the agreement under certain conditions and (iv) the termination fees payable to UnitedHealth Group and the Company upon certain events.

·       UnitedHealth Group has the reputation, resources and financial capability necessary to complete the merger and to fulfill its commitments, and has a history of completing and successfully integrating similar transactions.

·       The opinion of Lehman Brothers, dated March 11, 2007, to the board of directors as to the fairness as of such date, from a financial point of view, of the per share merger consideration to be offered to the holders of Company common stock, based upon and subject to the factors and assumptions set forth in the written opinion. See “The Merger—Opinion of Lehman Brothers” on page 26 and Appendix C—Opinion of Lehman Brothers.

·       The support for the merger expressed by Dr. Marlon in his capacity as a stockholder of the Company, as indicated by the voting and support agreement.

·       The  board of directors’ belief that the merger agreement is in the best interests of the Company’s employees, suppliers, creditors and customers.

The board of directors also considered a variety of risks and other potentially negative factors concerning the merger agreement and the merger, including the following:

·       The risks and costs associated with the merger not being completed in a timely manner or at all, including the diversion of management and employee attention, potential employee attrition, the potential effect on business and customer relationships and potential litigation brought by UnitedHealth Group or stockholders of the Company arising from the merger agreement or the transactions contemplated thereby.

·       As a result of the merger, our stockholders will lose the opportunity to participate in any future earnings growth of the Company and will not benefit from any future appreciation in the value of the Company.

·       Gains from the all-cash merger are taxable to the Company’s stockholders for U.S. federal income tax purposes.

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·       Under the terms of the merger agreement, (i) the Company may not solicit other takeover proposals and (ii) the Company, in certain circumstances, must pay UnitedHealth Group an $85.0 million termination fee if the merger agreement is terminated.

·       The restrictions on the conduct of the Company’s business prior to the completion of the merger.

·       The risk that, while the merger is expected to be completed, there can be no assurance that all conditions to the parties’ obligations to consummate the merger will be satisfied, and, as a result, it is possible that the merger may not be completed even if approved by the Company’s stockholders.

·       The interests of the Company’s management in the merger and the timing of the merger.

The foregoing discussion summarizes the material factors considered by the board of directors in its consideration of the merger agreement. After considering these factors, the board of directors concluded that the considerations in favor of the merger agreement and the merger outweighed the negative factors. In view of the wide variety of factors considered by the board of directors, the board of directors did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual directors may have assigned different weights to various factors. The board of directors unanimously adopted the merger agreement and declared the merger agreement advisable to and in the best interests of the Company and its stockholders and recommends that the stockholders approve the merger agreement based upon the totality of the information presented to and considered by it.

Recommendation of the Board of Directors 

After careful consideration, the board of directors, by unanimous vote:

·       has adopted the merger agreement and declared the merger agreement advisable to and in the best interests of the Company and its stockholders; and

·       recommends that you vote “FOR” the approval of the merger agreement.

Opinion of Lehman Brothers 

In August 2004, the Company engaged Lehman Brothers to act as its financial advisor with respect to the Company’s evaluation of strategic alternatives. The terms of this engagement were subsequently amended on May 25, 2005, August 18, 2005 and July 20, 2006. On March 11, 2007, Lehman Brothers rendered its opinion to the Company’s board of directors that, as of such date, and based on and subject to the matters stated in its opinion, from a financial point of view, the consideration to be offered to the stockholders of the Company in the merger was fair to such stockholders.

The full text of Lehman Brothers’ written opinion, dated March 11, 2007, is attached as Appendix C to this proxy statement. Stockholders are encouraged to read Lehman Brothers’ opinion carefully in its entirety for a description of the assumptions made, procedures followed, factors considered and limitations on the review undertaken by Lehman Brothers in rendering its opinion. The following is a summary of Lehman Brothers’ opinion and the methodology that Lehman Brothers used to render its opinion. This summary is qualified in its entirety by reference to the full text of the opinion.

Lehman Brothers’ advisory services and opinion were provided for the information and assistance of the Company’s board of directors in connection with its consideration of the merger. Lehman Brothers’ opinion is not intended to be and does not constitute a recommendation to any Company stockholder as to how such stockholder should vote in connection with the merger. Lehman Brothers was not requested to opine as to, and Lehman Brothers’ opinion does not address, the Company’s underlying business decision to proceed with or effect the merger.

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In arriving at its opinion, Lehman Brothers reviewed and analyzed, among other things:

·       the merger agreement and the specific terms of the merger;

·       publicly available information concerning the Company that Lehman Brothers believed to be relevant to its analysis, including the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006;

·       financial and operating information with respect to the business, operations and prospects of the Company furnished to Lehman Brothers by the Company, including financial projections of the Company prepared by the Company’s management;

·       a trading history of the Company common stock from March 11, 2002 through March 9, 2007 and a comparison of that trading history with those of other companies that Lehman Brothers deemed relevant;

·       publicly available third party research estimates with respect to the future financial performance of the Company;

·       a comparison of the historical financial results and present financial condition of the Company with those of other companies that Lehman Brothers deemed relevant; and

·       a comparison of the financial terms of the merger with those of certain other transactions that Lehman Brothers deemed relevant.

In addition, Lehman Brothers had discussions with management of the Company concerning the Company’s business, operations, assets, liabilities, financial condition and prospects and undertook such other studies, analyses and investigations as Lehman Brothers deemed appropriate.

In arriving at its opinion, Lehman Brothers assumed and relied on the accuracy and completeness of the financial and other information used by Lehman Brothers without assuming any responsibility for independent verification of such information and further relied on the assurances of the Company’s management that they were not aware of any facts or circumstances that would make such information provided by the Company inaccurate or misleading. With respect to the financial projections of the Company, upon advice of the Company, Lehman Brothers assumed that such projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of the Company as to the future financial performance of the Company and that the Company would perform substantially in accordance with such projections. In arriving at its opinion, Lehman Brothers did not conduct a physical inspection of the Company’s properties and facilities and did not make or obtain any evaluations or appraisals of the assets or liabilities of the Company. Lehman Brothers’ opinion was necessarily based on market, economic and other conditions as they existed on, and could be evaluated as of, March 11, 2007. The Company’s board of directors imposed no limitations on Lehman Brothers with respect to the scope of the investigations made or procedures followed in rendering Lehman Brothers’ opinion.

The following is a summary of the material financial analyses used by Lehman Brothers in connection with providing its opinion to the Company’s board of directors. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses used by Lehman Brothers, the tables must be read together with the text of each summary. Considering any portion of such analyses and of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Lehman Brothers’ opinion.

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Historical Share Price and Price Earnings Ratio Analysis

Lehman Brothers considered historical data with regard to the trading prices of shares of the Company common stock for the period from March 11, 2002 to March 9, 2007, and the relative stock price performances during this same period of the Company common stock, the Standard & Poor’s 500 Index and the common stocks of the Selected Comparable Companies listed under the caption “Comparable Company Analysis” below. Lehman Brothers also considered historical price earnings ratios for the same period of the Selected Comparable Companies and of the Company common stock. The foregoing analysis was presented to the Company’s board of directors to provide it with background information and perspective with respect to the relative historical share prices and price earnings ratios of the Company common stock.

Lehman Brothers also considered the trading prices of shares of the Company common stock from March 9, 2006 to March 9, 2007, from October 25, 2006 (the first trading day after the Company’s announcement that it may not be able to retain its provider contract with three Las Vegas hospitals owned by HCA, Inc.) to March 9, 2007 and from February 28, 2007 (the first trading day after the Company’s announcement of expected losses from the enhanced version of its Medicare Part D Prescription Drug Program product offering) to March 9, 2007. Lehman Brothers noted that during the period from March 9, 2006 to March 9, 2007, the closing share price of the Company common stock ranged from a high of $46.86 to a low of $30.90, as compared to the proposed per share merger consideration (also referred to as “Offer”) of $43.50. Lehman Brothers also noted that during the period from October 25, 2006 to March 9, 2007, the closing share price of the Company common stock ranged from a high of $40.68 to a low of $30.90, and that during the period from February 28, 2007 to March 9, 2007, the closing share price of the Company common stock ranged from a high of $37.66 to a low of $35.90 as compared to the Offer of $43.50.

Comparable Company Analysis

In order to assess how the public market values shares of similar publicly traded companies, Lehman Brothers, based on its experience with companies in the managed care industry, reviewed and compared specific financial and operating data relating to the Company with selected companies that Lehman Brothers deemed comparable to the Company, consisting of UnitedHealth Group, WellPoint, Inc., Aetna Inc., CIGNA Corporation, Coventry Health Care Inc., Humana Inc., and Health Net Inc. (together, the “Selected Comparable Companies”).

As part of its comparable company analysis, Lehman Brothers calculated and analyzed each of the comparable companies’ ratios of current stock price to estimated 2007 and 2008 earnings per share, commonly referred to as a price earnings ratio, or P/E ratio, and compared them to the Company’s estimated 2007 and 2008 P/E ratios. In calculating the Company’s P/E ratios, Lehman Brothers excluded the potential impact of certain extraordinary events in 2007 on its earnings per share. Lehman Brothers also calculated and analyzed each of the comparable companies’ ratios of current enterprise value (which is the market value of the common equity after giving effect to outstanding options, restricted stock units, or RSUs and convertible notes (“Equity Value”), plus the book value of debt less certain cash balances) to estimated 2007 and 2008 revenues, commonly referred to as a enterprise value to revenues ratio, or EV/Revenues ratio, and compared them to the Company’s estimated 2007 and 2008 EV/Revenues ratios. The estimated earnings per share attributable to the Company and its components as well as the Company’s estimated EV/Revenues and its components were determined using information provided by the Company’s management and published independent research, and ratios for the selected comparable companies were calculated based on publicly available financial data and publicly available third party

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research estimates and closing prices as of March 9, 2007, the last trading day prior to the delivery of Lehman Brothers’ opinion. The results of these analyses are summarized as follows:

 

Lehman Brothers selected the comparable companies above because their businesses and operating profiles are reasonably similar to those of the Company. However, because of the inherent differences between the business, operations and prospects of the Company and the businesses, operations and prospects of the Selected Comparable Companies, no comparable company is exactly the same as the Company. Therefore, Lehman Brothers believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the comparable company analysis. Accordingly, Lehman Brothers also made qualitative judgments concerning differences between the financial and operating characteristics and prospects of the Company and the companies included in the comparable company analysis that would affect the public trading values of each in order to provide a context in which to consider the results of the quantitative analysis. These qualitative judgments related primarily to the differing sizes, growth prospects, profitability levels and degree of operational risk between the Company and the companies included in the comparable company analysis.

Present Value of Research Analysts’ Price Targets Analysis

Lehman Brothers evaluated the present values of equity research analysts’ projected six- and 12-month price targets for the Company common stock and compared them to the closing price of the Company common stock of $35.90 as of March 9, 2007 and to the Offer of $43.50 per share. The present values of the research analysts’ 12-month price targets were obtained by dividing the current 12-month price target as of March 9, 2007 by one plus the Company’s estimated cost of equity. The present values of the research analysts’ six-month price targets were obtained by dividing the current six-month price target as of March 9, 2007 by the square root of the sum of one plus the Company’s estimated cost of equity. The following table presents the results of this analysis:

 

Precedent Transaction Analysis

Using publicly available information, Lehman Brothers reviewed and compared the aggregate purchase price (used interchangeably with “enterprise value” as defined above) and selected multiples paid in six acquisitions of companies that Lehman Brothers, based on its experience with merger and acquisition transactions, deemed relevant in arriving at its opinion. Lehman Brothers chose the transactions used in the precedent transaction analysis based on the similarity of the target companies in the transactions to the

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Company in the market presence, size, mix, margins and other characteristics of their businesses. Lehman Brothers reviewed the following transactions:

 

Using publicly available financial data and publicly available third party research estimates at the time of the selected transactions, Lehman Brothers calculated the aggregate purchase price as a multiple of last 12 months revenues, or LTM revenues, and equity value as a multiple of 1-Year forward estimated net income. The same analysis was conducted using the Company’s LTM revenues and 2007 P/E ratio for purposes of comparing the selected transactions to the merger. The following table presents the results of this analysis:

 

Transaction Premium Analysis

Lehman Brothers reviewed the premiums paid in the same six acquisitions of companies that Lehman Brothers used for its precedent transaction analysis. Lehman Brothers calculated the premium per share paid by the acquiror compared to the share price of the target company prevailing one day prior to the announcement of the merger. The same analysis was conducted for the Company using the closing price of the Company common stock on March 9, 2007, the last trading day prior to the delivery of Lehman Brothers’ opinion, and the Offer. The following table presents the results of this analysis:

 

General

In connection with the review of the merger by the Company’s board of directors, Lehman Brothers performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. In arriving at its opinion, Lehman Brothers considered the results of all of its analyses as a whole. Furthermore, Lehman Brothers believes that the summary provided and the analyses described above must be considered as a whole and that selecting any portion of its analyses, without considering all of them, would create an incomplete view of the process underlying its analyses and

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opinion. In addition, Lehman Brothers may have given various analyses and factors more or less weight than other analyses and factors and may have deemed various assumptions more or less probable than other assumptions, so that the ranges of valuations resulting from any particular analysis described above should not be taken to be Lehman Brothers’ view of the actual value of the Company.

In performing its analyses, Lehman Brothers made numerous assumptions with respect to industry risks associated with industry performance, general business and economic conditions and other matters, many of which are beyond the Company’s control. Any estimates contained in Lehman Brothers’ analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates. The analyses performed were prepared solely as part of Lehman Brothers’ analysis of the fairness from a financial point of view to the Company stockholders and were prepared in connection with the delivery by Lehman Brothers of its opinion, dated March 11, 2007, to the Company’s board of directors. The analyses do not purport to be appraisals or to reflect the prices at which shares of the Company common stock might trade following announcement of the merger.

The terms of the merger were determined through arm’s length negotiations between the Company and UnitedHealth Group and were unanimously approved by the Company’s board of directors. Lehman Brothers did not recommend any specific amount or form of consideration to the Company or that any specific amount or form of consideration constituted the only appropriate consideration for the merger. Lehman Brothers’ opinion was provided to the Company’s board of directors to assist it in its consideration of the merger. Lehman Brothers’ opinion does not address any other aspect of the merger and does not constitute a recommendation to any stockholder as to how to vote or to take any other action with respect to the merger. Lehman Brothers’ opinion was one of the many factors taken into consideration by the Company’s board of directors in making its unanimous determination to recommend approval of the merger.

Lehman Brothers is an internationally recognized investment banking firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. The Company’s board of directors selected Lehman Brothers because of its expertise, reputation and familiarity with the Company and the managed care industry generally and because its investment banking professionals have substantial experience in comparable transactions.

As compensation for its services in connection with the merger, the Company has agreed to pay Lehman Brothers a financial advisory fee of approximately $17 million, a portion of which became payable on Lehman Brothers’ rendering of Lehman Brothers’ opinion to the Company’s board of directors and a significant portion of which is contingent on the completion of the merger. In addition, the Company has agreed to reimburse Lehman Brothers up to $75,000 for reasonable out-of-pocket expenses incurred in connection with the merger and to indemnify Lehman Brothers for certain liabilities that may arise out of its engagement by the Company and the rendering of its opinion. Lehman Brothers in the past has rendered and expects in the future to render investment banking services to the Company, UnitedHealth Group and their affiliates, and has received and expects to receive customary fees for such services.

In the ordinary course of its business, Lehman Brothers actively trades in the debt and equity securities of the Company and UnitedHealth Group for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities.

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Certain Effects of the Merger 

If the merger agreement is approved by the Company’s stockholders and certain other conditions to the closing of the merger are either satisfied or waived, Merger Sub will be merged with and into the Company, with the Company being the surviving entity. As a result of the merger, the separate corporate existence of Merger Sub will cease, and the Company will continue as the surviving entity and as an indirect wholly-owned subsidiary of UnitedHealth Group.

Following the merger, all outstanding shares of the Company will be indirectly owned by UnitedHealth Group. When the merger is completed, each share of Company common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive $43.50 in cash, without interest. At the effective time of the merger, the Company’s stockholders will cease to have ownership interests in the Company or rights as stockholders of the Company. Therefore, the current stockholders of the Company will not participate in any future earnings or growth of the Company and will not benefit from any appreciation in value of the Company.

The Company common stock is currently registered under the Securities Exchange Act of 1934 (referred to herein as the “Exchange Act”) and is listed on the NYSE under the symbol “SIE”. As a result of the merger, the Company common stock will cease to be listed on the NYSE and there will be no public market for Company common stock. In addition, the registration of Company common stock under the Exchange Act will be terminated, and the Company will no longer be required to file periodic and other reports with the SEC.

When the merger becomes effective, the current directors of Merger Sub will become the directors of the Company, and the current officers of Merger Sub will become the officers of the Company, each to hold office until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. See “The Merger Agreement—Directors and Officers” on page 47.

Subject to certain changes required in order to comply with director and officer indemnification matters agreed to among the parties in the merger agreement, when the merger becomes effective, the articles of incorporation and bylaws of Merger Sub will become the articles of incorporation and bylaws of the Company until changed or amended as provided therein and by applicable law. See “The Merger Agreement—Articles of Incorporation and Bylaws” on page 46.

The benefit of the merger to our stockholders is the right to receive $43.50 in cash, without interest, for each share of Company common stock. This represents a premium of approximately 21.2% over the closing price of $35.90 per share of Company common stock on March 9, 2007, the last trading day prior to the announcement of the merger. The principal detriments are that our stockholders will cease to participate in our future earnings and growth, if any, and that their receipt of payment for their shares generally will be a taxable transaction for UnitedHealth Group States federal income tax purposes. See “The Merger—Material United States Federal Income Tax Consequences” on page 42.

Under the terms of the merger agreement, from and after the effective time of the merger, UnitedHealth Group and the Company will indemnify and hold harmless to the fullest extent permitted by law each current and former officer, director or employee of the Company and its subsidiaries against all claims, losses, liabilities, damages, judgments, inquiries, fines and reasonable fees, costs and expenses, including attorneys’ fees and disbursements, incurred in connection with any suits, claims, actions, proceedings, arbitrations, mediations or investigations, whether civil, criminal, administrative or investigative, arising out of or pertaining to the fact that such person was an officer, director, employee, fiduciary or agent of the Company or its subsidiaries, whether asserted before or after the effective time of the merger.

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Further, all rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the effective time of the merger (including rights for advancement of expenses) existing at the time of the merger agreement in favor of the current or former directors, officers or employees of the Company or any of its subsidiaries as provided in their respective articles of incorporation or bylaws (or comparable organizational documents) and any indemnification or other agreements of the Company and its subsidiaries in effect on the date of the merger agreement will survive the merger and will continue in full force and effect in accordance with their terms. See “The Merger—Interests of the Company’s Directors, Executive Officers and Certain Beneficial Owners in the Merger—Director and Officer Indemnification and Insurance” on page 41.

Effects on the Company and Our Stockholders If the Merger Is Not Completed 

In the event that the merger agreement is not approved by the Company’s stockholders or if the merger is not completed for any other reason, the Company’s stockholders will not receive any payment for their shares in connection with the merger. Instead, the Company will remain an independent public company, and the Company common stock will continue to be listed and traded on the NYSE and registered under the Exchange Act. In that event, we expect that management will operate the business generally in a manner similar to that in which it is being operated today and that the Company’s stockholders will continue to be subject to the same general risks and opportunities as they currently are, including, among other things, those arising from economic and market conditions.

Accordingly, if the merger is not completed, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of Company common stock. From time to time, the board of directors will evaluate and review, among other things, the business, operations, properties and capitalization of the Company, make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to maximize stockholder value. If the merger agreement is not approved by the Company’s stockholders or if the merger is not completed for any other reason, there can be no assurance that any other transaction acceptable to the Company will be offered, or that the business, results of operations, financial condition and prospects of the Company will not be adversely impacted.

The Company’s employees have expended significant expense, time and attention to attempt to complete the sale process, including the merger, leaving them with less time to devote to the Company’s operations, consideration of potential acquisitions and other strategic relationships and other aspects of the Company’s businesses during the pendency of the transaction. As a result, the value of the Company may have suffered, making the Company less valuable if the merger agreement is not approved and making it unlikely that the Company will be able to obtain a higher price from a third party.

In addition, there are other risks and costs if the merger is not completed in a timely manner or at all, including potential employee attrition, the potential effect on business and customer relationships and potential litigation brought by UnitedHealth Group or stockholders of the Company arising from the merger agreement or the transactions contemplated thereby. Finally, if the merger agreement is terminated under certain circumstances, the Company will be obligated to pay an $85.0 million termination fee to UnitedHealth Group. For a description of the circumstances obligating payment of the termination fee, see “The Merger Agreement—Termination Fees” on page 57.

Effects of the Merger on Our Senior Convertible Debentures 

At March 31, 2007, we had outstanding approximately $20.0 million in aggregate principal amount of our 2.25% senior convertible debentures due March 15, 2023. Pursuant to the indenture governing the debentures, the Company, at the option of the holders, may be required to purchase the debentures from the holders thereof upon certain corporate events, including a merger, unless the sale price of the Company common stock for any five trading days within the period of 10 consecutive trading days prior to

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the closing of the merger equals or exceeds 120% of the conversion price (which currently is equal to $9.145 per share). Assuming that the prevailing market price of the Company common stock prior to the closing of the merger is approximately $43.50 per share, the Company will not be required to purchase the debentures from the holders as a result of the merger. However, pursuant to the holders’ conversion rights under the indenture, such holders may surrender the debentures for conversion at any time during the period that commences on the date which is 15 days prior to the anticipated effective date of the merger and ends on, and does not include, the date which is 15 days after the actual date of the merger and, at the effective time, the right to convert a debenture into shares of Company common stock will be changed into a right to convert it into the amount of cash which the holder would have received if the holder had converted the holder’s debentures immediately prior to the merger.

Interests of the Company’s Directors, Executive Officers and Certain Beneficial Owners in the Merger 

In considering the recommendation of the board of directors with respect to the merger agreement, you should be aware that some of our directors, executive officers and certain beneficial owners have interests in the transactions contemplated by the merger agreement that may be different from, or in addition to, the interests of our stockholders generally. These interests, to the extent material, are described below. The board of directors was aware of these interests and considered them, among other matters, in unanimously adopting the merger agreement, the merger and the other transactions contemplated by the merger agreement.

Stock Options and Restricted Stock Units 

At the effective time of the merger, each outstanding stock option of the Company, vested or unvested, will be cancelled and the holder thereof will only be entitled to receive, as soon as reasonably practicable after the effective time of the merger, an amount in cash equal to the total number of shares of Company common stock subject to such stock option multiplied by the excess, if any, of the value of the per share merger consideration (i.e., $43.50) over the exercise price per share under such option, less any required withholding taxes.

At the effective time, each right of any kind, contingent or accrued, vested or unvested, to acquire or receive shares of Company common stock or benefits measured by the value of shares of Company common stock, and each vested or unvested award of any kind consisting of shares of Company common stock that may be held, awarded, outstanding, payable or reserved for issuance under the Company’s stock plans, including restricted stock units under the Company’s stock plans will be cancelled and the holder thereof will only be entitled to receive from the surviving entity, as soon as reasonably practicable after the effective time of the merger, an amount in cash equal to the total number of shares of Company common stock subject to such awards multiplied by $43.50 (or, if the award provides for payments to the extent the value of the Company common stock exceeds a specified reference price, the amount, if any, by which $43.50 exceeds that reference price), less any required withholding taxes.

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The charts below set forth certain information, as of April 17, 2007, with respect to the stock options and restricted stock units held by the Company’s directors and officers and an estimate of the total cash amount to be paid with respect to such options and restricted stock units:

 

(1)          Calculated as (the merger consideration less the weighted average exercise price) multiplied by the total number of options.

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